Magellan Financial Group (MFG) is an Australian based specialist fund management group. The group is involved in the development of globally focused investment funds for both retail and institutional investors.

The company has three main investment funds:

>	Magellan Global Fund – a long-only unit trust that invests in a concentrated portfolio of global equities.
>	Magellan Infrastructure Fund – a unit trust specialising in investing in global infrastructure securities with the aim of providing consistent long-term absolute returns which exceed the risk adjusted returns expected from the asset class.
>	Magellan Flagship Fund Limited – an ASX listed company (MFF) which invests in a concentrated portfolio of high-quality global equities.

 
1H13 results

MFG’s 1H13 results were amazing. Revenue came in at $32.9 million, a 112% jump on the same period in FY12. Net profit was $20.9 million, a staggering 195% increase on the prior corresponding period.

The group’s operations over the period were characterised by further growth in funds under management, the strong investment performance of its managed investment funds, and further improvement in the group’s net assets per share.

Performance fees and funds under management

The group has two main sources of income, one via management fees, which are set between 1.25% and 1.35% of funds under management.

The other is via performance fees, which are calculated on a six monthly basis at 30 June and 31 December with MFG earnings fees on the excess return (the total return of the fund above the respective benchmark).

>	Magellan Global Fund – 10% of the excess return above the higher of either the MSCI World Index Total Return in AUD and the 10 year Australian Government bond rate.
>	Magellan Infrastructure Fund – 10.1% of the excess return above the higher of either the UBS Developed Infrastructure and Utilities Net Total Return Index (AUD hedged) and the 10 year Australian Government bond rate.

 
The performance fees has been the main driver of MFG’s earnings given the fund’s ability to outperform the benchmark – the Magellan Global fund has outperformed on average by 10.2% a year since its inception.

The group has also enjoyed strong inflow of funds, with $1.55 billion added in May alone.

MFG’s funds under management now stands at an impressive $12.9 billion, a massive increase from a year earlier where it held $3.7 billion.

Outlook

MFG has steadily been growing funds under management over the last few years and we see this continuing.

The group has already a received a $396 million mandate from an institutional global equities firm, which commenced the first of this month. We expect continued inflows and performance fees to drive MFG ‘s share price to new heights.

Newcrest was listed as a share to buy for our members on June 14th. For all of our latest share tips and trading ideas sign up for FREE 7 Day Trial and gain full access our research files.

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Perseus Mining (PRU) is a gold explorer and producer, focused on under-explored gold belts in West Africa.

The group’s main assets are located in Ghana and the Ivory Coast, consisting of the Edikan Gold Mine (EGM), the Tengrela Gold project (TGP) and the Grumesa Gold Project (GGP).

The Edikan Gold Mine in Ghana has 5.6Moz of Measured and Indicated gold resources, including reserves of 3.4 million ounces of gold, and 1.7Moz Inferred gold resources. Production began at the mine in the 3rd Quarter of 2011.

The Sissingue Gold Project which is part of the Tengrela Gold Project. It is the group’s most advanced non-producing project.

Bearish outlook for gold

Gold holdings at exchange traded funds (ETFs) have fallen significantly in 2013. The drop in ETF holdings highlights the extent to which investment demand is weakening.

Inflation expectations have eased considerably in recent months as the world economy fails to gain traction despite coordinated central bank quantitative easing programs.

Below we graph the trend in ETF bullion holdings since the beginning of the year:

As we can see there have been major outflows in recent months, with the surge in supply overwhelming what demand remains for the precious metal.

Whilst physical demand from China and India is expected to continue and may even strengthen to take advantage of collapsing prices, we fear it won’t be enough to ignite a meaningful rally in gold prices.

Weak March quarter

PRU revealed a 12% increase in 3Q13 gold output (from 2Q13) to 57,169 ounces. This helped drive a 7% lift in revenue from the previous quarter to $77.2 million

Worryingly, quarterly cash costs were US$1132 an ounce (oz), up 7% from the previous quarter. PRU guided for cash costs of US$1,100/oz for the six months ending June 30, 2013.

At a time of falling gold prices, PRU’s elevated cash costs are translating into smaller cash margins, negatively impacting overall profitability.

This was evident in the March quarter, where PRU reported a net loss of $892,000. This was in stark contrast to the $15.1 million profit recorded for the December 2012 quarter.

PRU cannot afford more quarters like the previous one, but given how sharply gold prices have fallen since then we expect to see another weak result for the current quarter.

Outlook

Gold prices have suffered a dramatic decline of almost 18% since the beginning of the year. Higher cost producers are expected to be hit hard by the slump in prices.

PRU swung to a net loss in the March quarter amid a spike in operating costs. With cash costs to remain elevated through to the end of FY13, we fear the company is tracking for an even bigger loss in the current quarter.

This is likely to translate into continued share price weakness for the group.

Perseus Mining was listed in the traders report as a sell share for our members on May 22nd. For all of our latest share tips and trading ideas sign up for FREE 7 Day Trial and gain full access our research files.

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Boart Longyear (BLY) provides contract drilling services to the mining, environmental, infrastructure, and energy industries.

The Drilling Services business provides drilling services to the mineral exploration, development and production, environmental, infrastructure and energy markets.

The Drilling Products business designs, manufactures and sells drilling equipment such as drills and support systems, as well as bits, rods and all requisite tooling.

Industry conditions worsening

The mining services sector has been battered in recent times amid concerns over China’s slowing economy.

Chinese GDP rose just 7.7% in the year to March – weaker than economist estimates. Industrial production also grew a less-than-expected 8.9% annual rate in March.

Furthermore, Chinese manufacturing activity slowed in April, signalling the weak economic growth in the first quarter is continuing into the current quarter.

A slowdown in our resources sector will have negative consequences for related industries such mining services.

Indeed, these fears are being realised with engineering services providers, UGL and Sedgman Limited (SDM) downgrading profit guidance today. Amid difficult trading conditions SDM specifically pointed to delays in mining investment approval and underutilised assets.

SDM’s downgrade followed similar profit warnings from Ausdrill (ASL) and Emeco Holdings (EHL) last month.

Although BLY is one of the more established drilling services providers in the market it is by no means immune to the currently challenging operating environment.

Outlook

Following a positive start to FY12, BLY was buffeted in the second half of the financial year by a sharp slowdown in the mining cycle. Conditions have worsened since the end of 2012, with commodity prices plunging in April and no let up in sight as concerns over China mount.

Roughly two third of BLY’s drilling services revenue is linked to gold and copper. Bullion prices have eased considerably in recent months, squeezing cash margins of explorers and mid-to-small tier producers.

Copper prices have also taken a hit, down around 12% in the past three months. Lower profit margins will likely force copper and gold producers to curtail capex spending.

The implications for BLY include another weak first half result, characterised by lower revenue and earnings.

Borat longyear was listed in the traders report as a sell share for our members on May 15th. For all of our latest share tips and trading ideas sign up for FREE 7 Day Trial and gain full access our research files.

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iiNet (IIN) is the second largest Internet Service Provider (ISP) in Australia.

IIN has built its own network (the iiNetwork), boasts the largest Voice over IP network in the country, abolished monthly phone line rental with Naked DSL and has released wireless modem-and-phone-in-one BoB to the world.

The firm was included in the ASX 200 in 1999 and employs about 2,000 people at present.

The group’s strategy to increase its value is to grow organically and inorganically. IIN recently acquired TransACT in 2011 and Internode in 2012. These acquisitions are expected to deliver considerable synergies to the firm in the coming years.

Recent Results

In its 1H13 report, the firm’s NPAT increased to $31.9 million, 122% higher compared to the prior corresponding period.

Aside from the aforementioned, one of the main highlights of the recent report is the significant 73% increase in the firm’s EBITDA compared to the 1H12. This translates to a 35% improvement in the firm’s EBITDA margin from the prior corresponding period. The solid results were primarily due to the strong organic growth and synergies realized from its acquisitions.

Below are charts of the firm’s reported EBITDA and reported NPAT performance in its 1H13 results. One can easily see the vast improvement from the 1H13 results compared to the 1H12.

Peer Comparison

Despite the recent rally IIN’ share price, the company stacks up rather well when compared to its peers.

IIN is trading on a forward P/E of 16.8x.

This compare to peers Amcom (AMM) and TPG Telcom (TPM) which are trading 22.1x and 19.6x next year’s earnings.

IIN’s forecast dividend yield is around 3.8% more or less in line with AMM’s and higher than the 2.5% forecast for TPM.

Outlook

As previously mentioned, the firm’s recent acquisitions are expected to deliver synergies to the firm.

More importantly, both TransACT and Internode has a solid customer base, which will translate to higher potential earnings growth in the coming financial years.

Some of the benefits from the acquisitions have already manifested in the firm’s recent 1H13 results. We expect the firm to realize the full benefits from the aforementioned in the medium to long term.

Moreover, the firm has been successful with increasing its market share on the back of competitive rates, attractive combination of services, and its acquisitions.

Iinet was listed in the traders report as a buy share for our members on May 13th. For all of our latest share tips and trading ideas sign up for FREE 7 Day Trial and gain full access our research files.

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FlexiGroup (FXL) was listed as a share tip  in our traders report on May 7th and  is a leasing and rental finance service provider, operating in Australia and New Zealand. It was recommended as a buy share based on a pattern of strong growth, $50 million capital raising and the aquisitions of One Credit.

Customers are typically computer and office technology retailers and resellers, as well as electrical appliance retailers.

FXL has the following main business divisions:

>> Certegy – provides interest free loans and is an Australian cheque guarantee business
>> Flexi Commercial – offers leasing services to medium and large businesses
>> Flexirent – provides leases and loans for computer and electrical products
>> Lombard Finance – offers credit card and interest free finance to clients via retailers

1H13 results

FXLs’ 1H13 result revealed a 16% rise in cash profit to $32.6 million. The result came on the back of strong receivables growth of 30%.

The growth in receivables reflects the new business momentum generated by the company. This was evident in Lombard, which logged volume growth of 77% on-year.

Lombard profit doubled from 1H12, highlighting rapid growth in the number of companies distributing its 55-day interest free credit card.

The strong credit card take-up also opens up significant cross-selling opportunities to FXL’s existing client base, signalling further growth in this division.

Certegy was another highlight, with cash profit surging 31% amid a 29% increase in receivables.

The Flexirent business was a concern, with divisional profit falling 9% on flat receivables growth. A modest rebound is expected for this division in 2H13 if FXL can effectively execute recently announced cost initiatives.

Capital raising

Today FXL successfully completed a $45 million placement at $3.99 per share. The issue price represented a 2.9% discount to its last closing price of $4.11 a share.

The group aims to raise another $5 million via a share purchase plan. The $50 million in new proceeds will be used primarily to fund the purchase of Once Credit.

Sydney-based Once Credit is similar to the Lombard business, in that it too offers interest free and credit card finance to consumers via retail outlets.

Interestingly, FXL believes Once Credit offers greater scale and is more profitable than Lombard but is constrained by a lack of funding capital. With $300 million in undrawn funding facilities, the group has the financial headroom to drive increased volumes at Once Credit.

Combining Lombard and Once Credit allows for increased scale in the interest free credit market. The synergies from the acquisition are expected to translate into greater earnings growth as volumes expand.

Whilst the acquisition will incur one-off costs of $3.5 million, it is expected to be cash earnings per share accretive within the first 12 months.

Outlook

In another piece of good news for investors, FXL upgraded its FY13 cash profit guidance from $68-$71 million to $70-$71 million.

FXL’s 1H13 results continue a pattern of robust growth for the company. Cash profit has risen at a compound annual rate of 20% since FY09, whilst return on equity has climbed to a healthy 23%.

Strong receivables growth at Certegy and Lombard is expected to continue as FXL expands its distribution network.

Moreover, the Once Credit acquisition will likely be an important driver of long-terms earnings growth due to increased scale in the interest free credit card market.

For all of our latest asx share market trading ideas sign up for FREE 7 Day Trial and gain full access our research files.

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As featured in the Herald Sun on May 5th 2013 here are the latest buy, sell and hold recommendations from Geoff Saffer Equity Analyst & Educational Facilitator at the Australian Stock Report.

Geoff has over 10 years’ experience researching and analysing Australian stocks, with a passion for fundamental analysis and specialty in identifying undervalued companies – particularly at the smaller end of the market.

Shares To Buy -

The Reject Shop (TRS) – Recent capital raising to fund expansion a positive. Same store sales growth running ahead of targets. Expect outperformance to continue.

Energy Action (EAX) – Small energy services kicking goals with its energy management services and novel energy auctions. Company on track for fifth straight year of revenue and profit growth.

Shares To Hold -

Seek Limited (SEK) – High quality company enjoying strong domestic and international growth. ROE and margins remain very high, but valuation looks stretched at current levels.

James Hardie (JHX) – US property market continues to turn around and there is room for fibre cement to increase market share, but sales growth looks more than priced in.

Shares To Sell –

Matrix Engineering (MCE) – Embattled engineering company’s recent quarterly results showed some signs of life but we still expect FY13 results to underwhelm investors.

Elders Limited (ELD) – Still faces a bleak future despite selling off assets to reduce debt. Chances of a bailout via takeover look stymied by existence of hybrid securities.

For all of our latest asx share market trading ideas sign up for FREE 7 Day Trial and gain full access our research files.

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Primary Health Care (PRY) is one of Australia’s leading listed healthcare companies, operating as a service company to medical and allied health professionals.

PRY also boasts a network of medial and pathology centres across Australia, and is a leading provider of healthcare technology solutions to medical practitioners, medical practices and hospitals.

The group’s revenue is divided into four main segments:

> Medical Centres
> Pathology
> Imaging
> Health Technology

1H13 Results

PRY’s 1H13 results were a solid improvement when compared to the same period in FY12. The group’s revenue came in at $720 million, a 5% increase on the prior corresponding half.

EBITDA for the 1H was $186.1 million, an 11.6% increase on 1H12. PRY was impressively able to increase its EBITDA margin by 150 basis points (bps) as a result of revenue gains, economies of scale and operating efficiencies.

The group was also able to increase its interim dividend by 30% to 6.5 cents per share.

Breaking it down

A closer look at the recent results revealed all of the major divisions making positive contributions to 1H13 earnings. The Medical Centres division increased its EBITDA by 9% to 84.0 million, with the business expanding its margin by 80 bps to 55.4%.

Pathology EBITDA grew by 13% to $69.5 million, with the margin up 100 bps to 17.0%. The Imaging division EBITDA was up 30% to $35.0 million, with the margin up a staggering 500 bps to 22.6%.

Overall it was good to see that all divisions recorded not only EBITDA growth, but also growth in margins, indicating a business with a focus on cost controls.

Looking ahead

All PRY’s divisions performed well in first half, and we see this continuing in the second half. The group showed it was able grow its business organically, with better economies of scale and operating efficiencies driving expanding margins.

With Australia’s ageing population, PRY should be able to grow its earnings at an organic level. The group has also lowered its borrowing costs from $56 million, to $40 million in the 1H13, which should also have flow on effects in the 2H.

With think these factors, combined with growth from its Medical Centres division, will result in a solid full year result and further share price appreciation.

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Westfield Group (WDC) is the world’s largest listed retail property group was listed as a share to buy in our traders report on Tuesday April 16th. The group has a global portfolio, comprising 105 shopping centres across five countries.

It also manages all aspects of shopping centre development, from design and construction through to management and marketing.

FY12 results

WDC reported an 18.3% rise in FY12 net profit to $1.7 billion. Funds from operations – which strip out asset revaluations – climbed 6% to $1.5 billion.

Net property income rose 7%, with the UK contributing a large part of the growth as the London Olympics led to an increase in shopping centre traffic.

There was positive 2H momentum in the US, with net operating income growth exceeding previous guidance as specialty sales rose due to a record number of shops opened.

Another highlight was the high occupancy rates. Global occupancy was 97.8%, up 30 basis points on-year with most of the growth coming from the US portfolio.

WDC also extended its share buyback for another 12 months, a move likely to provide a good degree of support for its share price.

Shedding non-core assets

In the latest example of the group optimizing its asset structure, WDC sold its 49.9% stake in six Westfield shopping centres in Florida, USA, to O’Connor Capital Partners.

The sale is expected to bring in net proceeds of US$700 million and will result in a joint venture between the two firms, with Westfield retaining its role as property, leasing, and development manager.

By shedding non-core assets, WDC is freeing up capital to help fund its $12 billion development pipeline and engage in capital return initiatives such as the expansion of its buyback program.

Outlook

Last week WDC commenced a plan to redevelop Westfield Garden City at Mt Gravatt, Queensland.

The $400 million project will be jointly funded by WDC and Westfield Retail Trust (WDC). The redevelopment will include a full line Myer department store, a new Target store and over 100 new specialty retailers.

The Mt Gravatt project is expected to yield 6.75% – 7.25%, in line with the yield generated by WDC’s other development projects in the US and Australia.

WDC commenced $1.4 billion in new projects during 2012, and forecast another $1.25 – $1.5 billion in new projects during 2013. The overall development pipeline now stands at $12 billion.

In our view, the group’s selling of non-core assets and investment in high yielding projects will increase the return from its assets and ultimately translate into further share price appreciation.

For more share tips on not only the Westfield Group, get our latest asx share market trading ideas by signing up for FREE 7 Day Trial and access all our research files.

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Skilled Group (SKE) is an established national workforce services company and is listed in our traders report as a share to buy as of April 10th 2013. It has over 170 offices spread across Australia, New Zealand, United Kingdom, Malta and United Arab Emirates.

SKE has a broad service offering to suit changing client needs. Its three main divisions are;

>> Workforce Services, which provides labour hire services to the mining sector
>> Technical Professionals, which provides professional and white collar staffing
>> Engineering and Marine Services, which provides contract maintenance and engineering, as well as offshore marine staffing and management services

SKE has a strong position in key growth markets and sectors, namely mining & resources, oil & gas, and civil & infrastructure.

1H13 results

In February, SKE reported a 17.4% increase in 1H13 net profit to $29.2 million. This was delivered on the back of a 4.1% rise in sales to $973.6 million.

The company grew its profit against the backdrop of a weak macroeconomic environment. Specifically, Workforce Services suffered from lower volumes due to the mining slowdown.

Because SKE is diversified across different industries, Technical Professionals revenue climbed amid demand from the oil & gas and telco sectors.

The group is still in the process of cost reductions with the automation of key process and systems including; integrated rates calculator, candidate on-boarding, re-developed web portals and continued centralisation of distributed activities.

The cost cutting initiatives led to $5 million in indirect savings during the half, and SKE expects to deliver a total of ~$10 million in cost reduction over FY13.

Valuation upside

Whilst the group anticipated challenging conditions for its Workforce Services division would continue in 2H13, demand from the oil & gas and telco sectors would help soften the blow.

When factoring in expected cost savings, we think Workforce Services will experience a 2H13 earnings rebound. Trading on an undemanding one-year forward P/E of 14.3x, we believe the impact of a challenging mining sector outlook is at least partly factored into the share price.

Outlook

SKE’s 1H13 results impressed the market, and we expect the momentum to carry into the rest of the year. Although the outlook for Workforce Services remains somewhat uncertain, SKE’s cost cutting program should continue to provide a degree of support for the division’s earnings.

Also, Engineering and Marine Services is experiencing healthy growth in revenue and EBITDA due to the group’s exposure to the oil & gas sector. The division is benefiting from increased activity in new project and maintenance contracts, which is likely to translate into more revenue growth.

The share tip for Skilled Group was listed to our members on April 10th, if you would like further asx share market information you can sign up for FREE 7 Day Trial and access all our research files on not only SKU but all our current trading ideas.

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Kingsgate Consolidated (KCN) is a gold miner, operating in South East Asia, South America and Australia. The company’s major operation is the Chatree Mine in Thailand, and it also has the smaller Challenger Mine in South Australia.

Rising cash costs squeezing margins

In late January, KCN revealed a 13.4% slide in 2Q13 gold output relative to the same period a year earlier. Compared to 1Q13, gold output rose slightly by 4%.

Production was affected by the temporary closure of the Chatree North Expansion Plant (Plant 2) and interruptions at Challenger following the establishment of two new mining fronts.

The biggest disappointment with the result was another rise in the group’s cash costs. Cash costs rose 37% from 1Q13 to US$975/oz. However, compared to 2Q12 costs surged 60%.

KCN attributed the cost squeeze to lower ore grades at Chatree and ore sourced from an area of Chatree’s Pit A that was known to have lower recoveries.

The poor 2Q13 production result contributed to a 76% slide in 1H13 net profit to $8.1 million. Revenue was up 10% on-year, however the growth was driven primarily from stronger gold sales. Weaker output from Challenger and a lower realised average gold selling price detracted from the growth in revenue.

Gold prices trending down

The price of gold has weakened noticeably in recent months. Spot gold is trading around 7% below KCN’s 1H13 average realised selling price of US$1676.

The outlook for the precious metal has declined amid signs of weakening physical demand and diminished prospects for further monetary easing. In an example of waning demand, the US Mint sold 62,000 ounces of American Eagle gold coins last month.

This was much lower than the sale of 80,500 ounces in February and 150,000 ounces in January. Holdings in gold-backed exchange-traded funds are also 6.9% weaker in the year-to-date.

Furthermore, with the world economy stabilising, central banks like the US Federal Reserve are less inclined to implement additional monetary easing measures.

In our view these are among the key factors that will handicap gold prices, and by extension, KCN’s revenue growth.

Outlook

KCN stuck to its FY13 gold production guidance of between 200,000 and 220,000 ounces. 1H13 production totalled 90,413 ounces, meaning KCN is relying on stronger 2H13 output numbers in order to meet its guidance. Although Chatree’s Plant 2 is now back online, development at Challenger is expected to continue.

Also, the limited availability of stoping areas at Challenger the company highlighted in its 2Q13 production report indicates difficulties accessing the ore body being mined. Therefore we don’t share KCN’s optimism that full year production guidance will be met.

Moreover, the upward trend in its cash costs is coming at a time when gold prices have been retreating. This is creating pressure on cash margins and will ultimately translate into poor earnings in our view.

Transpacific was issued as a share to sell to our members on April 3rd, if you would like further information you can sign up for FREE share recommendations and access all our research files on not only KCN but all our current trading ideas. Simply click here and starting trading today, free for 7 days.

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