As featured in the Herald Sun on May 19th 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 shares, with a passion for fundamental analysis and specialty in identifying undervalued companies – particularly at the smaller end of the market.

Shares to buy

Slater & Gordon (SGH) – Major capital raising has allowed company to expand its footprint in the UK market. We expect to see further consolidation in the UK, driving profit growth.

Vision Eye Institute (VEI) – Eye surgery clinic company is an exciting growth story. Capital raising has allowed VEI to pay down debt, expect dividends to start soon.

Shares to hold

Macquarie Group (MQG) – MQG recently jumped on FY13 results. Turnaround story still in play, but offers poorer value compared to buy recommendation back in December.

Carsales.com (CRZ) – Great business with strong margins but will have to continue acquisition march in order to justify current valuation multiples.

Shares to sell

Boart Longyear (BLY) – BLY’s exposure to gold and copper mining could lead to protracted pain. At real risk of announcing a profit warning, following peers SDM, ASL and EHL.

ERA Limited (ERA) – Uranium sector still in doldrums and flagship Ranger mine has halted production. Funds generated from processing ore stockpiles are needed for mine rehabilitation.

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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.

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Fairfax Media Limited (FXJ) is an Australian multi-platform media group with a broad range of activities including news publishing, information and entertainment, advertising sales in newspaper, magazine and online formats, and radio broadcasting.

FXJ conducts its core activities throughout Australia and New Zealand. Its major newspaper brands are The Sydney Morning Herald, The Age and The Australian Financial Review.

Additionally, FXJ owns a range of business magazines, websites, and regional and community newspapers.

Organisational restructure

Last week, FXJ announced some changes to its organisational structure in addition to a major shakeup of its leadership team.

Better late than never, the group has recognised the shift from print to digital and is responding seriously to this change.

The Australian publishing businesses will be consolidated under the Australian Publishing Media division in an effort to drive efficiencies and simplify FXJ’s business model.

Also, the Domain and Digital Ventures businesses will operate as standalone divisions. This will allow the group to devote increased resources and management attention to areas of the business likely to drive its future growth.

Advertising weak, but profit rises amid asset sales

In February, FXJ announced a 300% increase in 1H13 net profit to $386.3 million.

The profit jump came primarily on the back of asset sales, including the company’s 51% stake in NZ-based advertising website, Trade Me, as well as its US agricultural media businesses.

The result helped mask a 7% decline in revenue, with FXJ facing a slump in advertising sales across its major divisions amid economic uncertainty.

On a positive note expenses fell 3% on-year, whilst the group says it is on track to achieve $251 million in total savings by FY15.

The balance sheet was also in much stronger shape, with a net debt to equity ratio of just 5.1% at the end of 1H13.

Outlook

In its 1H13 results, FXJ argued that a sustained improvement in consumer sentiment is required to see a turnaround in advertising conditions.

In the first four months of 2013, the Westpac Consumer Confidence Index has risen to its highest level since December 2010. Since last October, consumer confidence has risen 11.5%.

It appears the RBA’s 2012 interest rate cuts are beginning to have a noticeable impact on confidence, leading to improved operating conditions for advertisers and media firms alike.

Taking into account its asset sales, organisational restructure and focus on cost control, FXJ is putting itself in a position where it can be more profitable in a slow growth environment.

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Sims Metal Management (SGM) collects, sorts and processes scrap metal materials that are recycled for resale.

The company’s divisions include ferrous recycling, non-ferrous recycling, secondary processing of non-ferrous metals and plastics, international trading of metal commodities and the merchandising of semi-fabricated steel products.

SGM has operations in Australia, New Zealand, the United Kingdom, North America, Asia and Europe and is the world’s largest listed metal recycler with approximately 270 facilities and 6,600 employees globally.

The company is currently in a global search for a new CEO after current CEO Daniel Dienst announced he would retire when his contract concludes on June 30 2013.

1H13 Results

The group’s 1H13 results were disappointing to say the least. Revenue came in at $3.4 billion, a 25% decline on the prior corresponding half, due to a reduction of intake shipments in North America.

SGM reported a 1H13 net loss of $295.5 million, 53.3% better than the prior corresponding period’s $633.2 million loss. The result was attributed to goodwill impairments and inventory writedowns totalling $291.3 million.

On an underlying basis, the group did record a $10 million profit, although the rest was down from $42 million a year earlier. Given the poor result, management decided not to declare a dividend for the first half – the first time the company has not paid an interim dividend since listing.

US and UK Businesses

On 21 January 2013, SGM announced that it will form a special committee to investigate the inventory valuation issues in the company’s UK business.

The result of the committee’s investigation was a $78 million write-down of inventory, of which $16 million was allocated to 1H13 and the remaining balance resulted to a restatement of prior period results.

The write-down represents a massive 29% of the value of inventories in its UK business. That trouble does not stop in the UK.

SGM’s US division, which contributes around 60% f the group’s overall sales, also suffered impairment charges in the first half. The company recorded a goodwill impairment charge of $291 million in the 1H13.

Excluding the write-downs, the US business barely made a profit, reporting an underling EBIT of $2.1 million–a 30% drop from the prior corresponding period.

Looking ahead

The outlook does not look pretty for SGM, at least in the short-term. The $78 million writedown on its UK inventory is extremely alarming because it shows the company’s lack of adequate financial controls in relation to its inventory reporting.

It also brings into question the company’s financial controls in other regions and raises the possibility of further write-downs. Poor management has led to the decision not to distribute a dividend for the first time since it listed, which does not bode well for shareholder confidence.

Moreover, the group downgraded its guidance three times in 2012. Without a significant pickup in US economic activity, we cannot see this year being any different. As such, we feel there is more downside to SGM’s share price in the near-term.

Seek Limited was issued as a share to buy to our members on March 22nd, if you would like further information you can sign up for FREE share recommendations and access all our research files on not only SGM but all our current trading ideas. Simply click here and starting trading today, free for 7 days.

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 advance non-producing project.

Quarterly Production

As mentioned, EGM has been producing gold since the third quarter of 2011.  Since the initial ramp of production PRU has reported four quarters worth of production numbers.

The first two quarters were within guidance, however the last two set of figures released have missed. The December 2012 quarterly production result was the more disappointing of the two misses.

Gold production over the quarter was 51,090 ounces, 13% below the lowered guidance provided in November and also below the previous quarter’s production of 52,610 ounces.

Cash costs for the December quarter was $588 per ounce, 2.3% higher than the revised guidance and much higher than the $475 per ounce in the September quarter. The group blamed the production short-fall principally on lower crusher output since its initial downgrade on 23 November 2012.

The Sissingue Gold Project

The Sissingue Gold Project located in the Ivory Coast is the project PRU is planning on getting to production. The group is targeting a mid-2014 commissioning date, but given its 12-month build time from the start of construction we see this timeframe as unrealistic.  PRU still needs to:

 
Finally PRU will need to approve development of the project, which it has put on hold pending clarity of the some of the aforementioned tasks.

Outlook

PRU has missed two quarterly production results in a row. The production issue of late is relating to a mechanical issue to do with the drive shaft for the crusher, which has results in poor mill utilisation.

The drive shaft is scheduled to be replaced in February, but given the downtime that will be required for the replacing and testing of the new shaft we can’t see the group meeting its previous guidance range of between 127,000 to 143,000 ounces.

PRU offers long-term value at these levels, but until the company can stick to its guidance we have too many short-term concerns.

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Tabcorp Holdings Limited (TAH) is a gambling and entertainment group involved in a combination of wagering and media activities across Australia.

The company is divided into four main segments: Wagering, which includes totalisator and fixed odds betting; Media & International, including Sky Racing and Sky Sports Radio; Gaming, which includes a variety of Tabaret venues across Victoria; and Keno, which mostly operates in NSW and QLD clubs and hotels.

Back in June 2011, TAH successfully completed the demerger of its Casino business into the Echo Entertainment Group.

Promotional spend hurts margins

TAH’s FY12 core net profit rose 12.7% to $340 million. Revenue was up 3.1% as growth in Fixed Odds offset declines in totaliser revenues. Wagering costs climbed as TAH invested in technology and expanded its promotion and sponsorship activities.

This meant EBITDA margin fell sharply from 37.6% in FY11 to 23.2% in FY12.

Competitive pressures

The concerning aspect of the promotional activities expense was that TAH felt the need to boost its profile from increased competition. The explosion in online betting over the past few years has intensified competition in the wagering industry.

TAH has recognised this change and part of the reason behind its FY12 margin contraction was the amount of money it is being forced to spend on technology upgrades at its Trackside, Fixed Odds and self-service terminals.

Highlighting the competitive threat, Bet365, UNiTAB and Tom Waterhouse Betting have begun making their presence known in the past six months by ramping up advertising.

To boost its own profile, TAH needs to increase technological and advertising spending, which is going to be detrimental to margins in the short-term.

Outlook

Unfortunately for TAH, FY13 has got off to a shaky start.  1Q13 wagering revenue fell 2.4% on-year, with the result hurt by the changes to the Victorian Wagering and Betting Licence terms.

TAH was awarded a 12 year wagering and betting license by the Victorian government in July 2011 for $410 million. A tough trading environment in the Victorian and club network contributed to the fall in wagering revenue.

In our view a continuation of the weak trading conditions will limit revenue growth in FY13, putting further pressure on already strained profit margins.

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Bradken Limited (BKN) manufactures and supplies industrial products and maintenance services to the mining minerals processing rail and industrial markets.

The company’s products include ground engaging tools, mill liners, crusher liners, freight wagons, bogies wear plates, crawler systems, along with mining services and rail maintenance. BKN’s five divisions are mining products, rail, power and cement, engineered products and industrial.

FY12 results

BKN’s FY12 results did not really surprise the market too much given it downgraded guidance in late April. NPAT for FY12 was $100.5 million, a 15% climb on the FY11 result.

Sales over the 12-month period jumped by 26% to $1.45 billion. Earnings per share actually decreased over the year from 60.7 cents, to 60.5 cents, as the company expanded its capital base.

The most worrying aspect about BKN’s results was the decline in margins. EBITDA margin decreased from 17.07% to 14.93%, a significant move and the first contraction since 2009.

Commodity prices and the mining industry

The above chart shows the Commodity Price Index (CRB Index), which comprises 19 different commodities and represents broad commodity price trends.

The CRB index clearly shows a decline in commodity prices over the last six weeks. How does this affect BKN? In FY12, 78.2% of the company’s sales came from resources related companies.

As commodity prices decrease new mining projects and expansion plans become less viable, which in turn leads to less capital expenditure, which ultimately hurts BKN.

The correlation between BKN (green line) and the CRB index (white line) is evident in the above chart.

Outlook

BKN’s FY12 results may not have looked bad on the surface, but were beginning to show some worrying signs.

Declining margins are a real concern especially in the current environment where increased competition is likely to lead to all contractors having to lower their bid prices to get any work.

The group reframed from giving qualitative or quantitative FY13 guidance during the release of its FY12 results or at its AGM.

This is usually a worrying sign, because if they had good results they would be inclined to mention them either with specific numbers, or at least comment on whether the results would be similar to the previous period.

The correlation between the CRB index and BKN is unmistakable; and given the future uncertainty surrounding the US elections and the US ‘fiscal cliff’, we see more commodity price weakness on the horizon and thus a further deterioration in the BKN share price.

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Wotif.com Holdings (WTF) provides online travel services via itswww.wotif.com website. The website offers last-minute travel accommodation, across hotels, motels, serviced apartments, resorts, guesthouses and bed & breakfasts.

While the company is the dominant hotel booing site in Australia, it is attracting more competition and the historically strong rates of growth are becoming increasingly hard to replicate.

The company’s recent results saw higher revenue and profits but still disappointed the market, with the high Aussie dollar constraining overseas booking of Australian hotel rooms

FY12 results

At first glance, WTF’s FY12 results weren’t that bad. Net profit rose 14% to $58 million, with total revenue up 5% on the back of accommodation and flight booking growth.

EBIT margin increased from 56% to 59%, with the group demonstrating good cost control in a period of revenue growth.

However the operating environment has weakened noticeably in the opening months of FY13, reducing the odds of a repeat performance this financial year.

CEO resigns

Last month, WTF CEO Robbie Cooke announced he would leave the group at the end of the year to take up the top role at Tatts Group (TTS). Cooke’s intention to depart was met with a negative reaction, as his seven year tenure coincided with a period of strong growth for the group.

Given there was no immediate successor, his departure introduces leadership uncertainty just as the company is grappling with a slowing domestic economy.

Squeezed by competition

The biggest long-term threat to WTF is the entrance of new competition in the online accommodation market. The market itself has very low barriers to entry, meaning it wouldn’t be that hard for WTF’s competitors to muscle into its territory.

Indeed this seems to be happening already with US-based Expedia and Priceline expanding their presence in Australia through the development of smart phone apps.

Increased competitive pressures are also a likely reason why the value of room nights sold through WTF has stagnated around $7 million a year from FY10.

Outlook

The near-term outlook for WTF is uncertain at best. Its domestic-oriented business faces a period of weak revenue growth as TTV declines amid cutbacks in consumer discretionary spending.

Moreover, the Aussie dollar is still trading at lofty enough levels to encourage consumers to travel internationally rather than domestically. WTF admitted as much in its FY12 results, saying the high dollar was “situation normal”.

Flight bookings make up less than 10% of overall revenue, so whilst there may be some benefit to WTF from increased offshore travel, it won’t be enough to mitigate the impact to domestic accommodation revenue.

Moreover, greater competition from companies like Expedia and Priceline is expected to eat into WTF’s domestic market share, potentially resulting in slower revenue growth and margin pressure over the longer-term.

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Mirabela Nickel (ASX:MBN) is a mining company focused on the production and sale of nickel concentrate.

The miner’s key asset is the Santa Rita nickel operation in Bahia, Brazil.

MBN achieved its production ramp up goals in 2011, successfully upgrading the Santa Rita’s plant capacity to 7.2Mtpa of ore milled, from 4.6Mtpa in 2010.

However the ramp up was also accompanied by rising cash costs, which detracted significantly from an otherwise solid set of December 2011 quarter production numbers.

Costly cash

Mirabela Nickel announced its December quarter production report today.

Nickel output climbed 9% from the previous quarter, helping MBN to meet its 2011 production target of 15,854 tonnes.

However the production numbers were overshadowed by a disappointing rise in cash costs.

Cash costs jumped 11% on the quarter to US$7.42, as the higher output was accompanied by higher plant costs and lower productivity.

Additionally, mining costs rose amid increased expenses relating to drilling activity.

The ramp up in quarterly production was thus poorly executed due to the company’s own efficiencies as well as industry cost pressures.

Risk on

Another concerning aspect of the production release was the almost 50% fall in MBN’s cash holdings from the prior quarter.

A significant part of that outflow was due to the closing out of the company’s nickel and copper hedges.

The lower cash balance in addition to a new US$50 million debt facility entered into by a Brazilian subsidiary, raises MBN’s risk profile in a period of economic uncertainty.

Outlook

MBN has raised its 2012 production guidance, targeting 20,000 – 22,000 tonnes of nickel output.

As mentioned, however, greater output is not necessarily a good thing when it is accompanied by higher cash costs.

Mirabela Nickel has commenced a cost reduction program, which aims to lower cash costs towards US$6/lb by the end of the year. However that is largely dependent on the proper implementation of the program.

Although a return to steady state production may help, cost reductions will also be linked to the favourable renegotiation of MBN’s major contracts.

Having recently closed out of its nickel hedges, MBN is now fully exposed to the movement in commodity prices.

Unfortunately, there is also considerable uncertainty surrounding nickel prices, with brokers Morgan Stanley and Goldman Sachs recently downgrading their forecasts amid concerns about oversupply.

We at Australian Stock Report believe these headwinds are likely to weigh on MBN’s share price for a while yet.

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Kagara (ASX:KZL) is a copper, zinc-lead and nickel miner, with operations in North Queensland and WA. It has four operational hubs in North Queensland – Mungana, Mt. Garnet, Balcooma and Thalanga.

KZL’s North Queensland mines supply ore to three treatment facilities in Mt. Garnet (copper and polymetallic) and Thalanga (polymetallic).

A strategic review determined KZL’s nickel operations at Lounge Lizard, WA to be non-core, and so the group has put the assets up for sale.

The company faced major operational issues in FY11, which culminated in a $32.2 million loss.

An uncertain outlook for commodities has come at a poor time for Kagara, with its recently announced capital raising highlighting potential cash problems at the company.

Although KZL recently unveiled a five year turnaround strategy, we feel there are significant near-term headwinds that are likely to keep its share price under pressure.

Operational issues

KZL’s September quarter activities report revealed a 3% fall in copper output from the June quarter. However that was balanced by a 13% rise in zinc output.

Cash costs for both commodities fell on the quarter, reflecting the company’s focus on protecting its margins in the face of declining prices.

The quarterly output result followed a hugely disappointing FY11, which was characterised by a $32.2 million loss (compared to a $3.2 million profit in FY10).

The loss came on the back of a $48.5 million write-down of KZL’s Mt. Garnet and Mungana mines (Mungana Mines: MUX is 61.9% owned by KZL).

Production over the year was impacted by a prolonged wet season.  This was accompanied by rising cash costs over the year, which came about due to lower zinc output and adverse FX movements.

Uncertain commodities outlook

Europe’s debt crisis coupled with signs of a slowdown in Chinese economic activity has clouded the outlook for KZL’s key commodities – copper and zinc.

Copper has slumped around 17% from the highs it created in July, whilst zinc has suffered similar falls amid persistent concerns about global oversupply.

Copper is usually seen as an economic barometer, and its recent weakness suggests diminishing prospects for global growth.

Although longer-term we expect stronger demand for the red metal, we see more weakness in the near-term as Europe struggles to end its debt crisis.

Cap raising highlights problems

Kagara’s problems ultimately led to a $25 million capital raising (completed today), which it said was to finalise the acquisition of the Einasleigh Copper Deposit at Mt. Garnet.

Einasleigh was bought from Copper Strike (CSE) for $16 million, as part of KZL’s push to ramp up production in the next five years.

The announcement of the raising was surprising considering it came less than three months after KZL unveiled its five year turnaround strategy.

The capital raising suggests KZL is facing cash problems, with the group in a precarious position as it looks to significantly increase exploration activities in North Queensland.

Worryingly, this leaves KZL vulnerable to continued declines in copper prices and any unforseen production delays.

Outlook

KZL has been hit hard in recent times due to operational issues at its mines.  A prolonged wet season led to production delays and write-downs at Mt. Garnet and Mungana, which was reflected in a massive loss for FY11.

Although KZL is to embark on a five year turnaround strategy, it has set itself lofty exploration and production goals. The group aims to produce 30,000tpa of copper by FY15 (FY11: 22,530t) and 71,000tpa of zinc by FY14 (FY11: 40,125t).

KZL’s immediate focus, however, is on ensuring it has enough cash to cover near-term development expenses.

The recently completed capital raising is a worrying sign, and suggests KZL has little room for error in a very uncertain global economy.

A worsening of Europe’s debt crisis could see copper prices come under further selling pressure, thus impacting KZL’s margins.

As a result, we feel there is further near-term weakness in store for KZL’s share price.

KZL’s woes have seen it being a major mover on the ASX, it has plummet more than 60% in 2011.

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