Shares To Buy: The Reject Shop (TRS)

The Reject Shop (TRS) is a discount variety retail company, targeting Australian consumers through low price points, bargain-purchasing and convenient shopping locations.

TRS offers a wide variety of general consumer merchandise, with a focus on everyday needs, such as toiletries, cosmetics, homewares, personal care products, hardware, basic furniture, household cleaning products, kitchenware, confectionery and snack food.

The company has two key advantages that many of its mid-to-upper market rivals don’t – a strong Australian Dollar benefits earnings due to lower import costs, whilst the substitute nature of its products can appeal to cost-conscious consumers.

After a disappointing finish to FY11, TRS got itself back on track in 1H12, with net profit and sales rising on the back of a resumption in operations at its Ipswich Distribution Centre.

1H12 results

TRS grew its 1H12 net profit 4% on-year to $16.6 million.

New store openings helped sales climb 6.1% to $292.8 million, but this could have been higher had TRS not face capacity constraints in the early part of the half.

These capacity constraints were due to the early-2011 Queensland floods, which impacted operations at the Ipswich Distribution Centre.

TRS was able to generate sales momentum in the second quarter, helped by improved seasonable trade and the reinstatement of the Ipswich Distribution Centre.

A strong AUD combined with a reduction in shipping costs saw the company’s underlying gross margin rise from 44% in 1H11, to 45.4% in 1H12.

This was particularly impressive considering TRS faced price deflation over the period. It also illustrates how for TRS a high AUD can provide a hedge against price deflation, unlike many other retailers.

Outlook

With the Ipswich Distribution Centre now fully functional, TRS can focus on continuing the sales momentum generated in the second quarter.

Furthermore, with inventory management back to normal, we expect TRS to further improve margins (via less stock markdowns) and build on 1H12’s strong operating cash flow performance (via better working capital management).

Although it expects a tough trading environment to persist into 2012, TRS said second half comparable sales to date were positive. We expect TRS’ new store rollout to continue to underpin sales growth into this year.

The group forecast FY12 net profit to be between 27% and 36% higher than FY11. Even taking this strong growth into account, TRS is trading on reasonable multiples and we expect this to translate into further gains in its share price.

Seven Group Holdings (SVW) 1H FY12 profit of $52.1 million

Seven Group Holdings (SVW) is a diversified operating and investment group listed on the Australian Stock Exchange. The operating business encompasses WesTrac, a global top five Caterpillar dealership. It also is a minority holder in Seven West media and major shareholder National Hire.

Seven Group Holdings announced a 1H FY12 profit of $52.1 million, a 57.8% fall on the previous corresponding period.  The result was better than the market expected.

Despite the fall in profit, revenue grew 29.3% to $2 billion over the same period.

The result was spoiled by $165.2 million impairment charge on the carrying value of its investment in Seven West Media.

The company will pay an interim dividend of 18 cents a share, fully franked.

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Westfield Group (ASX:WDC)  is the largest retail property group in the world by equity market capitalisation. It has investment interests in 126 shopping centres in Australia, New Zealand and the United States

Westfield, which is among the blue chip stocks, revealed a full year 2011 profit of $1.53 billion, a 37.5% rise on the previous corresponding period, slightly ahead of analyst expectations.

Full year revenue climbed 10.5% to $1.46 billion, year on year.

WDC declared a final distribution of 24.2 cents, in line with expectations.

The group also announced it would start an on-market buyback of securities for up to 10% of its issued capital.

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Western Areas NL (ASX:WSA) is an exploration company that is involved in the development of the Fox Nickel mine and the exploration of nickel sulfides, platinum group metals and gold.

Material stock Western Area reported a 1H FY12 net profit of $24.1 million, reflecting a 64% drop compared to same period a year earlier.

The company said the price of nickel averaged US$8.51/lb in the first half of its financial year compared to an average of US$ 11.61/lb a year earlier.

WSA slashed its interim dividend in half, declaring $0.05 dividend, unfranked.

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Leighton Holdings Ltd (ASX:LEI) offers a variety of project development and contracting services to public and private sector clients in the Asia-Pacific region. Leighton provides design management, civil engineering construction, building, mining, process engineering, telecommunications, waste management and infrastructure operation and maintenance and property development and management. Leighton is listed on the Australian Stock Exchange and is a member of the S&P/ASX 200.

Leighton announced a 1H FY12 NPAT of $340 million, a 57% jump on $216.7 million a year earlier.

Revenue jumped 25% to $12.2 billion compared to the same corresponding period in FY11.

LEI said in statement that the group is confident it is positioned in the best possible markets in the world for at lead the foreseeable future.

The company also said it will pay an interim dividend of 60 cents per share.

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News Corporation (ASX:NWS) is a diversified media conglomerate with interests in all geographic locations around the world, and in all facets of the media. The principle activities of the company include printing and publishing, books and magazines, television broadcasting and production including both free to air and pay television, and film production and distributions.

Today, ASX 200 listed News Corporation announced its December quarter earnings, showing a net profit of $984.49 million up 65% compared to the same quarter a year ago.

The earnings rise came despite a $33.44 million cost for restructuring the group’s British and Australian newspaper divisions.

NWS reaffirmed its outlook for 2012, saying it still expects the company’s overall operating income to rise in then low-mid double-digit range for the year.

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Downer EDI Ltd (ASX:DOW), provides engineering and infrastructure management services to the public and private rail, road, power, telecommunications, mining and resources sectors in Australia, New Zealand, Asia and the Pacific. Downer provides rolling stock services, drilling services for the exploration industry, mine planning and management services and highway maintenance.

Industrials stock Downer EDI today announced it has been awarded a six year magnetite mining contract with Karara Mining for provisions of services at its iron ore project in Western Australia.

The contract which commences this month has total estimated revenue of approximately $570 million over the six years.

CEO Mr Grant Fenn said the contract will enhance Downer’s exposure to the expanding iron ore sector and also increase its geographical presence in Western Australia.

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Woolworths (ASX:WOW) operates supermarkets, specialty and discount department stores, liquor and electronics stores throughout Australia. Woolworths also manufactures processed foods, exports and wholesales food and offers petrol retailing.  The Company also operates hotels which includes pubs, food, accommodation, and gaming operations.

ASX Blue chip supermarket giant Woolworths today announced 2Q sales growth of 5.1% to $14.1 billion compared to the previous corresponding quarter, this was in line with market expectations.

The 2Q sales results bought the 1H FY12 sales to $29.7 billion, a 5% increase on the previous year.

WOW also announced that it will sell its Dick Smith consumer electronics business following a strategic review that was announced in November.

Since the review the company said it has received a number of unsolicited approaches in relation to Dick Smith.

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CSG Ltd. (ASX:CSV) offers computer and other technology services. The Company offers information, technology, and communications project management and outsourced infrastructure support; applications development services; and sales of document management solutions and telecommunications services.

Small cap stock, CSG today announced that is expects NPAT for the half ending 31 December to be within the range of $9 million – $11 million, down from the $19.2 million in same half in FY11.

The company said the NPAT included a one off cost of $2.1 million in the last quarter of CY12.

CSG cited challenging trading conditions, but did expect an improved performance in the second half.

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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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