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Hidden Barriers

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Apr 22 2015

This story features ASALEO CARE LIMITED, and other companies. For more info SHARE ANALYSIS: AHY

In this week’s Weekly Insights:

– Hidden Barriers
– US Profits: Bad Or Still Reasonable?
– Nine Entertainment: About Dividends
– FNArena Sponsors ASX Investor Series
– Share Buybacks – Who’s Doing It?
– Rudi On TV
– Rudi On Tour

Hidden Barriers

By Rudi Filapek-Vandyck, Editor FNArena

It happens to all of us, every now and then. We own a stock that doesn’t look expensive. Most brokers like it and think it’s good value. General commentary is supportive too. But the share price refuses to play ball.

Sometimes there’s a hidden barrier that is weighing upon investors’ enthusiasm and thus upon the share price. Identifying this hidden barrier is not always easy as it often concerns a risk the market rather wants to see resolved before jumping on board.

Identifying this risk can solve a lot of questions as well as the ultimate investor dilemma: am I going to stay on board in the meantime?

Below is a list of stocks I believe are currently being held back by such a hidden barrier (in alphabetical order):

ARDENT LEISURE ((AAD)) – Admittedly, the first one is a tricky one. The previous stellar run for Ardent Leisure shares came to an abrupt halt in the closing quarter of 2014. First there were market fears about a potential impact from lower oil prices on consumer spending in the state of Texas, which is at the centre of the company’s successful Main Events roll-out. Then there was the shock release of interim results in February which unexpectedly revealed negative momentum for the gym operations. Then there was the ill-communicated CEO replacement. The last decision has received a lot of airplay and is often quoted as the reason why the shares don’t seem to be going anywhere lately.

But is it really all about an inexperienced CEO who does not enjoy the confidence from investors? I beg to differ. I think what is holding back the share price is a general realisation that overall dynamics for gyms in Australia have changed and no one is really certain what this means for Ardent Leisure’s presence in this market. And yes, within this framework having an unknown and unproven CEO at the helm doesn’t seem very helpful. Previously, Ardent Leisure had been priced as a solid growth stock and its gym operations had supported the outlook for ongoing strong growth in the years ahead.

While Main Events continues to power along, a sluggish performance from the gyms can potentially weigh on growth and thus on investors perception of the stock. On the other hand, an implied dividend yield in excess of 6% should provide some support to the downside, but not if things turn out much worse than expected.

ASALEO CARE ((AHY)) – This producer of hygiene products is still rather unknown to most investors in Australia even though it has been firmly on my radar since listing last year at around the $2 mark. Being unknown is one reason that might explain as to why the share price has found it difficult to stay near the $2 price tag, but it doesn’t cover the full picture.

The company is a major producer of toilet paper in a market that in Australia is dominated by ABC Tissue (Quilton), global player Kimberley-Clark (Kleenex) and by Asaleo Care itself (Sorbent). Of course there’s intense competition between these three, but if everything remains rational everyone’s a winner, right? The problem is Indonesian Asia Pulp & Paper also wants a piece of the slice of what today is a $1.4bn market in Australia for toilet paper and facial tissues. The entrance of a new major player has the potential to become rather disruptive for all existing players and it is this prospect that is preventing Asaleo’s share price to revisit the $2 mark.

Solaris Paper, a local subsidiary of the Indonesian conglomerate, is planning an all-out assault on the Australian market from next month onwards. Keep an eye out for the “new” Emporia brand on supermarket shelves. Changes in the competitive landscape can have profound effects on companies and their share price. Think of Blackmores previously, or of Ardent Leisure above, or of Woolworths right now. It is this uncertainty that is keeping a lid on overall investor enthusiasm for Asaleo Care. In the meantime, the shares promise a dividend yield in excess of 5%, for as long as there are no disasters on the horizon post the Indonesian invasion.

AURIZON ((AZJ)) – Transport services provider Aurizon has not been able to keep its share price above levels of late 2013/early 2014. Shareholders should be pleased the former QR National is a solid and reliable dividend payer. What is holding back investor interest is the fact that bulk commodities remain in a savage downtrend and Aurizon provides transport and haulage services to many miners of coal and iron ore, predominantly in Queensland. There is a suspicion in the market that ultimately contracts will have to be renegotiated which places one big question mark over current market expectations.

In addition, US-headquartered Cliffs Natural Resources has indicated it wants to leave Australian shores and Cliffs just happens to be one of Aurizon’s major customers. Plenty of potential for unpredictable negative developments thus. What goes for Aurizon also applies to the likes of Qube Logistics ((QUB)), McAleese ((MCS)) and to other contractors and mining services providers, including Orica ((ORI)).

CARSALES.COM ((CAR)), REA GROUP ((REA)) and SEEK ((SEK)) – The Holy Trinity of online classifieds is battling against a general perception that the easy gains for these markets are now behind us with maturity kicking in and competition increasing. This in itself opens up the debate about whether the lofty Price-Earnings (PE) ratios from the past can still be used as guidance for the future?

Investors who believe this is something that is holding back their respective share prices this year should extend their price charts until early 2014. Share price patterns for REA and Seek look similar, but Carsales has been more volatile and the latter share price has underperformed the other two over the past twelve months.

All three are still showing robust performances, albeit at decelerating pace for Carsales and for Seek, and all three are seeking growth in additional products, segments and geographical regions. There is potential for margin pressure, which is weighing upon valuations because high margins attract higher rewards in the share market. Lower margins however… I am sure you get the picture.

INSURANCE AUSTRALIA GROUP ((IAG)) and SUNCORP ((SUN)) – Most investors in Australia might have become used to treating insurers as defensive yield stocks, in particular with IAG and Suncorp shares performing well post 2012, but insurance as a sector goes through its own cycles and right now a new down-cycle is taking place. Attentive observers will have noticed shares in IAG and Suncorp have found the going tougher since last year’s August reporting season when a large number of stockbroking analysts saw enough evidence to proclaim the cycle indeed had started to turn downwards.

The timing seems inopportune with smaller protagonists on the hunt for increased market share, in particular for car insurance. The silent debate is now about how low can/will margins go? As a result, the dividend outlook for both insurers has become muddied, in particular for IAG. AMP ((AMP)), on the other hand, has performed quite well over the past twelve months, but that was after serious underperformance following a sector rout with life insurances. AMP also has a larger leverage to rising equities through its network of financial planners. It is for the same reason most experts would recommend owning QBE Insurance ((QBE)) shares, given persistent weakness for QBE shares between 2007 and early 2015 and a natural exposure to rising bond yields in the USA and, later on, to European bonds.

SLATER AND GORDON ((SGH)) – Until a few weeks ago little seemed to disturb shareholders in Australia’s most successful law firm, apart from occasional bouts of profit taking after a stellar outperformance that started in early 2012. Then on the first of April the company announced its largest acquisition ever with the purchase of the professional services division from UK-listed Quindell. While the transaction propels Slater and Gordon into the UK top three, with the potential to transform the company as a whole, it has since also dawned on investors locally that Quindell is not exactly top of the shelf material.

As a matter of fact, it has transpired Quindell has a rather eventful history and the UK press has grabbed plenty of opportunities to pick the company and its management apart and put them on public display. This opens up all sorts of questions. How solid was Slater and Gordon’s due diligence? Has Slater and Gordon overpaid? How many corpses are there potentially lying around or under the carpet? Judging by the share price performance since, investors don’t seem too happy about the dramatically changed risk profile at one of Australia’s pre-eminent success stories from the past years.

WESFARMERS ((WES)) – Shareholders in retail conglomerate Wesfarmers, especially those who had to defend their choice against friends with a preference for Woolworths ((WOW)), have every reason under the sun to feel smug today. Under growing pressure from changes in the competitive supermarket landscape in Australia, Woolworths shares have tumbled from $38 to $28 and it remains to be seen when a turnaround will announce itself. Wesfarmers shares, on the other hand, remain proudly in the vicinity of $44, and still yielding a healthy dividend of well above 5% (fully franked).

But look closer and the share price of Wesfarmers has essentially stood still around today’s share price for the past two years. Lucky they do pay that healthy dividend! The apparent ceiling above the Wesfarmers share price is partially linked to the fact the PE ratio had run up well above 20, which seems a bit rich. But most of all, there remains the question whether a wounded Woolworths, eager to claw back some of the lost ground, won’t force Coles into a price war. Some analysts are convinced this is the ultimate outcome. Others are not so sure. All are watching industry developments closely.

In the background remains the unanswered question whether the Australian supermarket sector is now going through the same process as did their UK peers in years past, with devastating consequences for profit margins for the incumbent players as discounters like Aldi grabbed an ever larger piece of the pie. It is clear Metcash and now Woolworths have suffered from changing market dynamics. How immune will Coles ultimately prove to be? It is this uncertainly that is likely to keep a lid on the Wesfarmers share price, until it is resolved, either way.

US Profits: Bad Or Reasonable Still?

Yes, US equity markets have lost their lustre in 2015, which should not come as a complete surprise. The Federal Reserve wants higher rates, GDP growth and employment have been firmly supported by a booming energy sector, which is now facing tougher times and then there is the historical inverse relationship between labour costs and corporate profit margins. Did I mention headwinds from a stronger greenback for international exporters?

What has everybody’s attention, however, is slowing top line growth and the disappearance of growth in earnings per share. The latter could turn out nasty given lofty valuations. But then how bad is the situation? The overview below, from a recent Goldman Sachs report, suggests that if we strip out the energy sector, things really don’t look so bad.

Nine Entertainment: About Dividends

Shares in Nine Entertainment have staged a remarkable come-back since they sold off in the early days of January almost touching $1.60 at the time versus $2.25 on Monday. Those who watch my appearances on Sky Business each week know I have been quite constructive on Nine shares, for which I copped some flack from punters who did not see as to why the share price should move higher while Ten Network ((TEN)) and Seven West Media ((SVW)) remain in a quagmire, not to mention Southern Cross Media  ((SXL)) or Prime Media ((PRT)).

The “secret” so to speak is that Nine, thanks to a temporary off-market existence under private equity wings, is in much better shape than its peers, giving management more options to create shareholder value through new initiatives and by grabbing market share in TV land. Those analysts covering the local media sector had been expecting more upside and the company is starting to deliver with the sale of Nine Live, essentially its events operations including Ticketek, further underpinning prospects for higher dividends and capital management initiatives in the following years.

Given the board has now increased its payout to 80-100% from 50-60% previously, the prospective FY16 dividend yield may well turn out as high as 8%, plus franking, plus any additional benefits from share buybacks, beyond the $150m buyback already announced. Yes, I know, traditional TV operators are doing it tough and there await many challenges for the sector on the immediate horizon, but Nine appears very much a story of one beautiful mansion in a run down street. Focus on the environment and you will never even consider it. Those who live inside the mansion, however, have no reason to complain.

FNArena Sponsors ASX Investor Series, Sydney April 21, 12:30pm -2pm

Don’t miss the next opportunity to hear from CEOs over lunch with an informal meet and greet session at the conclusion of presentations. Speaking at this event are Martin Aircraft Company, Eureka Group Holdings, Cynata Therapeutics, Actinogen and Jumbo Interactive.

These events are free to attend however registration is required as seating is limited. Register here

Share Buybacks – Who’s Doing It?

Below is an incomplete overview of companies buying in their own shares this year. We very much appreciate all contributions and suggestions at info@fnarena.com

– Amcor ((AMC))
– Boral ((BLD))
– CSL ((CSL))
– DWS Ltd ((DWS))
– Fairfax ((FXJ))
– Fiducian ((FID))
– Finbar Group ((FRI))
– GDI Property Group ((GDI))
– Logicamms ((LCM))
– Nine Entertainment ((NEC))
– Orica ((ORI))
– Pro Medicus ((PME))
– Rio Tinto ((RIO))
– Seven Group ((SVW))

Wants to buy in own stock (but still awaiting shareholders approval): Intrepid Mines ((IAU))

Rudi On TV

– on Wednesday, Sky Business, 5.30-6pm, Market Moves
– on Thursday, Sky Business, noon-12.45pm, Lunch Money
– on Thursday, Sky Business, Switzer TV, between 7-8pm

Rudi On Tour

I have accepted invitations to present:

– May 19, ATAA Canberra
– May 29, CEOs lunch French Chamber of Commerce
– August 2-5, AIA National Conference, Surfers Paradise Marriott Resort and Spa, Queensland – for more information about this event:

http://www.investors.asn.au/events/events-schedule/aia-national-investors-conference/

Note: FNArena subscribers can attend at similar discount as AIA members

(This story was written on Monday, 20 April 2015. It was published on the day in the form of an email to paying subscribers at FNArena).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena’s – see disclaimer on the website. In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via Editor Direct on the website).

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THE AUD AND THE AUSTRALIAN SHARE MARKET

This eBooklet published in July 2013 forms part of FNArena’s bonus package for a paid subscription (excluding one month subscriptions).

My previous eBooklet (see below) is also still included.

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MAKE RISK YOUR FRIEND – ALL-WEATHER PERFORMERS

Odd as it may seem, but today’s share market is NOT only about dividend yield. Post-2008, less risky, reliable performers among industrials have significantly outperformed and my market research over the past six years has been focused on identifying which stocks, and why, are part of the chosen few; the All-Weather Performers.

The original eBooklet was released in early 2013, followed by a more recent general update in December 2014.

Making Risk Your Friend. Finding All-Weather Performers, in both eBooklet versions, is included in FNArena’s free bonus package for a paid subscription (excluding one month subscription).

If you haven’t received your copy as yet, send an email to info@fnarena.com

For paying subscribers only: we have an excel sheet overview with share price as at the end of March available. Just send an email to the address above if you are interested.

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CHARTS

AHY AMC AMP AZJ BLD CAR CSL DWS FID FRI GDI IAG LCM NEC ORI PME PRT QBE QUB REA RIO SEK SGH SUN SVW SXL WES WOW

For more info SHARE ANALYSIS: AHY - ASALEO CARE LIMITED

For more info SHARE ANALYSIS: AMC - AMCOR PLC

For more info SHARE ANALYSIS: AMP - AMP LIMITED

For more info SHARE ANALYSIS: AZJ - AURIZON HOLDINGS LIMITED

For more info SHARE ANALYSIS: BLD - BORAL LIMITED

For more info SHARE ANALYSIS: CAR - CARSALES.COM LIMITED

For more info SHARE ANALYSIS: CSL - CSL LIMITED

For more info SHARE ANALYSIS: DWS - DWS LIMITED

For more info SHARE ANALYSIS: FID - FIDUCIAN GROUP LIMITED

For more info SHARE ANALYSIS: FRI - FINBAR GROUP LIMITED

For more info SHARE ANALYSIS: GDI - GDI PROPERTY GROUP

For more info SHARE ANALYSIS: IAG - INSURANCE AUSTRALIA GROUP LIMITED

For more info SHARE ANALYSIS: LCM - LOGICAMMS LIMITED

For more info SHARE ANALYSIS: NEC - NINE ENTERTAINMENT CO. HOLDINGS LIMITED

For more info SHARE ANALYSIS: ORI - ORICA LIMITED

For more info SHARE ANALYSIS: PME - PRO MEDICUS LIMITED

For more info SHARE ANALYSIS: PRT - PRIME MEDIA GROUP LIMITED

For more info SHARE ANALYSIS: QBE - QBE INSURANCE GROUP LIMITED

For more info SHARE ANALYSIS: QUB - QUBE HOLDINGS LIMITED

For more info SHARE ANALYSIS: REA - REA GROUP LIMITED

For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED

For more info SHARE ANALYSIS: SEK - SEEK LIMITED

For more info SHARE ANALYSIS: SGH - SLATER & GORDON LIMITED

For more info SHARE ANALYSIS: SUN - SUNCORP GROUP LIMITED

For more info SHARE ANALYSIS: SVW - SEVEN GROUP HOLDINGS LIMITED

For more info SHARE ANALYSIS: SXL - SOUTHERN CROSS MEDIA GROUP LIMITED

For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED

For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED