In this section we provide readers with three stocks that have attracted the interest of the broking community or the ‘herd’. Broker recommendations tend to be biased and highly optimistic. We try and breakdown these barriers and give our own honest opinion. It is important to keep in mind that technical analysis is only one part of the investment process and any recommendations do not give consideration to the underlying fundamentals of each business.
NAB – Current Price – $30.19 – NAB has posted its FY profit result and it’s in line with expectations. NAB’s cash earnings came in at $6.642bn up 2.5% and broadly in line with the $6.678bn expected by most brokers and it held its final dividend flat at 99c, fully franked. But what stole the headlines was its intention to cut 6,000 jobs over 3 years as it heads into the digital age. The introduction of new technology and digital transactions will cause a shift in its workforce. But it’s not just NAB, all four will be under pressure to cut jobs and reshape their workforces. CEO Andrew Thorburn says the losses will be closer to 4,000 and 2,000 new jobs will be created with the digital focus. Restructuring costs of between $500m-$800m next year. It also said $1.5bn will be spent in investing on innovation in its small and medium business lending arm.
Broker View: Morgans (BUY $35.00) – The broker says the recent result was in line with consensus but missed its estimates. Dividend was also in line. Morgans doesn’t see any downside with NAB’s strategy going forward and it’s confident on planned cost reductions. It does however forecast earnings fall in FY18 to account for restructuring costs.
Unconventional view: We agree with Morgans. Off the cuff, the NAB result looks mixed. FY17 results beat expectations with cash earnings coming in above most broker analyst estimates. The quality of the result was OK. Bad and doubtful debts rose by 1.3% to $810m which isn’t great but isn’t bad. NIM also dropped by 3bps. The focus really was on NAB’s decision to slash its workforce by 4,000 and enter the digital age. We think this is a major positive going forward. The bank is reshaping its business to enable it to deliver for its customers a better service via new technology. That’s always a good thing. Whilst 6,000 roles will be impacted another 2,000 will be created. The business and private banking units will be most affected. Cash earnings and revenue are up, asset quality was the highlight and NAB’s balance sheet is strong. Cost savings of greater than $1 billion are targeted by the end of FY20. NIM was down 3bps but revenue was up 2.7%. On the StockOmeter, NAB comes in at 55. It loses points for its high gearing which is the case with all banks. But NAB’s intrinsic value is $44.36 which is well above the current share price, which makes the stock undervalued at its current level. All in all, an OK result, but its intention to create a state of art high tech bank is rather exciting. NAB may open lower due to the mixed result. We think investors should be buying on the back of this result.
Credit Corp – Current Price – $21.22 – Is an Australian receivables management company which provides debt purchase and debt collection services, primarily focusing on the acquisition of purchased debt ledgers (PDLs) comprised of distressed consumer debt from Australian and New Zealand banks, finance companies, and telecommunication companies. CCP has a recent expansion to USA. So basically the company purchases past-debts that company’s such as banks and telcos cannot recover. It purchases these debts on the cheap and then attempts to work with the debtor to agree on an affordable repayment plan. CCP delivers immediate and guaranteed cash inflow and relives the seller of costs associated with the collection process. This week CCP announced the acquisition of Thorn Group’s (TGA) Cashfirst consumer finance book.
Broker View: Ord Minnett (ACCUMULATE $21.00) – The broker thinks there’s merit in the Cashfirst acquisition for $13.3m. It represents a small acquisition but it will have a positive impact on earnings in FY18 and FY19.
Unconventional view: We agree with Ords. We like the CCP business. It’s a simple business model, purchasing past-due unsecured debt and giving it a second go. This can include credit card or loan, loans or bills. Debt is purchased at a massive discount (15c-25c in the dollar) to the outstanding value. The key is to not pay too much for the debt and to make sure you can recover it. Then the debt obligation moves away from the bank. CCP usually tries to recover double the initial investment amount. As you can see, it’s a high return business. Returns are dependent on price debt and being able to locate the customers to collect debt as efficiently as possible. This is what CCP is good at and it does this well. CCP is by and far the country’s largest operator but barriers to entry are quite low, anyone can enter this field and recover debt. On the downside, the Australian PDL market is in its maturity, so growth will only come from acquisitions and growth outside Australia. Both of which CCP is actively doing. The company recently moved into the US and this week acquired Thorn Group’s Cashfirst consumer finance book. Returns are maximised when collections are sustained over the collection life.
We think CCP’s move to enter the US market is largely a positive one. The US market is a lot larger than Australia and it includes healthcare and student loans. The debt available for purchase is some US$5bn compared to Australia’s $300m. On the StockOmeter the company stacks up well. It rates in at 70. Its PE is neither cheap nor expensive at 18.50x with a high ROE of 23.89% rising to 24.34%. Dividend and gearing are OK. The company has a solid balance sheet and funding comes from operating cash flow and debt. On the chart the stock has broken out on the upside. This break out is a bullish buy signal indicating that the stock should push higher. We advise buying at these levels but it should be noted, that the stock has had a solid rally. So any negative news could see it pull back to $12-$14. So to be safe, set stop losses.
Origin Energy – Current Price – $8.15 – Is a gas and oil exploration and production company but also deals in power generation and energy retailing in Australia. LNG operation, energy retailing and power generations. It also conducts the business in New Zealand through a 53.09% investment in Contact Energy. Production basins include SA Cooper & SWQ, Otway, Bass, Surat, Perth, and Taranaki. It also holds a 37.5% investment in Australia Pacific LNG. It is the owner and developer of gas-fired power generation in Australia and also produces renewable energy from wind farms with 6,000 MW of capacity. ORG released its Quarterly Production Report for the quarter ended 30 September 2017 this week. Origin’s quarterly production of 89.1 PJe was stable compared to the June quarter, reflecting a sustained level of production.
Broker View: Deutsche Bank (HOLD $9.15) – The broker is Neutral on the stock. The September Q production at APNLG was up 3% and will be the main focus going forward after the Lattice sale. As such the broker has lowered its FY18 and FY19 estimates down by 8% and 9% respectively.
Unconventional view: We disagree with Deutsche. The company hit a major milestone announcing the sale of Lattice Energy, which helps simplify the business and reduce debt. Revenue from APLNG for the quarter was higher reflecting higher production and higher realised prices. APLNG will continue to be a major supplier of gas to Australia’s east coast, and is expected to provide almost 30% of total east coast gas market demand in 2018, as well as meeting its export contract commitments. For that reason, we are confident that Origin will continue to do well going forward. APLNG performed strongly in the September quarter. Whilst Deutsche is lowering its estimates, UBS has raised its FY18 forecasts for EPS by 44% to reflect nine months of Lattice contributions prior to the sale. To add to it, if the recent oil price rally is sustained, it will only increase the level of cash distributions from APLNG to the company. On the chart, the stock is looking particularly attractive. Origin is in a short term uptrend formation and looks to be making higher highs. As long as it continues along this support line, we think it’s an attractive Buy.