May 2011 Review Comments
Written by Tony Gray   
Sunday, 15 May 2011 10:54

Portfolio Valuation & Comment

This month, rather than dwelling on the broader national and international themes, we have laid out a number of potential investments for the growth or inflation linked side of portfolios.  The investments are not tailored to your portfolio or risk/return profile or goals and hence may not be appropriate.

Australian Shares – Large Companies / Core
Newcrest Mining (NCM) - $38.82

Newcrest Mining is Australia’s largest gold miner and third largest globally and with very large gold reserves.  They are a large scale, low cost producer, carrying no debt and with significant production increases due through expansion of existing mines and development of new operations.  They also have a 50% stake in a massive new project in Papua New Guinea that could contribute 500,000 ounces of gold per annum for the next 40 years (their 50% stake) in addition to copper credits and potential for further resource upgrades – although production is another 5 years away for this project.
The stock is not cheap in terms of current earnings, but is also not excessively expensive.  Accepting the very low dividend yield, Newcrest Mining provides a gold hedge in portfolios – which could do very well if global inflation becomes an issue.  Looking to the 1970’s for a high inflationary period, then we might only be half way through the gold rally to date?

Australian Shares – Smaller Companies / Non-Core
Incitec Pivot (IPL) - $3.87

Incitec Pivot has just reported first half results and appear to be on track for a reasonable uplift in 2011 earnings.  Comments by the CEO on the 20% lift in earnings from the ammonium nitrate plant (due for completion in June 2012) make the stock appear cheap on a 2 year basis.  Earnings are highly dependent on explosives demand and fertiliser prices.  With good growing conditions and relatively high stock and crop prices the share price could rise strongly.
Incitec Pivot’s share price has been volatile and this is a higher risk/return stock.

Talent2 International (TWO) - $1.68

Talent2 International provide HR management services – with an on-line outsourcing service that is scalable globally and benefiting from the trend to businesses outsourcing HR functions.  Talent2 also provide traditional recruitment services, which is recovering strongly as labour shortages re-emerge.  The stock is trading on 15 times 2011 consensus estimates and 12 times 2012 estimates – which appears good value given the potential for above average growth.

Australian Shares – Speculative Companies
Marengo Mining (MGO) - $0.29

 Marengo Mining has the very large Yandera copper deposit (~2 million tonnes) in Papua New Guinea and may attract the interest of one of the major mining houses (including China Nonferrous with whom they have a memorandum of understanding).  Production from the largest existing global copper mines is declining and the copper price rising. 
Marengo have ~$65 million in cash and a market capitalisation of $300 million.  The company is completing a definitive feasibility study, with project construction to start in the new financial year and copper production in 2014, with a 20 year mine life.

Mesoblast (MSB) - $9.60

Unfortunately the share price has jumped a further 20% in the past week, but Mesoblast offer potentially very strong growth from present levels IF phase III clinical trials are successful.  Pre clinical, phase I and phase II trials are occurring for a range of diseases.

The company has global patents for a mass production technique for adult stem cells - and applying stem cells to treat a range of diseases – ranging from heart disease to diabetes.  The company has $280 million in cash and has partnered with major pharmaceutical stock, Cephalon, to develop some applications.

Go to www.brr.com.au/asx/MSB/mesoblast-limited and listen to the ASX presentation in London on the 22nd of March for a good overview of the company’s operation.

Listed Property Trusts (AREITS)
Australian Education Trust (AEU) - $0.82

Australian Education Trust own 335 childcare centres across Australian and New Zealand.  This includes some centres that had been leased to the now defunct ABC Learning – hence the low unit price.
All but 4 of the centres are now leased (i.e. a 1% vacancy rate), with most leases maturing between 2019 and 2024.  Debt refinancing is not required for almost 3 years and gearing is on the high side at 41%.  The income yield is very high at 11% p.a. and the units trade at a 31% discount to asset backing.

The unit price has been recovering, gearing levels falling and I expect a circa 15% p.a. total return is reasonably achievable over the next few years.

Bunnings Warehouse Property Trust (BWP) - $1.73

The Bunnings business is very strong and the Warehouse Property Trust owns a wide number of centres, with low gearing of 22% and yield of 7.6% forecast.  At $1.73 per unit they are trading at a 12% discount to asset backing.  I like the very large land footprint and location of the Bunnings centres.  Some 70% of the centres either have rents linked to inflation, or at a flat 4% p.a. – the balance are on market rent reviews.
Leases are typically 10 years, with 5+5+5 options to renew.

International Shares
Platinum International Healthcare Fund

This is the smallest fund in the Platinum stable.  The listed healthcare sector in Australia is quite small and we have no major listed pharmaceutical stocks.  This can be a very defensive sector but also appears well priced, with historically low valuations for the sector.
The major listed holdings are in the US and Europe for this sector and takes advantage of the high $A.

General Reading

For those who are interested in the comments of Pacific Investment Management Co (PIMCO), the largest global bond manager, with around $1.2 trillion in assets, then go to www.pimco.com and read Bill Gross’s Investment Outlook and also look at the ’Global Central Bank Focus – The End of QEII: It’s Time to Make the Donuts’ - the title will make sense when you have read the articles.
As always, please contact me if you have any investment or planning queries.

Best wishes,


A.W. (Tony) Gray BCom, LLB, Dip FP, GDipAppFin, CFP, FFin
Principal, TG Financial

Please treat the above comments as General Advice, with no action to occur until we have considered with reference to your financial position, needs and goals.

Last Updated on Thursday, 16 June 2011 17:31
 

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