Australia’s competition watchdog cleared the way for AGL Energy (AGK) to fully acquire the Loy Yang, a power station in Victoria and launch a $900m share issue to help fund the deal.

The Australian Competition and Consumer Commission said AGL’s acquisition of the 67.5% of the coal-fired power station that it doesn’t already own is unlikely to substantially reduce competition in electricity generation and retail markets.

The Australian utility in February agreed to buy the stake for $448m. It includes Tokyo Electric Power’s holding of 32.5% and minority interests held by pension funds.

The deal gives the asset an enterprise value of $3.1bn including its heavy borrowings. AGL has already executed a $650m issue of subordinated notes to help fund the deal. It will issue new AGL shares at $11.60 each to raise $900m through institutional and retail entitlement offers. AGK remained unchanged at $14.93.

The equity raising will be a fully underwritten 1:6 pro-rata renounceable entitlement offer at A$11.60 per new share, a 22.3% discount to last close and a 19.7% discount to the theoretical ex-rights price.

AGL Energy also indicated the full year 2012 final (fully franked) dividend will be 32cps and reaffirmed full year 201212 profit guidance of A$470–500 million.

We will be participating in the right issue given the discount to the current price and the gross dividend yield of 5.7%.

Our valuation on this company is $17.50 as such we expect to see good growth over the long-term.

For more information on AGL Energy (AGK) please contact us on 07 4771 4577. 

GMI invests in the metal and mining sectors of global equity markets.

GMI is managed locally by Bell Asset Management Limited while the natural resources team of BlackRock Investment Management (UK) Limited is the Investment Manager of the Company.

GMI provides exposure for Australian shareholders through a single ASX-listed entity to a global portfolio of metal and mining securities.

The portfolio comprises around 70 metal and mining stocks, including positions in other international mining companies.

In managing the portfolio of the Company, the Investment Manager aims to exceed the return of the HSBC Global Mining Capital Index in Australian dollars and maximise capital growth through investing globally in natural resource companies.

The Board of GMI has been concerned for some time about the Company’s continuing share price discount to net tangible assets (NTA). This discount has persisted despite consistent outperformance of GMI’s investment portfolio relative to its benchmark and the various initiatives taken over the past four years to close the discount gap.

The Board has announced to the Australian Stock Exchange (ASX) that it intends to put forward to shareholders a proposal to restructure GMI to remove this share price discount to NTA.

GMI will be wound up and the shareholdings will be transferred into a unit trust, this will allow share holders to realise the real value of these shares.

Until recently the share price has been trading at $0.90 per share the price has jumped to $1.05 per share on the back of this news.

As at the end of April 2012 the net tangible assets are $1.19 per share after tax. At present the stock is trading at a discount of 13% to net tangible assets.

GMI is a good example of how the market can mis-price a company.

For more information on Global Mining Investments Limited (GMI) please contact us on 07 4771 4577. 

AGL Energy is Australia’s second largest retailer of electricity and gas.

AGL is the oldest company listed on the ASX, founded in 1837. It services over 3.3m retail electricity and gas customers in the eastern and southern Australian states representing a 27% market share.

Profit (EBIT) is evenly split between energy retailing and energy generation and procurement activities.

Generation capacity comprises a portfolio of peaking, intermediate and base load plants with a combined capacity of 3,614 MW.

Although first half 2012 profits were 51% below prior period comparison it was the derivative revaluations which produced the poor result. If we adjust for these revaluations the performance net profit was up 3% and in line with expectations.

The recent acquisition of Loy Yang base load power station taking their share from 33% to 100% caused concerns over credit ratings but is expected to be earnings accretive form 2013 financial year.

The company has a forecast dividend of $0.62 per share which is expected to be 66 & franked.

I noted that the last two dividends had 100% franking. The gross yield for this company is 6.4% at 100% franking.

Over the past couple of months the price has moved up from $13.70 to $14.94 our price target remains at $17.50.

The recent price movement in price has pulled our recommendation back from a Buy to an Accumulate.

For more information on AGL Energy please contact us on 07 4771 4577. 

This is a company I am keeping an eye on.

At this stage I do not consider it investment grade however if we start to see a turnaround in investors attitudes to growth it would be one to be in.

TRG is an Australian investment and funds management company. Treasury Group Investment Services (100%) acts as product issuer and responsible entity for a range of registered managed investment schemes.

The Company currently comprises eight boutique fund management businesses. Investors Mutual Limited (47.5%), Orion Asset Management (41.9%), AR Capital Management (30%), Celeste Funds Management (39.1%), Global Value Investors (48.7%), Treasury Asia Asset Management (40%), Rare Infrastructure (40%) and Aubrey Capital Management (20%).

The company has seen a 7% fall in Net Profit After tax in the first half 2012, this is due to a fall in the profits of the managed funds industry.

As investors are currently looking toward cash in this uncertain environment the fund management industry will continue to struggle.

On the positive side TRG has maintained its dividend at 34c per share fully franked giving it a gross yield of 11% and forecasts that this will grow slightly in 2013 to 35c per share.

We are also expecting a 15% increase in earnings per share in 2012 and a further 8% increase in earnings per share in 2013.

The company has no debt at present and all dividends are paid from cash, the current payout ratio is 63%. They have a strong cash position of $10 million.

At present the industry carries a little too much risk to call a buy on the stock but certainly one to watch. 

For more information on Treasury Group (TRG) please contact us on 07 4771 4577. 

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SMS is a consulting, technology and systems integration company.

SMS specialise in improving operational performance and IT delivery by addressing everything from business integration to Compliance, process improvement to change management and technology strategy to systems integration and application development.

Offices are located in Australia and Hong Kong.

The industries serviced are Defence and National Security, Financial Services, Governments, Health and Human Services, Information and Communications Technology, Mining and Resources, Transport and Utilities.

The company has performed well since the start of the year and is currently trading at $5.70, we have a price target of $7.10 on the company and it is paying a 7.5% gross dividend yield.

The main risk with the stock is that it has a number of government contracts which over the past 12 months have seen a decrease in government spending on IT projects this has caused a drain on both cash flow and staff utilisation.

We are expecting that the company will end of year profit of $31 million which is below original forecasts. The company has provided no guidance at this time on profits.

For 2013 year, we are expecting a profit of $36 million. We also expect to see the dividend improve over time as they maintain their payout ratio around the 67% level.

We maintain an "accumulate" on this stock with a long-term view of growth and income.

We are cautious, as in the current economic environment we expect that capital expenditure will be reduced or postponed.

SMS is a solid investment for those who are looking for exposure to the IT sector.  

For more information on SMS please contact us on 07 4771 4577. 

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SKI is an infrastructure fund with an objective to invest in regulated utility infrastructure, both within Australia and overseas.

This includes electricity and gas distribution and transmission, regulated water and sewerage assets.

Spark Infrastructure's current portfolio comprises a 49% interest in three regulated electricity distribution companies, ETSA Utilities in South Australia, CitiPower and Powercor in Victoria.

We started buying this company around the $1.05 mark. It is currently trading at $1.54 and has had a good run over the past month.

At the current price, it has a yield 6.5% which is a good return for a solid utilities company.

It is currently paying $0.10 per share with an expectation that this will increase to $0.105 per share in 2012. All dividends are paid from the free cash flow of $0.142 per share on a 80% payout ratio.

Dividend reinvestment has been suspended which is always a good sign.

The net asset backing for the company is $1.64 per share giving further upside to the price.

With no debt due in 2012 and no regulatory resets until 2015 and the gearing level at 75% we continue to hold this company although taking a profit is very tempting. 

For more information on Spark Infrastructure (SKI) please contact us on 07 4771 4577. 

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David Jones warned that full year profit may fall as much as 40% due to weak consumer spending and costs of a new strategy to arrest declining sales.

Releasing the company’s first half results, Chief Executive Paul Zahra announced plans to open six department stores, cut costs and offer more products online, as part of a strategy to return to modest profit growth next year.

The company said net profit for the year ending 31 July will fall between 35% and 40%, implying earnings of $100.9m to $109.3m.

First half profit fell 20% to $85m from $105.7m a year ago, and first half sales dropped 6.7% to $1.01bn from $1.08bn a year ago.

The company said its full year profit would be hit by costs associated with its “Three Point Strategy” plus challenging trading conditions and the cost of clearing excess inventory.

Retail is a tough sector right now, sale are down across the board and with consumers looking to reduce debt and concerned about loss of employment this trend will continue for some time.

If you hold retail stocks, continue to hold for the long-term but now is not the time to buy.

David Jones share price fell 30% on the back of the announcement, the stock is now trading at levels last seen at the bottom of the GFC.

For more information on David Jones please contact us on 07 4771 4577. 

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Woolworths reported that first-half net profit fell 17% on costs associated with the restructuring and sale of its Dick Smith electronics stores.

Net profit for the six months to Dec. 31 fell to $966.9 million from $1.16 billion the previous year.

Last month, Woolworths said it would close underperforming Dick Smith stores, sell the business and take a $300 million provision in the half.

Woolworths also plans to create 10,000 jobs in fiscal 2012 to grow its store numbers, including its Master Home Improvement outlets, a joint venture with US giant Lowe's, as it seeks to challenge the dominance of Wesfarmers' Bunning’s chain. 

Woolworths said it anticipates before-tax start-up costs of up to $100 million for Masters in the full year, depending on the pace of its store rollout.

The company said it expects trading to remain subdued over the remainder of the year, and continues to estimate full-year after-tax profit growth of 2-6%, excluding restructuring costs.

Revenue for the period rose 5.0% to $29.91 billion from the previous year's $28.48 billion. The company also said it will pay an interim dividend of 59 cents a share, up from last year's 57 cents. 

Woolworths is a defensive stock providing exposure to the retail sector.

With a full year guidance of Net Profit After Tax growth of 2-6%, excluding the $300 million provision on Dick Smith the company is expect to continue to grow.

Moving in to the home improvements market will ensure that they keep pace with competitors.

I continue to hold the stock at current levels and continue to accumulate at or below $25. 

For more information on Woolworths (WOW) please contact us on 07 4771 4577. 

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Atlas Iron Limited (AGO) is an iron ore producer located in Western Australia. 

Projects are predominantly located within the Northeast Pilbara region and cover approximately 26,000km2 of ground prospective for iron ore.  

Pardoo is AGO's flagship project and is located approximately 50 km east of Port Hedland and is Australia's newest iron ore mine. 

It was announced in Dec 2009 that Direct Shipping Ore from this project has reached a shipping capacity over 1 million tonnes of iron ore in its maiden year of operation.

AGO result was a little weaker than expected but the long-term outlook remains on track. 

Production growth to 12 million tonnes a year has been delayed slightly too mid 2013 but expansion is still tracking well. 

A resource reserve update is due in July 2012 with growth in production being the primary concern for investors. 

We have a fair value of $4.00 for the company, which is currently trading at $3.20. 

AGO results were poor with a 96% drop in profit for the half-year to $6 million. This was due to weaker iron ore prices and two shipments of low-grade ore. 

Cash flow also fell 27% to $159 million but continues to fully fund investing cash flow. The cash balanced increased 3%. 

AGO also sold its Yerecoin and Balla Balla magnetite projects for $57 million and those funds are expected to be received during the current half. 

We are expecting a full year dividend of $0.03. 

This company is for the more aggressive investor. 

We expect that we will see a 25% upside in the coming 12 months.  

For more information on Atlas Iron Limited (AGO) please contact us on 07 4771 4577. 

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AAC is Australia´s largest cattle manager, with more than 600,000 head of cattle and a land bank of more than 6m ha from around 20 properties.  

Vertical integration from breeding to exporting with high-rainfall stations minimises, but does not remove, drought risk.  

A key advantage is quality control, gaining premium pricing for its source-guaranteed and marbled beef.  

With a long history, the company has considerable experience in beef cattle production. 

Earnings and cash flow are volatile.  

AAC´s extensive land and cattle holdings are valuable assets and provide investors with direct exposure to cattle and land-price movements, but dividends are likely to be minimal. 

Full year 2011 earnings before interest and tax were up 41% on 2010, with a net profit of $11.8 million for the 2011 year which was a turnaround from the loss of $2.1 million in 2010. 

Sales increased on the back of herd improvements and very good seasonal conditions. They are continuing to expect demand to increase in Asia, continued good weather in the next two years and have forecast that they will start paying dividends in 2013 financial year.   

The company is trading at a 20% discount to net assets and an 18% discount to our fair value. 

This company provides good exposure to the beef industry but you must be prepared to ride out the bad seasons. 

For more information on Australian Agricultural Company Limited (AAC) please contact us on 07 4771 4577.