Five-Year Highs, Flash China PMI and Far-off Elections

By David Dittman • January 30, 2013 • Pacific Digest

Three members of the group of “Eight Income Wonders from Down Under” that made up the original Australian Edge Portfolio have posted five-year closing highs on the Australian Securities Exchange (ASX) this week. Five more Portfolio Holdings, including three recent additions, have also pushed out to new half-decade highs.

That’s 33 percent of current Holdings that have established post-Great Financial Crisis highs in the last couple days.

APA Group (ASX: APA, OTC: APAJF), Australia’s biggest pipeline operator, closed at AUD5.94 on  Jan. 29, 2013, and has now generated a total return of 64.1 percent in Australian dollar terms and 76.1 percent in US dollar terms.

Natural gas transmission and distribution outfit Envestra Ltd (ASX: ENV, OTC: EVSRF), of which APA Group owns 32.8 percent, closed at AUD0.98 on Jan. 30, pushing its aussie total return to 66.3 percent and its greenback return to 78.4 percent.

Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY), our favorite among Australia’s Big Four banks, established its five-year closing high of AUD26.58 on Jan. 30, 2013. ANZ, which continues to execute on its plan to become a “super-regional” bank, is now up 56.1 percent, including dividends, in local terms, and has generated a US dollar total return of 67.4 percent since the Sept. 26, 2011, debut of AE.

CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY), which was one of our first additions to our original Portfolio collection of “Eight Income Wonders from Down Under,” established a five-year high on Jan. 30, 2013, of AUD55.40.

Since Oct. 14, 2011, through Jan. 30, 2013, the developer of vaccines and plasma protein biotherapies has generated a total return in Australian dollar terms of 86.9 percent. Accounting for the impact of a strengthening aussie versus the US dollar during this time frame the total return is 89.2 percent.

M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF), which we added to the Conservative Holdings on Dec. 16, 2011, notched a five-year closing high of AUD4.40 on Jan. 30, 2013. The stock has generated a total return in Australian dollar terms of 64.2 percent and a US dollar return of 72.1 percent.

Recent additions to the Portfolio have benefitted from the general bullishness that emerged late in 2012. Conservative Holding Ramsay Health Care Ltd (ASX: RHC, OTC: RMSYF) reached a half-decade high on Jan. 30, 2013, of AUD29.88.

Ramsay, which runs medical facilities in France and England in addition to being the largest private hospital operator in Australia, has generated a total return of 23.9 percent in local terms and 22.2 percent in US dollar terms since we added it to the Portfolio on Sept. 14, 2012.

Our two most recent additions, from the November 2012 issue have also posted double-digit total return numbers in Australian and US dollar terms.

Diversified conglomerate Wesfarmers Ltd’s (ASX: WES, OTC: WFAFF, ADR: WFAFY) run to a five-year high of AUD38.82 on Jan. 29, 2013, has pushed its Australian dollar total return since Nov. 16, 2012, to 12.1 percent. For US-based investors the total return is 13.2 percent.

Australia’s largest retailer, with grocery, office supply and home-improvement stores, also has coal and insurance interests. We detail Wesfarmers’ retail sales and revenue and coal production for the second quarter of fiscal 2013 (ended Dec. 31, 2012) in The Roundup, which is available to Australian Edge subscribers.

AE Portfolio Aggressive Holding Amalgamated Holdings Ltd (ASX: AHD), which we added in November, along with Wesfarmers, reached a five-year closing high of AUD7.67 on Jan. 30, 2013. In the two and a half months the cinema and hotel operator has been a member of the Portfolio it’s generated a local total return of 16.4 percent and a US dollar total return of 17.5 percent.

Manufacturing in the Middle Kingdom Expands (Again)

The HSBC Flash China Manufacturing Purchasing Managers Index (PMI) for January came in at a 24-month high of 51.9, better than analysts’ consensus expectations of 51.7 and up from 51.5 in December. It’s the fifth consecutive month the Flash PMI has risen.

The new exports component turned positive, coming in at 50.1, up from 49.2 in December. The output and the employment component rose to 22-month and 20-month highs, respectively. The data suggests that China will report a 2013 first-quarter gross domestic product (GDP) growth rate better than the 7.9 percent sequential expansion from the third quarter to of 2012 to the fourth quarter.

Qu Hongbin, Chief Economist, China & Co-Head of Asian Economic Research for HSBC, attributed January’s expansion “to the continuous gains in new business” that led manufacturers to accelerate production “by additional hiring and more purchases.”

“Despite the still-tepid external demand,” Mr. Qu noted, “the domestic-driven restocking process is likely to add steam to China’s ongoing recovery in the coming months.”

China’s official manufacturing PMI for January will be released on Feb. 1. The consensus expectation from 33 analysts surveyed by Bloomberg is for a reading of 51.0. That would be a fourth consecutive month of accelerating activity for the Middle Kingdom’s manufacturing sector and the highest reading in nine months.

(Another) Long Campaign, Aussie Style

Prime Minister Julia Gillard announced this week that the next general elections in Australia will be held on Sept. 14, 2013. The announcement caught pundits and politicians by surprise, as governments typically hold out until the last possible moment to declare elections.

In Australia federal election dates aren’t fixed. But the federal parliament can’t run for more than three years after the day it first meets. Although governments are free to call for elections earlier if they believe they’ll benefit, a minimum campaign period of 33 days must precede the day of voting.

The Australian said the move “blindsided” Ms. Gillard’s current cabinet, while members of parliament loyal to her predecessor as prime minister and Labor Party leader Kevin Rudd described the decision as “incomprehensible.”

Tony Abbott has declared the Liberal-National Party coalition that he leads ready for an election he says will be based on the issue of trust.

In 1984 then-Prime Minister Bob Hawke called for elections 10 weeks ahead of the vote, and that was considered an abnormally long interval. The upcoming vote will come after seven and a half months’ worth of promise-making and vote-grubbing. It will be the longest campaign in Australia’s history.

Ms. Gillard’s Labor Party is trailing the opposition Liberal-National Party coalition, though the gap has narrowed to around 3 percentage points.

We’ll have more on the coming elections in the February issue of Australian Edge, which will be published Feb. 15, 2013.

The Roundup

Retail and commodity conglomerate Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY), a November 2012 addition to the AE Portfolio Conservative Holdings, reported that key asset Coles posted comparable sales growth of 3.8 percent for the first half of fiscal 2013. The grocery store chain has now posted 15 straight quarters of growth in comparable sales and sales density.

During a conference call to discuss retail sales and revenue results management noted that “a strong Christmas trading period saw record numbers of shoppers visiting our stores.”

Coles’ food and liquor sales grew by 5 percent during the second quarter, bringing total sales for the half to AUD14.3 billion, or up 5 percent over the first half of fiscal 2012. Comparable sales growth was 3.9 percent for the quarter.

Coles reported a record number of customers and almost AUD1 billion of sales during the week leading to Christmas.

Management opened 10 new supermarkets, with another 26 stores refurbished during the quarter. Coles launched three new superstores and began the trial of a new supermarket format that focuses on fresh foods, including more compelling bakery, meat, deli and “ready meal” offers.

Although liquor sales were a drag on overall results, management noted “further underlying improvement” during the half.

Convenience store unit Coles Express posted total sales growth of 5.8 percent for the quarter, bringing total sales for the half to AUD4 billion, 4 percent higher than the first half of fiscal 2012. Coles Express opened five new stores and closed one during the quarter, bringing the total network to 634 stores.

The Bunnings home improvement chain posted total sales growth of 6 percent for the six months ended Dec. 31, 2012, as store-on-store sales growth accelerated 3.4 percent. Sales increased 6.6 percent in the second quarter, bringing total sales for the half to AUD4 billion, or 5 percent higher than the prior corresponding period. Store-on-store growth for the quarter was 4.2 percent and 3.4 percent for the half. Management noted “good” transaction growth above the rate of sales growth and increasing participation in key growth categories.

Officeworks sales were flat for the half due to ongoing deflation in technology-related categories and challenging conditions for its small to medium-sized business customers. Management did note that Officeworks “achieved good growth in online sales.”

Total sales for the office supply unit were AUD350 million in the second quarter, up 0.3 percent from a year ago. Total sales for the half increased by 0.3 percent to AUD712 million. Management reported “good” transaction growth in the half and noted that online sales continued their strong growth, exceeding 10 percent.

Bargain retailer Kmart achieved comparable sales growth of 3 percent for the half, the strongest rate of growth since management implemented its turnaround strategy. Kmart posted strong transaction and unit growth.

Kmart’s total sales increased 3.8 percent during the second quarter to AUD1.4 billion and 3.5 percent for the first half to AUD2.4 billion. Comparable sales grew 3.7 percent for the quarter. Kmart has now posted 12 consecutive quarters of growth in transactions and units sold.

Target’s total sales increased 1.2 percent for the half to AUD2.1 billion, though comparable sales declined 1.8 percent. Total sales grew 0.6 percent for the quarter with comparable store sales 0.2 percent below last year.

Metallurgical coal production at Wesfarmers’ Curragh mine was up year over year but lower compared to the first quarter of fiscal 2013. Wesfarmers posted total coal production of 2.673 million metric tons (MMmt) during the three months ended Dec. 31, 2012, down 6.4 percent from the July-through-September period.

Management attributed the decline to lower-yielding feed stocks and a scheduled mine shutdown.

Metallurgical coal production was 1.814 MMmt, up 15.8 percent compared to second quarter of fiscal 2012 but down 11.6 percent from the first quarter of fiscal 2013. Met coal production for calendar 2012 grew by 49.5 percent to 7.997 MMmt. Management noted that the completion of the Curragh mine’s new coal handling and preparation plant in June 2012 drove the calendar-year result.

Thermal coal production in the quarter totaled 859,000 metric tons, up 34.2 percent from a year ago and 7 percent quarter over quarter. Wesfarmers’ share of thermal coal production from the Bengalla mine for second quarter was 827,000 metric tons, a 67.7 percent increase over the prior corresponding period and 25.1 percent higher quarter over quarter.

Management also announced that Wesfarmers Resources has negotiated the price for its metallurgical coal exports from the Curragh mine for the third quarter of fiscal 2013.

For the three months to March 31, 2013, the weighted average US dollar freight-on-board for new contract prices at Curragh will increase by about 2 percent quarter over quarter.

Wesfarmers Resources Managing Director Stewart Butel noted that this increase was in line with recent market price settlements. Approximately 90 percent of the January-to-March quarter sales tonnage is expected to be at the new contract prices, with the balance at carryover prices.

Wesfarmers is a buy for long-term growth and stable income up to USD36 using the symbol WES on the Australian Securities Exchange (ASX) or the symbol WFAFF on the US over-the-counter (OTC) market.

Wesfarmers also trades as an American Depositary Receipt (ADR) on the US OTC market under the symbol WFAFY. The ADR represents 0.5 shares of the ASX-listed stock. Owning the ADR conveys all the same benefits as owning the ASX- listed WES share or the US OTC-listed WFAFF share, including the effects of a rising Australian dollar. Wesfarmers’ US OTC-listed ADR is a buy under USD18.

Here are dates for the next round of reporting season, which for most companies will be for the first half of fiscal 2013. We’ve noted where the reporting period differs.

Please consult the Portfolio tables at www.AussieEdge.com for current advice.

Conservative Holdings

  • Aberdeen Asia-Pacific Income Fund (NYSE: FAX)–N/A (fund, reports holdings on a quarterly basis)
  • AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY)–Feb. 27, 2013 (confirmed)
  • APA Group (ASX: APA, OTC: APAJF)–Feb. 20, 2013 (confirmed)
  • Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF)–Feb. 7, 2013 (full year 2012, confirmed)
  • Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY)–Feb. 15, 2013 (fiscal 2013 second quarter trading update, confirmed)
  • Cardno Ltd (ASX: CDD, OTC: COLDF)–Feb. 13, 2013 (confirmed)
  • CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY)–Feb. 13, 2013 (confirmed)
  • Envestra Ltd (ASX: ENV, OTC: EVSRF)–Feb. 21, 2013 (confirmed)
  • M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF)–Feb. 25, 2013 (confirmed)
  • Ramsay Health Care Ltd (ASX: RHC, OTC: RMSUF)–Feb. 24, 2013 (confirmed)
  • SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF)–Feb. 20, 2013 (confirmed)
  • Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY)–Feb. 7, 2013 (confirmed)
  • Transurban Group (ASX: TCL, OTC: TRAUF)–Feb. 5, 2013 (confirmed)
  • Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY)–Feb. 14, 2013 (confirmed)

Aggressive Holdings

  • Amalgamated Holdings Ltd (ASX: AHD, OTC: None)–Feb. 25, 2013 (estimate)
  • BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–Feb. 20, 2013 (confirmed)
  • GrainCorp Ltd (ASX: GNC, OTC: GRCLF)–May 21, 2013 (estimate)
  • Mineral Resources Ltd (ASX: MIN, OTC: MALRF)–Feb. 18, 2013 (estimate)
  • Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY)–Feb. 8, 2013 (confirmed)
  • New Hope Corp Ltd (ASX: NHC, OTC: NHPEF)–Mar. 26, 2013 (estimate)
  • Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY)–Feb. 26, 2013 (full year 2012, confirmed)
  • Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY)–Feb. 21, 2013 (confirmed)
  • Rio Tinto Ltd (ASX: RIO, NYSE: RIO)–Feb. 24, 2012 (full year 2012, confirmed)
  • WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY)–Feb. 13, 2013 (confirmed)
Following are links to our discussion and analysis of the most recently announced financial and operating results for Portfolio Holdings.

Conservative Holdings

Aggressive Holdings

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Leonard

Will the most recent severe weather cause adverse price and or financial revenue problems for sector regulated companies or has it already begun and how long will its affects be?
Thank you as always. Leonard

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