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Mid-Cap

Which five stocks you should avoid?

October 17, 2015 | Team Kalkine
Which five stocks you should avoid?

Fortescue Metals Group Limited


 
The results for Fortescue Metals Group Limited (ASX: FMG) FY 2015 showed a sharp decline in revenues from $ 11.75 billion to $ 8.57 billion, a similarly sharp decline in underlying EBITDA from $ 5.63 billion to $ 2.50 billion and net profit after tax from $ 2.74 billion to $ 316 million. Net cash flow from operating activities fell from $ 6.24 billion to $ 2.03 billion and EPS declined steeply from 88 US cents per share to 10.18 US cents per share. The 33% increase in shipments was offset by the sharp decline in the market prices of iron ore. Cash on hand as at 30 June 2015 was $ 2.38 billion and net debt was $ 7.18 million and the company paid a modest dividend of 2 cents per share fully franked as a token of long term confidence. As per the September quarter production updates, the cash production costs (C1) fell 47% over one year from US$32 to US$16.90 per wet metric tonne and US$384 million of debt was repurchased at an average price of 80 cents in the dollar. However, we believe that iron ore prices will continue to deteriorate with no expectation of any kind of recovery as long as there is uncertainty about the future of the Chinese economy.


Cash Production Costs (Source: Company Reports)

Some experts believe that commodity prices may have bottomed out but we would require to see much more substantial evidence before expressing any optimism in view of the otherwise poor performance by FMG. The P/E ratio is also slightly high (17.27x) while the dividend yield is 2.18%. Accordingly, recommend to avoid investing in this stock.


FMG Daily Chart (Source: Thomson Reuters)
 

Atlas Iron Limited


 
In FY 2015, despite record exports of 12.2 million tonnes compared to 10.9 million tonnes in the previous year, Atlas Iron Limited’s (ASX: AGO) revenues were down by 35% to $ 718.5 million following the sharp decline in the prices of iron ore during the year. Consequently there was an underlying EBITDA loss of $ 51.5 million even though a reduction of all in cash costs will result in annualised cost reductions of $ 150 million. Non-cash impairment charges and write-downs of $ 1.07 billion together with restructuring and suspension costs of $ 52.8 million resulted in a statutory loss of $ 1.37 billion. Even if you ignore the one-off charges, the company is still in an operating loss situation. This company has not paid any dividends during the last 12 months and reported losses during the previous 12 months. AGO updated about its iron ore sales agreement with a major international trading group for 5 million tonnes per annum of Atlas standard fines for 2 years.


Annual Shipments (Source: Company Reports)

We must now question the continued sustainability of the company's operations and even its very survival as the iron ore prices continue to be weak and will continue to be depressed as long as questions about the future growth of the Chinese economy remain. Improved shipment volumes and stringent cost reductions can only go so far and only a price recovery will help for the company. Moreover, the company is on the brink of breaching its debt covenants and any breach would leave it in default with its creditors. All said and done, this is an investment better to be avoided at present.

 
AGO Daily Chart (Source: Thomson Reuters)

New Hope Corporation Limited


 
For FY 2015, New Hope Corporation Limited (ASX: NHC) reported net profit after tax before exceptional items of $ 51.7 million which is a 27% increase on the previous year. Losses from impairment and other exceptional items were $ 73.6 million after tax resulting in a statutory net loss after tax of $ 21.8 million. A fully franked final dividend of 2.5 cents per share and a special dividend of 3.5 cents per share were declared bringing the total fully franked dividends for the year to 10 cents per share. The continued focus on operational efficiency resulted in a 17.1% reduction in cost of sales while simultaneously delivering better safety performance. Strong operating cash flows of $ 88.5 million after-tax showed an increase of $ 24.1 million over the previous year. Cash and term deposits totalled $ 1.06 billion as at 31 July 2015. The exceptional items included a $ 36 million impairment of oil producing assets, $ 4.2 million in the impairment of goodwill on oil producing assets, $ 17 million on impairment of the coal to liquids facility because of the lack of immediate commercial applications, $ 17.6 million in impairment of held for sale shares in IGas and Planet Gas and a profit of $ 1.2 million on the disposal of Dart Energy. Further, Rio has recently agreed to sell a 40% interest in Bengalla coal JV to NHC for US$606m (AUD865m).


NPAT and other Financial Metrices (Source: Company Reports)

This may consume about $1.1billion of NHC’s cash balance. Given the steep decline in the prices of thermal coal and oil and the uncertain outlook for the medium future, we would regard this stock is one to be avoided.


NHC Daily Chart (Source: Thomson Reuters)
 

Myer Holdings Ltd


 
Among the highlights of the results for FY 2015 by Myer Holdings (ASX: MYR) were a 1.7% increase in total sales to $ 3.19 billion, an increase of 1.1% on a comparable store basis, a 53 basis points reduction in operating gross profit to 40.4%, a decline of 11.6% in EBITDA to $ 223.2 million, a 21.3% reduction in net profit after tax to $ 77.5 million and no final dividend has been declared by the board. The company also announced that it had devised the New Myer strategy to define a path for a return to sustainable growth in profits. The strategy will be supported by new investment in stores to engage more customers and make them more productive. However, full year profit in the current year is expected to be between $ 64 million and $ 72 million. The new strategy is also expected to incur strategy implementation costs of between $ 35 million and $ 45 million which will depress the bottom line even more. Recently Myer completed the institutional component of its two-for-five accelerated pro rata non-renounceable entitlement offer and has been able to raise $99 million at an issue price of 94 cents per share while the remaining $122 million being offered to retail investors.


CODB (Source: Company Reports)

The Company will be using the funds to strengthen the balance sheet. Despite all this, until it is seen that Myer can expand the foot traffic to the stores and attain good returns, the buying opportunity does not seem to be an attractive one. Also, the New Myer strategy is unlikely to have an immediate impact on the fortunes of the company and it remains to be seen what results the effective implementation brings. We cannot see any upside in the medium-term future for the stock and recommend that it should be avoided.


MYR Daily Chart (Source: Thomson Reuters)
 

Bendigo and Adelaide Bank Ltd


 
The Bendigo and Adelaide Bank Ltd (ASX: BEN), the fifth largest retail bank in Australia, announced its after tax statutory profit of $ 423.9 million for FY 2015 and the underlying cash earnings were $ 432.4 million which represents an increase of 13.1% over the previous year. Cash earnings per share at 95.1 cents represented a 3.9% increase over the previous year. The fully franked dividend of 33 cents per share raised the full year dividend by 2 cents to 66 cents per share. Net interest margin showed a small decline of 4 basis points reflecting the highly competitive low interest rate environment in which the bank operates. The balance sheet shows an increase of 15 basis points in the Basel III, equity tier 1 ratio to 8.17%. Rural Finance Corporation joining the group has significantly increased the depth of agribusiness and performance has exceeded initial expectations and the new Alliance Bank partnership provides opportunities for business growth completely aligned with strategy.


Cash Earnings (Source: Company Reports)

We note that the results have been reasonable though not as good as some of the big four and that the dividend yield is attractive. However, BEN’s homesafe may represent a headwind and the market expects the EPS to fall while the dividend may be flat in FY16E. Particularly, uncertainty in sustaining the FY15 revenues remains at the back of moderation in house price growth from about 12% in FY15 to 5% in FY16E. Accordingly, we recommend that any proposed investment should be deferred and we therefore opine that the stock be avoided for the time being.


BEN Daily Chart (Source: Thomson Reuters)

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The information given by Kalkine Pty Ltd ABN34 154 808 312 (Australian Financial Services License Number 425376) on this website is general information or advice only.

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