Alumina Limited

• Improved cash costs and Margins:  Alumina Limited (ASX: AWC) recently reported a statutory net profit after tax of US$122 million for the first half of 2015 against the net loss of US$47 million in pcp. This result includes restructuring of AWAC’s asset portfolio, due to which AWC incurred US$53 million. AWC declared a fully franked dividend of 4.5 cents per share against 1.6 cents per share against pcp. Meanwhile, the group’s focus to enhance its asset portfolio has been paid off during the period. As a result, the EBITDA rose by US$611 million to US$730 million in 1H15, while the cash from operations improved by $239 million to $321 million in 1H15, in spite of a $300 million prepayment for the Western Australian gas supply agreement. The Average realized price of alumina surged US$21 per tonne, while AWC was able to reduce Cash cost of alumina production by US$30 per tonne. Meanwhile, AWAC’s NPAT improved by US$169 million, while the free cash flow rose by $54 million during the period.

 
 
 
                   
 
                  Declining cash cost Alumina Performance (Source: Company Reports)

• Outlook: The shares of Alumina Limited (ASX: AWC) touched a one year high in the month of Feb, but have been under pressure since then, falling more than 30% over the last six months due to poor FY14 performance on the back of falling aluminum prices as well as lower demand from China. However, the recent first half of 2015 results offered some respite to the stock, as the group was able to maintain its margins in spite of declining commodity prices, boosted by API pricing shift, improved productivity and lower Australian and Brazilian currencies (as the group incurs costs). Moreover, we believe that Alumina would be able to be among the lowest cash cost refineries in the world, while maintaining its higher production. Alumina also offers a solid dividend yield of 6.5%. We believe that AWC would be able to maintain its margins even during the second half, and any improved alumina demand and prices can further boost the stock. Based on the foregoing, we give a “BUY” recommendation to the investors for the stock at the current low levels of $1.26

 
Contango Microcap

• Poor FY15 preliminary results, Weaker than expected: Contango Microcap Ltd (ASX: CTN) declared a preliminary results, reporting a net loss after tax of $0.73 million as compared to a net profit after tax of $32.53 million in the corresponding last year. This decrease was mainly due to poor June 2015 performance, although the eleven months ended on May 2015 delivered a net profit after tax of $10.8 million. As a result, CTN dividends increased to 8.6 cents per share as compared to 8 cents per share in earlier fiscal year.  Meanwhile, the funds under management surged to $870,845 in FY15 as compared to $7,047 (seven month to June 2014). The after tax NTA reached $1.058 per share, which is a return of 0.5% post adjusting dividends, against $1.138 per share in pcp.
• Investment Portfolio performance: Contango is among the best performing portfolios in Australia, and delivered 2.1% annual returns to June 30 2015, as compared to 0.4% annual returns of S&P/ASX small companies Accumulation Index and negative annual returns of 3.6% for S&P/ASX emerging companies Accumulation Index. Meanwhile, S&P/ASX the All Ordinaries Accumulation Index generated 5.7% annual returns. On the other hand Contango Asset Management have also been delivering an outstanding performance as compared to other Ordinaries Accumulation Indices.

        
       Contango Asset Management performance against benchmark indices (Source: Company Reports)

• Contango Income Generator: Contango has been making efforts to drive value to the shareholders by launching new products, investing in best practices as well as developing its investment team. The group launched a Contango Income Generator Limited (CIE), for investors looking for yield stocks in the equity market, for retirees, high net worth investors as well as investors who are over exposed to large cap stocks. CIE offers investors with a diversifiied exposure to ex-30 income securities. The fund also intends to pay a minimum annual dividends of 6.5% of the firm’s net tangible  company’s objective. Some of the picks by the fund manager include Bank of Queensland Limited, Bendigo and Adelaide Bank Ltd, IOOF Holdings Limited, McMillan Shakespeare Limited and Tatts Group Limited.
• Outlook: Contango comprises a diversified portfolio of 60 to 90 firms listed on ASX, with a market cap in the range of $10 million to $3350 million at the time of acquisition. CTN selects these which promises to be a potential large cap. Therefore, CTN faces considerable amount of risk while investing in the mid cap stocks. The weak June quarter performance have led to the stock decline of 10.9% over the last three months as well as over 4.8% in the last five days.  On the other hand, investors need to note the potential of these mid to small cap stocks which has the ability to deliver huge upside and generate solid earnings with good dividend yields. The fund has successfully delivered a long term gross performance of 16.4% per annum since its inception in March 2004. Given the attractive valuations offered by CTN portfolio (P/E of 11.5x as at June 2015) as compared to the small ordinaries accumulation index (P/E of 12.8x), CTN has the ability to deliver a decent performance for the fiscal year 2016. Accordingly, we give a “BUY” recommendation to the stock at the current price of $0.94

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