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Three stocks you should stay away from

Oct 14, 2015 | Team Kalkine
Three stocks you should stay away from

Arrium Limited



Falling iron prices impact earnings: Arrium Ltd (ASX: ARI) sales revenue fell over 13% year on year (yoy) to $6,086 million in fiscal year of 2015 due to falling iron ore prices and accordingly its underlying EBITDA plunged over 59% yoy to $351 million. The group reported a statutory net loss after tax $1,918 million during the period, which had over $1,799 million of asset impairments and restructuring costs. Meanwhile, ARI rose over $730 million from fully underwritten capital to pay its debt. The group underwent restructuring at the back of lower iron ore price environment. ARI recorded hematite export sales of 12.5Mt during the period. Therefore, ARI is focusing on cost efficiency across its segments. The group’s Mining Consumables segment sales volumes rose by 4% yoy to 1.17 million tonnes driven by rising demand in North and South America in spite of copper, gold and iron ore pricing pressure. Mining Consumables underlying EBITDA surged by 13% yoy to $211 million given better volumes, foreign currency benefits and stable margins. The group is expanding 120,000 tonne capacity at Kamloops, Canada and also expanding 175,000 tonne at La Joya, in Southern Peru.
 
Other Updates: ARI has also announced about an agreement with the South Australian government to create a major-multi user port at Whyalla. This is expected to unveil investment opportunities in the Upper Spencer Gulf.
 

Poor Financial Performance (Source: Company Reports)
 
Stock Performance: Arrium shares plunged around 56.52% year to date due to falling iron ore prices and earnings pressure. The group estimates to have an average cash breakeven price decrease to over US$47/dmt while 13Mt of low cost ores is added to reserves. Arrium estimates grinding media in the Americas demand to improve by over 7% compound annual growth during fiscal year of 2015 to 2020. On the other hand, we believe that commodity pricing pressure would continue to impact the group’s stock performance and based on the foregoing, we give an “EXPENSIVE” recommendation to the group’s stock at the current price of $0.105.


ARI Daily Chart (Source: Thomson Reuters)

Echo Entertainment



Improving domestic gaming performance and solid international VIP business drove top line: Echo Entertainment Group Ltd.’s (ASX: EGP) normalized gross revenue surged 20.6% yoy to $2.3 billion in fiscal year of 2015, driven by domestic gaming business and solid international VIP rebate business performance. Slots business, domestic tables and VIP business improved by 13% for the year, 20.1% for the year, and 33.3%, respectively. Normalized earnings before interest, tax, depreciation and amortization increased by 24% to $521 million, while the group’s normalized net profit after tax rallied by 52.2% yoy to $219 million driven by enhanced operating performance, decrease in interest expenses at the back of decrease in debts. EGP finished the first stage of Jupiter’s gold coast expansion project. Queensland government chose the group as the preferred proponent in developing Queen’s Wharf.

 
Projects pipeline (Source: Company Reports)
 
Recent Updates: The market views that Echo may be able to raise its revenue from pokies in two of its Queensland casinos. Particularly, revenue from these pokies in pubs and clubs surged 7.4% and 9% respectively in the September quarter.
 
Stock Performance: Echo Entertainment shares delivered a year to date returns of over 26.18% (as of Oct 14, 2015) as compared to the broader index S&P/ASX 200 decline of over 4%. On the other hand, EGP shares are trading at higher valuations with a P/E of 23.5x and has an annual dividend yield of 2.28%. Based on the foregoing, we give an “EXPENSIVE” recommendation to the group’s stock at the current price of $4.83.


EGP Daily Chart (Source: Thomson Reuters)

Charter Hall Retail



Earnings Highlights: Charter Hall Retail REIT (ASX: CQR) Funds under Management improved to $13.6 billion during fiscal year of 2015, as compared to $11.5 billion in FY14 as the group started for new funds that include Long WALE Investment Partnership, Retail Partnership No. 6 Trust and Charter Hall Direct Industrial Fund No. 3. The latest updates entail the increase of the FUM to $14.5 billion, an increase of $0.95 billion since 30 June 2015. The group’s operating earnings per stapled security improved by 8.7% yoy to 27.5 cents in FY15, against 25.3 cents in FY14. CQR net Tangible Assets per stapled security improved to $2.76 in FY15 as compared to $2.38 in FY14. Charter Hall Retail operating earnings fell to $98.8 million during the period against $81.2 million in pcp.  
 

CQR funds under management and property investment highlights (Source: Company Reports)
 
Recent Updates: The news about National Australia Bank opening up a new flagship branch at Charter Hall Group’s commercial development in Sydney has taken a positive momentum.
 
Stock Outlook: CQR shares fell over 9.32% (as of Oct 14, 2015) in the last six months due to volatile market conditions. But, CQR recently reported that its industrial funds under management improved to $700 million. The group recently added $250 million of retail and office acquisitions which include $102 million of Charter Hall retail acquisitions and $170 million of Aurizon pre-leased project acquisition by CPOF/DOF. CQR’s funds under management enhanced by $0.95 billion from June 30, 2015 to $14.5 billion. On the other hand, we believe that CQR is trading at relatively expensive valuation at the current price of $4.01.


CQR Daily Chart (Source: Thomson Reuters)

Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people.Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation.Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product.The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
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Kalkine is a trading name of Kalkine Pty Ltd ABN 34 154 808 312, which holds Australian Financial Services Licence No. 425376.

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