Aussie Picks and Shovels from Australian Edge

Part two of our look at the "Income wonders from down under"

By Travis Johnson, Stock Gumshoe, October 5, 2011

If you’re just joining us, we’ve been working on identifying the Australian stock picks teased by the new Australian Edge newsletter from Roger Conrad and David Dittman — that first note is here, with the lead-in about their general “invest in Australia” theme, and they teased us with eight “income wonders from down under” that they think are good buys so we looked at the first few of them here in yesterday’s article.

It looks like the focus of the letter will not be on the high-flying resource companies of the “lucky country,” but on the “picks and shovels” companies that either benefit from the general strength of the economy or provide services to the natural resources businesses that generate most of Australia’s exports. Yesterday’s picks were a utility, a natural gas transport firm, and a telecom giant — so what are the rest of the “income wonders?” Let’s dig into their brief little clue blurbs and see what we can find, one at a time:

“INCOME WONDER #4—One of Australia’s largest natural gas distribution companies, with more than 21,000 km of pipelines and distribution serving over a million consumers. With 90% of revenue derived from domestic and small industrial customers, this company’s cash flows are highly predictable and support a yield of around 8%.”

Into the Thinkolator it goes … and the result? This is Envestra (ENV in Australia, EVSRF on the pink sheets). Never hear of this one before, but it looks like a pretty pure play on gas distribution — they have some larger transmission pipelines, but their primary asset is the distribution network (which is around 21,000 km) that reaches about a million customers in South Australia, Victoria, Queensland, New South Wales and the Northern Territory. And yes, the share price is teensy (about 65 cents) and trading is quite light on the pink sheets, but this is a reasonably large and stable company with a market cap near a billion dollars.

They have outsourced the operation of these networks to one of the much bigger companies we talked about yesterday, APA Group, so they don’t spend much money on employees or operations (APA owns a piece of Envestra, and also gets a management fee). It looks like they operate exclusively in regulated areas, so although they do carry a fair amount of debt they seem to be able to manage it fine and pass through any cost increases … so it’s a pretty clean investment in a long-lived asset, with a yield that is currently about 8.5%.

I don’t know the company history, but it looks like they probably had too much debt a few years ago — that’s usually the reason when you see a stock whose share price abruptly collapsed in 2007-2009, and the stock chart tells a story of a rebuilding company in the couple years since then. You can buy APA Group, the larger and much more diversified operator, for about the same yield so I don’t know what the argument would be for buying the smaller and more “vanilla” Envestra, but perhaps one of our Aussie readers can supply more details on the relative appeal of the two firms.

Moving on!

“INCOME WONDER #5— Spread across a 2,700-km footprint, this company operates at every point along the agricultural supply chain, from storage to exports to domestic distribution. They operate storage capacity for more than 20 million tons of grains and oilseeds, and are capable of hauling four million tons of grain annually with 20 contracted trains. Another high-yielder, with more than double the dividend of the average S&P company.”

This one, sez the Thinkolator, is GrainCorp (GNC in Australia, GRCLF on the pink sheets), another billion-dollar company that has fairly light trading in its US pink sheets-shares. GrainCorp is basically built on their big elevator network, not unlike the Canadian/Australian Viterra that I’ve written about before — they buy grain (mostly wheat in this case) from farmers, store, and sell, and also use their distribution network to sell supplies to farmers. They’ve also been investing pretty heavily in malting, which has been a regional focus as Asian beer consumption has grown but which has also been a bit of a contrarian investment in the last couple years due to flagging developed world beer sales.

GrainCorp does have a decent dividend, they paid 30 cents last year and are on track to pay at least something similar this year (they’ve paid out 20 cents so far, the final dividend has generally come in December). That gives a trailing yield in the neighborhood of 4% — better than the S&P, to be sure, though not dramatic (to be fair, agricultural stocks in general tend not to pay high — if any — dividends). As with Viterra and other grain storage, distribution and export companies, their performance depends in large part on volume — Australian wheat in their part of the country had a bumper harvest this year, but there have certainly also been very bad years with drought and/or floods, and if the grain isn’t produced there’s not much of a way for them to generate their “toll” income for processing, moving or storing it.


“INCOME WONDER #6—This company is focused on the niche marketing of its high-energy coal products, and exports around 65% of its production to Asia. They operate three mines and hold large interests in new exploration projects, as well as 100% ownership of an export ship-loading facility.”

In a piece of fortuitous timing, it looks as though this one must be (the clues are a bit thin, so certainty ain’t quite 100%) New Hope Corp. (NHC in Australia, NHPEF on the pinks), a pretty big ($5 billion or so) coal company. They do indeed export about 65% of their coal to Asian customers, which is not unusual for an Australian coal company, and they do operate a couple coal mines in Queensland and own the common-carrier bulk handling export port. And they’re profitable, with a similar trailing PE ratio (around 10 or so) to big international operators like Peabody (BTU).

But the most important news came after this teaser started running a couple days ago, and before I started writing this morning: New Hope announced today that they have received takeover offers from several parties and are beginning a “formal process for potential bidders” — which, as you can imagine, drove the share price up smartly. The stock went up about 15% today, so at this point you’re speculating on a potential takeover as well as trying to get in on a successful coal mining operation. They will pay a 20-cent dividend for the year just ended and payable on November 8, so that’s roughly a 3% yield … but I don’t know what the “ex dividend date” might be for the shares and they pay only once a year, so if that’s important to you take care to look into it.

The larger issues with this potential takeover/bidding process are that many of the likely bidders are Chinese firms, and such firms have been rebuffed by Australian regulators before … and that the company is 60% controlled by a big investment fund (Washington H. Soul Pattinson, also publicly listed at SOL in Australia), so it will pretty much be up to them to determine whether or not any potential bidding war erupts. At a suddenly-15%-higher share price the stock doesn’t necessarily look like a bargain, but it doesn’t seem outlandishly expensive compared to other coal exporters.

“INCOME WONDER #7— This is the perfect stock to ride the Asian energy boom. This company does it all. They are focused on gas and oil exploration and production, power generation and energy retailing. And they are one of the largest holders of gas reserves in eastern Australia, with numerous exploration projects. They are also a large energy retailer, with more than 4.6 million customers. You’ll want this stock in your portfolio before new lucrative deals are struck in the months ahead!”

The mighty, mighty Thinkolator tells us that this is … Origin Energy (ORG in Australia, OGFGF on the pink sheets), another big utility company (about a $14 billion market cap) — though one that is also investing heavily in energy exploration and production, largely liquefied natural gas and coal seam gas for export. They have been growing nicely in large part due to some acquisitions of local utilities, there was a pretty good article about them from Reuters after the last earnings release. They have paid a dividend of about 50 cents per year over the last couple years, so that comes in just under 4% — fairly typical for a US utility, though they do also have that exploration and production arm for potential upside (and more risk) … so perhaps a more apt comparison would be a firm like National Fuel Gas (NFG), which I’ve covered before for their mix of Marcellus Shale exploration and production to go with their more stable utility operations — NFG yields just under 3% now, just FYI.

Can’t say that I know Origin Energy well, but I do generally like the idea of combining utility and E&P operations to give a bit of a kicker to utility stocks — though utilities are investor favorites anyway during periods of tumult, so getting away from the safer side of the utility spectrum doesn’t always work well.

“INCOME WONDER #8— This is the leading provider of logistics services in Asia, with revenues of $6.9 billion and an extensive network of more than 1,100 facilities throughout 55 countries. Their transportation and infrastructure assets include road fleets, warehouses, ships, ports, cargo planes and railroads. They serve a diverse customer base, from automotive and natural resource companies to food, beverage and retail. They currently pay just under 8%.”

And we crank up the Thinkolator for the final time today — to discover that this is … Toll Holdings (TOL in Australia, THKUY for the 1:2 ADR on the pink sheets — that means each pink sheets share represents two shares in Australia).

Toll is indeed one of the bigger logistics companies in the world, though I’d never heard of them — the 1,100+ facilities and 55 countries and $6.9 billion in revenue all match perfectly. They do serve many industries and appear to over a pretty complete integrated service — basic freight stuff as well as supply chain management, freight forwarding, logistics management, etc. … and certainly logistics is an interesting area to be in across the Asia Pacific region, where trade continues to accelerate and consumer spending, by most estimates, has a long uptrend as we look into the future.

From their last earnings release (data from company here, news story here), it looks like they posted a substantial revenue increase in fiscal 2011 (ended in June) but must have had some margin pressures (I’d guess fuel and personnel costs, but haven’t checked), so their reported earnings were close to flat year over year.

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Their dividends for the past two years have come in at 25 cents per year in total, so at a share price of about A$4 that gives a yield of about 6% — not sure where they get the “just under 8%” number, but given the precise match of the clues I can’t imagine they’re referring to a different company. Perhaps I’m adding wrong.

Toll put up an interesting investor day presentation early in the year, so the numbers are a bit out of date now but it does give you a good idea of there growth priorities, including intra-Asian trade and supplying logistics support the growing LNG and mining sectors in Australia, so it does look like they’ve got a decent growth argument to make for their shares. They have grown through a couple decades of pretty aggressive strategic (though mostly small) acquisitions, and freight handling and logistics is generally a low margin and competitive business when you get to large scale operations, so there’s not often a lot of wiggle room for management to screw up and they do carry a pretty big slug of debt … but they seem to be doing well and the shares are not particularly expensive with a trailing PE of about 10.

I like that they are well-diversified across resource and consumer/manfuacturing sectors, and I’m more intrigued by the potential here than I am with some of the other picks teased, but it’s also worth noting that if the pundits who predict a big slowdown in Chinese trade are right then certainly there would be a revenue slowdown for Toll (of course, if China really slows and coal and iron demand are slashed, then Australia will suffer like crazy almost regardless of which stock you’re talking about).

Phew. So there you have it, eight “income wonders from down under” for you as the first (I think) US-based newsletter dedicated specifically to Australian stocks tries to get itself off the ground. What do you think — any exciting ideas in the group? Anything you’d rather buy with your Aussie dollars? Let us know with a comment below.


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