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Top Gainer: Eastern Star Gas (ESG)

 Closing price  $0.84
 Change  +0.245
 % change  +41.2%

 

In a day of takeovers, Eastern Star Gas (ESG) pipped Sundance Resources to be the day’s biggest gainer on Monday. Although Sundance’s takeover bid from a Chinese company sent the share price rocketing 22.5%, this was half of the amount ESG shares jumped on its takeover bid.

Two weeks ago we wrote that Santos was a potential buyer of ESG, and lo and behold the oil and gas giant put in a bid on Monday (we also wrote about SDL’s potential upside just last week). We highlighted that in July 2009, Santos had acquired Gastar Exploration’s 35% interest in its Narrabri CSG project and the Wilga Park Power Station, as well as buying Hillgrove’s 19.99% interest in ESG. We also noted that total upfront consideration for the transaction was $476 million, but that it was the 20% interest in ESG that made STO a potential buyer.

And the takeover bid did in fact eventuate, sending ESG soaring 41.2% on Monday. After months of a sliding share price, Santos obviously saw it as an opportunity to grab the company cheaply. Eastern Star Gas’s shares had jumped two weeks ago, up a hefty 13.3% – it seems we weren’t the only ones who thought that something was in the air.

With its $739 million all-share bid Santos aims to control NSW’s largest coal seam gas reserve. “This transaction represents the next major step in Santos’ eastern Australia gas strategy and positions the company to meet the expected increase in demand for natural gas from both domestic power generation and export LNG (liquefied natural gas) markets,” Santos chief executive David Knox said.

If successful, the takeover will give Santos control of Eastern Star Gas’s coal seam gas exploration permit in the 15,000 square kilometre Gunnedah Basin. The addition of the project to Santos’ assets would make it the holder of the largest natural gas reserves in NSW.

According to the ESG website, ESG “was formed in August 2000 to explore, develop and produce both conventional natural gas and coal seam gas in eastern Australia”. When it listed in February 2001, ESG had interests in six exploration licences in Victoria and NSW and was focused on brown-coal gas plays in Victoria’s eastern Otway Basins. The company went on to shift its focus to exploration and development in NSW, acquiring numerous exploration licenses.

Paterson’s had a buy on the stock with a 1.02 valuation, also noting that it was a potential takeover target for Santos. You can see a previous broker report from Paterson’s by clicking here.

Roger Leaning, Head of Research with RBS Morgans also had a buy on ESG. “Ideally placed to feed gas into NSW and LNG export markets, Eastern announced plans to evaluate the feasibility of LNG exports from the Port of Newcastle,” says Leaning. Leaning sees Eastern’s uncontracted gas resource as a logical bolt-on acquisition for numerous companies looking for more gas, the most obvious being major shareholder, Santos. The stock is trading on a 50 per cent discount to Leaning’s $1.24 price target.

Many other analysts are also very bullish on ESG’s prospects. Based on Thomson Reuters data, 89% of analysts have a buy on MBN, 11% have a hold, 0% have a sell. 

 

Chart: Share price over the year to 18/07/2011 versus ASX200 (XJO)

Stock code: ESG

Charts: Eastern Star Gas Limited

More news: Eastern Star Gas Limited

Investor Centre: Eastern Star Gas Limited

 

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Biggest Loser: Australand (ALZ)

 Closing price  $2.69
 Change  -0.12
 % change  -4.3%

 

After jumping 15 cents or 5.6% on Friday, Australand (ALZ) was the day’s biggest loser on Monday, losing most of Friday’s gains to end 4.3% lower for the day.

ALZ, which is 60% owned by the Singapore-based company Temasek Holdings, is an industrial, residential and investment property developer. It is different from most shares that you would invest in on the ASX in that it is a Real Estate Investment Trust (REIT), or more appropriately AREIT (Australian Real Estate Investment Trust). Many newer investors aren’t even aware of REITs because they pretty much fell off the investing radar when the sector collapsed at the onset of the GFC.

Prior to the GFC, real estate values had been appreciating handsomely since the end of the Second World War.  However, for the retail investor, property investing suffered from a serious drawback – illiquidity.  Simply put, if you had substantial investment capital tied up in real estate and you needed quick access to some cash, it could be quite some time before you could convert the investment.  REITS was an answer to this liquidity problem and first appeared in the Australian share market in the 1970s when they were called LPTs (Listed Property Trusts).

Beyond the liquidity advantage, the tax designation of a REIT benefits both the owners and the investors.  Owners get significant tax reductions but are required to distribute 90% of their taxable income to shareholders.  Obviously, this makes REITs attractive investment vehicles for investors looking for dividend paying shares.

TheBull PREMIUM’s Bob Kohut did a fundemental analysis of ALZ a few weeks back, using Cedar Woods Properties (CWP) as a point of comparison. He found that while the numbers seemed to stack up for CWP, things didn’t look good for ALZ – which has high leverage, low return on equity (ROE), low return on assets (ROA, high price/earnings ratio and a high price to earnings growth ratio. The numbers below speak for themselves:

  CWP ALZ
Gearing Ratio 36.5 68.97

  CWP ALZ
ROE (Return on Equity)  15.8 6.3
ROA (Return on Assets)    18 5.35

 

 

 

  CWP ALZ
P/E (Price to Earnings) 9.73 12.77
PEG (Price to Earnings Growth)    .29  1.51

 

 

 

Sean Conlan, from Macquarie believes that investors would be best clearing out of the stock and has a sell on the REIT. “Earnings for this major diversified property group should recover strongly in the next couple of years underpinned by improving profitability in its development businesses,” says Conlan. “However, we retain our underperform recommendation given the stock continues to trade around our target price.”

Many other analysts have mixed views on ALZ’s prospects. Based on Thomson Reuters data, 3 analysts have a buy on the stock, 5 have a hold, 4 have a sell. 

 

Chart: Share price over the year to 18/07/2011 versus ASX200 (XJO)

Stock code: ALZ

Charts: Australand Limited

More news: Australand Limited

Investor Centre: Australand Limited

 

Each trading day we will look at the top gainer and biggest loser for the day. Note that these are not recommendations to buy or sell, although we do include broker views on these stocks in the article.

Please note that TheBull.com.au simply publishes broker views on this page. The publication viewsof these  does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.