Origin Energy, which cut its ties with the construction and building materials group Boral in 2000, has blossomed with independence.
The interim result to December 31, 2002, when it delivered a 64 per cent increase in net profit to $90 million, was just more evidence of how well this group is travelling. A full-year profit of $150 million-plus would not be a surprise.
Origin earns its revenue across the energy chain - a deliberate strategy to create an integrated operation. It is a successful explorer (Victoria's offshore Otway Basin has proved a fertile hunting ground with the discovery of large-scale gas reserves), an efficient producer and a competitive retailer. While the strategy has evolved slowly and cautiously, it is clearly delivering results and winning market approval.
The acquisitions began in the middle of last year. Fletcher Challenge's 50 per cent stake in Western Australia's South West power project for a few dollars short of $70 million was the first strike. The second was in the retail sector when it snapped up Citipower's Victorian electricity business for $136 million from Cheung Kong Infrastructure and Hong Kong Electric. A power station in northern Queensland followed. Developing the Yolla gas field in Bass Strait is on the drawing board, as is a gas pipeline from Victoria to Adelaide.
In terms of other acquisitions, in the wake of the interim results managing director Grant King flagged the potential purchase of the Southern Hydro peaking generator in Victoria, worth between $300 million and $500 million, and the Cooper Basin assets of Delhi Petroleum.
Indeed, the only sour note of any consequence to elicit comment from Mr King at the profit announcement was the Victorian Government's decision to refuse higher gas and electricity tariffs. While he was suitably diplomatic, he left the market under no illusion that the decision will hurt the second-half result.
That negative was already factored into Origin's share price, which has risen in the past 12 months from a low of $2.97 on March 11 to $4-plus following the profit announcement. Few companies can match that performance, especially when there is precious little offering on the income front. In the year to June 30, 2002, shareholders only got five cents giving them a yield, based on a $4 share price, of 1.25 per cent.
However, even the news on that front is looking more promising, with Origin boosting the interim payment from two cents to five cents (franked to two cents), suggesting that analysts' predictions of a 10-cent payout for the 2003 financial year are not wide of the mark. Even so, a 2.5 per cent yield that does not come fully franked emphasises how dependent shareholders are on capital gain.
Put simply, Origin is a growth stock in favour at a time when many of its fellow travellers are struggling. A survey of analysts by the Bloomberg wire service shows seven rating it a "buy" and two a "hold". Caution suggests a hold, but the story simply looks too positive. Buy.
ORG: $4.25
Sector: Energy
Business: Exploration/production of oil/gas and retailing natural gas, LPG and electricity
Market cap: $2774 million
Final dividend (June 30, 02): 5 cents
Yield: 1.2 per cent
Price-earnings multiple (June 30, 02): 20.5 times
At February 28
Bulls
BHP Billiton (BHP, $9.17) BUY
Ian Parker, a senior investment adviser with Harlteys, says BHP recently reported a result slightly ahead of expectations, with coal earnings down but good increases in petroleum and aluminium. "We believe BHP offers earnings protection with its oil price exposure and we remain attracted to the company's quality asset base and cost cutting potential," he says, adding that that global instability may have a negative affect on future demand.
Origin Energy (ORG, $4.25) BUY
Richard Morrow, a director of EL&C Baillieu, says Origin has once again demonstrated that it is one of the savviest players in the Australian energy sector, unveiling a half-year profit well ahead of market expectations. "Realisation is slowly dawning about the advantages of vertical integration in this sector," he says, adding that Baillieu expects a substantial revenue boost from Western Australian oil production this year.
Futuris Corporation (FCL, $1.47) BUY
James Georges, a senior equities dealer with Terrain Securities, says Futuris has experienced a tough period due to the drought, but is expecting some growth from its rural financial services unit, Elders. "The recent interest from AWB Limited, which has accumulated about 15 per cent of the stock with board approval to increase its stake, seems to point towards opportunities for this asset-rich company," Mr Georges says, adding that investors should accumulate on weakness.
Bears
Burswood (BIR, $0.70) SELL
Ian Parker, a senior investment adviser with Hartleys, says gaming company Burswood's first-half profit of $4.5 million was down 61 per cent on last year, partly due to a $2.8 million loss on its high roller business and a smoking ban. Burswood relies on volatile earnings streams and has high levels of debt. He says Hartleys values the stock at 62 cents a share and believes it is vulnerable to a downturn in tourism while there is a prospect of war.
Henry Walker Eltin (HWE, $0.70) SELL
Richard Morrow, a director of EL&C Baillieu, says Henry Walker Eltin has demonstrated what a tough world it is for contractors to the resource sector. "Customers apply relentless pressure on margins to the extent that if an investor wants to be in the mining game, the best place to be is with the owner of the project, not the supplier of specialist knowledge as a contractor," Mr Morrow says.
Sons of Gwalia (SGW, $1.44) SELL
James Georges, a senior equities dealer with Terrain Securities, says Sons of Gwalia recently reported a 79 per cent fall in its first-half profit. "Its main problems have arisen from weak tantalum demand, lower gold grades and questionable hedging positions," he says. Sons of Gwalia is dependent on global economic conditions for a turnaround, he says. "This raises doubts about the company's future performance and investors should be aware of further downside potential," he says.
Wildcard
Mithril (MTH, $0.245) BUY
Sitting atop Western Australian nickel explorer Mithril's shareholder list is BHP Billiton Minerals, with nearly 23 per cent, and Minotaur, which also knows the odd thing about mineral exploration, with 22 per cent. It has David Miller, who honed his skills at WMC, as chief executive. But neither the presence of these shareholders or Mr Miller have salvaged the share performance of Mithril - named after the mythical metal in J.R.R Tolkien's The Lord of the Rings - since its November listing. The shares, which listed at 20 cents, recently peaked at 25 cents, but potential investors should note the thin trading volumes. It is fair to assume BHP and Minotaur believe that nickel will be in strong demand in coming years. This stock might be worth slowly accumulating. Buy.
