Conservative Holding APA Group (ASX: APA, OTC: APAJF), one of the original eight members of the AE Portfolio, has made a AUD1.3 billion offer to buy the 67 percent of fellow Conservative Holding Envestra Ltd (ASX: ENV, OTC: EVSRF), also one of our original eight “income wonders from Down Under,” that it doesn’t already own.

Envestra’s rejection of APA’s opening bid should be considered in light of the fact that APA holds approximately 33 percent of the company’s outstanding shares. It will be extremely difficult for a third party to get between APA and Envestra.

The second-biggest shareholder is Cheung Kong Infrastructure Holdings Ltd (Hong Kong: 1038, OTC: CKISF) at approximately 17 percent.

Li Ka-Shing, reportedly the richest man in Asia, is the founder and chairman of Cheung Kong Infrastructure’s parent company, Cheung Kong Holdings Ltd (Hong Kong: 1, OTC: CHEUF, ADR: CHEUY).

On July 16 APA offered 0.1678 of one new APA share for each Envestra share. The bid equated to AUD1.07 a share, based on APA’s close on July 15. That price excludes a final dividend of as much as AUD0.03 per share by Envestra to its shareholders.

The offer represented a 6.3 percent premium to the 20-day average of Envestra’s stock price leading up to July 16, lower than the average premium of 16 percent for gas distribution deals since July 2008.

APA closed on the Australian Securities Exchange (ASX) at AUD5.89 on Aug. 15, valuing the present offer at approximately AUD0.99 per share. Envestra closed at AUD1.12, suggesting the market sees an improved offer on the horizon.

APA can clearly stand to boost its offer by at least 10 percent, particularly in light of the significant growth forecast for Envestra.

The latter, which owns 14,000 miles of pipelines that supply gas to about 1.2 million customers mostly in Victoria and South Australia, is expected to see profit growth of 66 percent by 2014.

APA Group remains a buy under USD6.50.

Envestra, which closed at AUD1.12, approximately USD1.02, on the Australian Securities Exchange (ASX) on Aug. 15, is a buy on dips to USD1.

Conservative Update

Australand Property Group (ASX: ALZ, OTC: AUAOF) hit a 2013 closing low of AUD3.20 on the Australian Securities Exchange (ASX) on June 24, a sharp spike lower at the end of a weeks-long slide triggered by GPT Group’s (ASX: GPT, OTC: GPTGF) withdrawal of a AUD2.94 billion bid for the A-REIT’s office and industrial assets.

Australand’s share price has rallied from that annual low to as high as AUD3.61 on July 22 on renewed speculation that another A-REIT, specifically Stockland (ASX: SGP, OTC: STKAF) is contemplating an offer for the entire business.

On July 22 Australand management announced that it had completed its previously announced strategic review, commenced in the aftermath of an announcement by 59 percent owner CapitalLand Ltd (Singapore: CAPL, OTC: CLLDF, ADR: CLLDY) that it was contemplating the sale of its stake.

Management noted in its July 22 statement that though it had received “several” proposals for “parts and all” of its assets none was “superior to business as usual.” As such management committed to the “execution of … previously stated strategic objectives.”

CapitalLand also announced that “Australand will continue as a key investment.”

None of this has stopped the rumor mill, with analysts at Commonwealth Bank of Australia (ASX: CBA, OTC: CBAUF, ADR: CMWAY) running numbers that suggest a bid by Stockland at 4 percent above Australand’s current share price would boost earnings for the acquirer.

These analysts concluded that Australand is “a good strategic fit for Stockland,” noting too that the likelihood of a deal is “increasing despite the fact that Australand recently announced the conclusion of its strategic review.”

Stockland CEO Mark Steinert said he wanted to increase his A-REIT’s exposure to industrial property following a recent strategic review but would only invest in office property on a selective basis.

Australand has one of Australia’s most valuable commercial portfolios, including 47 industrial properties and 13 office towers, mainly along Australia’s eastern seaboard.

Management reported a 9 percent decline in first-half operating profit to AUD62.4 million, within guidance issued in February. Statutory net profit after tax was AUD88.4 million, 1 percent lower than the prior corresponding period.

Despite soft business and consumer confidence residential sales activity strengthened during the first half, with contracts on hand up 36 percent.

Australand’s industrial and office investment portfolio continues to deliver growth, supporting distributions, driven by rental growth and the completion of development projects. Operating earnings per security were AUD0.108, while management declared a distribution of AUD0.105 per security.

Net tangible asset value per security as of June 30, 2013, was AUD3.57.

Australand’s Investment Property division posted earnings before interest and taxation (EBIT) of AUD96.2 million on comparable rental growth of 3.1 percent. Occupancy at the end of the period was 95.3 percent, while the weighted average lease term was 5.4 years.

The Development segment reported a 35 percent decline in EBIT to AUD32.2 million due to lower Residential earnings as a result of a reduced contribution from high-margin land projects and a lower level of settlements on residential built-form projects in the first half.

The division held 1,793 contracts as of June 30, up from 1,169 contracts as of Dec. 31, 2012, with 51 percent of these expected to be recognized in the second half of the year.

The Commercial & Industrial division delivered seven projects during the half with an end value of approximately AUD225 million and secured approximately 75,000 square meters of new commitments from industrial tenants. The division’s forward workload stands at 146,000 square meters across 11 projects.

Development earnings are expected to be higher in the second half of the year, underpinned by the expected delivery of nine third party C&I development projects with an end value of approximately AUD235 million and the level of Residential contracts on hand.

Management reiterated guidance for full-year operating earnings growth of 3 percent to 4 percent, with stronger performance during the second half of 2013 supported by secured residential sales and industrial developments currently in progress.

This is a solid operating result despite heavy Residential headwinds. And there is a strong possibility that the value of its office and industrial assets will be recognized through an M&A transaction. As of this writing Australand is trading at a 3.6 percent discount to the value of its portfolio, with a yield of 6.3 percent. Australand is a buy again, under USD3.20.

CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY), the world’s second-biggest maker of blood-derived therapies, reported fiscal 2013 net income grew by 19 percent to USD1.22 billion, or USD2.43 per share, from USD1.02 billion, or USD1.97 per share, for fiscal 2012. Revenue was up 6.6 percent to USD5.13 billion.

Management declared a final dividend of USD0.52 per share, up 6.1 percent from a final dividend of USD0.49 for fiscal 2012. Full-year dividends totaled USD1.02, a 17.4 percent increase over fiscal 2012.

Cash flow from operations grew by 9 percent to USD1.31 billion. CSL has USD762 million in cash on hand, highlighting a strong balance sheet that will continue to support development of new therapies. Group EBIT margin grew from 26.6 percent to 29.1 percent, driven by improved efficiencies and a change in sales mix across the portfolio of products.

Research and development investment was up 16 percent in fiscal 2013 to USD427 million.

CSL Behring sales of USD4.5 billion were up 10 percent in constant currency terms, as immunoglobulin product sales of USD2.08 billion were up 9 percent. Management reported that sales for the self-administered subcutaneous primary immune deficiency disease therapy Hizentra surged by 27 percent.

Albumin sales of USD601 million were up 28 percent, driven by demand in China, which was aided by domestic plasma supply interruptions. Improved distribution logistics in China also helped grow sales. Hemophilia product sales were up 2 percent to USD1.09 billion.

Specialty products sales were up 17 percent to USD719 million, management noting that “a changing paradigm for the treatment of peri-operative bleeding continued to underpin growth in demand for fibrinogen product Haemocomplettan in Europe.”

bioCSL sales were up 8 percent to USD449 million, as Gardasil revenue of USD57 million was driven by commencement of a vaccination program for boys in Australia. Influenza vaccine sales fell to USD137 million amid a challenging year for this business due to what was for most of the fiscal year a high Australian dollar.

Management’s strategic review of bioCSL continues.

CSL Intellectual Property revenue was USD134 million due to solid growth in royalty contributions from human papillomavirus vaccines.

Management guided to 10 percent profit growth for fiscal 2014, while per-share earnings will increase more due to the repurchase of AUD869 million worth of stock.

The market responded negatively to CSL’s guidance, as it represents a slowdown from the 19 percent growth posted for fiscal 2014. We continue to be impressed by the double-digit rate and the double-digit rate of dividend growth.

CSL is a buy under USD58 on the ASX using the symbol CSL and on the US over-the-counter (OTC) market using the symbol CMXHF.

CSL also trades on the US OTC market as an American Depositary Receipt (ADR) under the symbol CMXHY. CSL’s ADR, which represents 0.5 of an ordinary, ASX-listed share, is a buy under USD29.

GPT Group (ASX: GPT, OTC: GPTGF), which we added to the Portfolio in the May 2013 issue, reported statutory net profit after tax of AUD257 million for the first six months of 2013, down 6.7 percent compared to the prior corresponding period due primarily to smaller gains on property values.

Realized operating income (ROI) was up 4.1 percent to AUD236.5 million, while ROI per security of AUD0.127 represented a 6 percent year-over-year increase. Management paid distributions of AUD0.101 during the first half, 79.5 percent of realized operating income.

Comparable income growth of 0.9 percent, and management reported 98.1 percent occupancy. The A-REIT also reported a 30.3 percent decline in management expenses, as its focus on operational efficiency continues to pay off.

Income from the group’s retail properties declined to AUD139.6 million from AUD160.4 million a year ago, while office income rose to AUD73.1 million from AUD32.4 million in the first half of 2012.

The logistics arm booked an increase in revenue to AUD37.1 million for the half, up from AUD32.4 million.

Net tangible asset value per security increased to AUD3.76, up 0.8 percent since Dec. 31, 2012.

Management maintained its 2013 guidance for “at least” 5 percent growth in ROI per share and reiterated a target payout ratio of 80 percent of ROI, or approximately 100 percent of cash earnings.

Management will unveil a five-year strategy plan in October 2013, which will focus on capital allocation as “the single biggest driver of total returns.” GPT Group remains a buy under USD4.

Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY), a July 2013 “best buy” profiled in a Sector Spotlight feature and a charter member of the AE Portfolio, posted a 12.9 percent increase in statutory net profit after tax (NPAT) to AUD3.865 billion.

Earnings before interest, taxation, depreciation and amortization (EBITDA) increased by 3.9 percent to AUD10.63 billion, as Telstra continued to distinguish itself with solid wireless customer growth, unmatched investment in its network and advancement of strategic initiatives.

Revenue for the period was up 1.2 percent to AUD25.68 billion, as mobile revenue rose by 6 percent to AUD9.2 billion. Telstra added 1.3 million new domestic retail mobile customers, bringing its total to 15.1 million.

Earnings per share were up 11.6 percent to AUD0.307. Telstra confirmed a AUD0.14 final dividend, bringing the total payout for fiscal 2013 to AUD0.28 per share. The payout ratio for the year was 91.2 percent.

As of this writing Telstra is yielding a solid 5.5 percent.

Free cash flow decreased by 3.3 percent to AUD5.02 billion, including increased working capital to support business growth, cash proceeds of AUD669 million from the sale of the New Zealand-based TelstraClear unit and payments of AUD821 million for spectrum licenses.

Management invested AUD1.2 billion in Telstra’s mobile network during the year, expanding the reach of its 4G network to cover 66 percent of Australia’s population. Coverage is on track to reach 85 percent of Australians by the end of calendar 2013.

The CAPEX-to-sales ratio for the period was 14.9 percent, based on an overall capital expenditure of AUD3.79 billion.

Network Applications and Services (NAS) revenue increased by 17.7 percent for the year, including the commencement of a AUD1.1 billion, six-year contract with the Australian Dept of Defence as well as international agreements with Jetstar Airways Ltd and UK-based Fitness First Ltd.

NAS, Telstra’s fastest-growing unit, is focused on expanding into international markets, particularly in Asia. Management is currently negotiating the establishment of delivery centers in conjunction with industry partners that will enable the delivery of “cloud” computing services in India.

Fixed-line customers continued to decline, with 287,000 customers, or 3.6 percent, disconnecting during the year and revenue slipping by 9.5 percent.

Australian media revenue declined by 7.8 percent, though Sensis performed as forecast, with revenue down 11.4 percent. Digital media revenue growth of 11.3 percent was offset by a 19.9 percent decline in print revenue. Sensis continues to be restructured as it transitions from a print to a digital business.

Telstra continues to implement its agreements related to the National Broadband Network and “will continue to work constructively in the best interests of shareholders and seek to maximize the value of those agreements as the project progresses.”

Management expects growth to continue in fiscal 2014, forecasting low single-digit total income and EBITDA growth. Free cash flow is forecast to be between AUD4.6 billion and AUD5.1 billion in fiscal 2014.

CEO David Thodey also said Telstra will resume its practice of considering dividends on a half-yearly basis, as previously announced.

Telstra is a strong buy on dips to USD4.60 on the Australian Securities Exchange (ASX) using the symbol and on the US over-the-counter (OTC) market using the symbol TTRAF.

Telstra also trades on the US OTC market as an American Depositary Receipt (ADR) under the symbol TLSYY. Telstra’s ADR, which is worth five ordinary, ASX-listed shares, is a buy under USD23.

Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY) declared a final dividend in respect of fiscal 2013 of AUD1.03 per share, up 8.4 percent from the AUD0.95 paid a year ago, and also declared a AUD0.50 per share return of capital payment.

Total dividends for fiscal 2013 come to AUD1.80, up 9.1 percent from AUD1.65 for fiscal 2012.

Management reported net profit after tax (NPAT) of AUD2.26 billion, up 6.3 percent on solid earnings growth for the company’s retail businesses, a significant increase in earnings in the insurance division and continued reduction in financing costs.

Operating cash flow was up 8 percent to AUD3.93 billion.

Net capital expenditure of AUD1.672 billion was 28.9 percent below the fiscal 2012, as ongoing organic investments, including in its retail store networks in the ammonium nitrate capacity expansion in the chemicals business, was supported by increased property disposals of AUD659 million for the year.

Free cash flow surged by 47.5 percent to AUD2.17 billion.

For the 10 years through fiscal 2013 Wesfarmers has delivered a compound annual growth rate for NPAT of 11.2 percent, and that’s been matched with consistent dividend growth.

Wesfarmers, which is yielding 4.3 percent, is a buy under USD40 on the Australian Securities Exchange (ASX) using the symbol WES and on the US over-the-counter (OTC) market using the symbol WFAFF.

Wesfarmers also trades on the US OTC market as an American Depositary Receipt (ADR) under the symbol. Wesfarmers’ ADR is worth 0.5 of an ordinary, ASX-listed share and is a buy under USD20.

Aggressive Update

Mineral Resources Ltd (ASX: MIN, OTC: MALRF, ADR: MALRY) has enjoyed a solid run on the Australian Securities Exchange after hitting a 2013 closing low of AUD7.30 on July 3, rising as high as AUD10.85 on Aug. 13 and closing at AUD10.71 on Aug. 15.

That’s about USD9.76 when accounting for the weaker Australian dollar versus the US dollar, below our USD10 buy-under target and good for a yield of 4.4 percent.

Mineral Resources, with core mining services operations that are tightly tied to iron ore production as opposed to exploration and development as well as a growing iron ore production capability, posted solid results for fiscal 2013.

Management declared a final dividend of AUD0.32 per share, up from AUD0.30 a year ago. Total dividends declared for fiscal 2013 were AUD0.48, up from AUD0.46 for fiscal 2012.

Company policy is to pay dividends equal to approximately 50 percent of NPAT.

Mineral Resources reported company-record revenue of AUD1.097 billion, as earnings before interest, taxation, depreciation and amortization (EBITDA) surged 29 percent to AUD385 million. Statutory net profit after tax (NPAT) was up 2 percent to AUD180.4 million.

Earnings improved in the second half of the year over the first, on better mining services business performance as well as a recovery in iron ore prices, higher iron ore output and a weaker Australian dollar.

On the services side, contracting volumes have increased, with six crushing contracts commencing operations during fiscal 2013. The PIHA pipeline engineering and construction unit also posted a solid contribution, while the company broadened its service base into accommodation and materials-handling activities.

Mining operations produced a solid result despite low iron ore prices in the first half of the financial year, with iron ore export volumes up 44 percent from the prior corresponding period. The Carina project is on track to reach optimum output on schedule, and the new

Phil’s Creek mine is beginning to contribute to export volumes.

Mineral Resources is a buy under USD10 on the Australian Securities Exchange (ASX) using the symbol MIN and on the US over-the-counter (OTC) market using the symbol MALRF.

Mineral Resources also trades on the US OTC market as an American Depositary Receipt (ADR) under the symbol MALRY. Mineral Resources’ ADR, which is worth one ordinary, ASX-listed share, is also a buy under USD10.

Rio Tinto Ltd (ASX: RIO, NYSE: RIO) posted an 18 percent decline in 2013 first-half underlying earnings to USD4.23 billion on lower average market prices and a higher effective tax rate, partly offset by record iron ore shipments and cost savings.

Net earnings of USD1.72 billion–down from USD5.88 billion for the first six months of 2012–include non-cash exchange losses of USD1.9 billion and a USD300 million write-off of waste-stripping costs and damaged equipment at the Kennecott Utah Copper project following the pit wall slide at Bingham Canyon in April.

Despite the top-line result management confirmed a 15 percent increase in Rio’s interim dividend to USD0.835 per share.

Management noted USD1.5 billion of total cost cuts during the period, including USD977 million of operating cost improvements and USD483 million from lower exploration and evaluation expenditures.

Rio has reduced its employee roll by 2,200 over the past year, after taking into account 1,800 new roles in iron ore to support the expansions.

Management noted solid operating performance during the half-year, with record iron ore production and stronger copper volumes, driven by a faster-than-forecast recovery at Bingham Canyon.

Steps to strengthen the balance sheet include a 9 percent reduction in capital expenditure to USD7 billion. CAPEX is on track to USD14 billion for 2013, 20 percent below its 2012 peak.

So far Rio has announced or completed USD1.9 billion of non-core divestments in 2013, as it adjusts to the phase of the global commodity cycle.

But the company continues to develop assets for the long term.

Funding and development of phase two of the Oyu Tolgoi underground expansion has been delayed until discussions with the Mongolian government on a range of matters is concluded and a new timetable has been agreed.

The Oyu Tolgoi copper-gold open pit mine and concentrator is now in production and consistently operating at more than 80 percent of design capacity.

The first phase of the Pilbara iron ore expansion to 290 million metric tons per annum is on budget and on time to deliver first metric tons in September 2013.

Note that Rio Tinto’s New York Stock Exchange (NYSE) listing is an American Depositary Receipt that represents one share of the company’s London Stock Exchange listing. Rio Tinto is dual-listed in Sydney and London.

The shares on the respective exchanges represent ownership in the same underlying company. But there will be slight differences in pricing.

Rio Tinto is a buy under USD65 on the Australian Securities Exchange (ASX) using the symbol RIO.

Rio Tinto is a buy on the New York Stock Exchange (NYSE), also using the symbol RIO, under USD55.

WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY) reported an 8.8 percent decline in net profit after tax (NPAT) to AUD322.1 million, though revenue was up 19.2 percent to AUD8.83 billion.

The Hydrocarbons unit posted solid revenue and earnings before interest and taxation (EBIT) growth, with good results coming from Australia, the US gas and downstream market and the Improve sector in Canada.

During the second half of the year lower demand and higher costs hurt WorleyParsonsCord, the Canadian construction and fabrication business.

Even with the significant downturn in the Western Australia market, the Minerals, Metals & Chemicals segment still delivered overall growth, largely in the chemicals market in China, Brazil and the US.

Infrastructure & Environment was hit by reduced demand for resource infrastructure services, particularly in Western Australia. Results for the unit also suffered due to reductions in government spending in South Africa and the US.

The Power segment was impacted by the cancellation of key projects in both Europe and Canada and increased material costs on a substantially complete lump-sum procurement project in Brazil.

The bottom line was further impacted by restructuring costs incurred as a result of job cuts.

In May management had guided to a decline in profit to as little as AUD320 million due to the postponement of projects in Western Australia and a slowdown in Canadian oil sands activity.

Operating cash flow for the period was AUD444 million, up from AUD438 million in fiscal 2012. WorleyParsons invested AUD347 million in the business in fiscal 2013, up from AUD106 million, for acquisitions, property, plant and equipment and computer software.

The company’s balance sheet remains strong, with a 25 percent gearing ratio and a cash-to-interest cover ratio of 10.6 times.

CEO Andrew Wood noted during the company’s conference call to discuss earnings that earnings across all its divisions, including hydrocarbons, minerals, metals and chemicals, infrastructure and environment, and power should improve in fiscal 2014. Mr. Wood added that organic growth as well as acquisitions would be part of the company’s strategy.

Management declared a final dividend in respect of fiscal 2013 of AUD0.51, in line with the year-ago level. Total dividends for fiscal 2013 were AUD0.925 per share, up 1.6 percent from AUD0.91 for fiscal 2012.

In July WorleyParsons won a contract from South Africa-based Sasol Ltd (Johannesburg: SOL, NYSE: SSL) for work on a gas-to-liquids and ethane cracker complex that’s expected to cost as much as USD21 billion. In June it was selected by Chevron Corp (NYSE: CVX) to provide engineering services for five years at the Super Oil’s operations in Western Australia.

WorleyParsons is a buy under USD24 on the Australian Securities Exchange (ASX) using the symbol and on the US over-the-counter (OTC) market using the symbol WYGPF.

WorleyParsons also trades on the US OTC market as an American Depositary Receipt (ADR) under the symbol WYGPY. WorleyParsons’ ADR is worth one ordinary, ASX-listed share and is also a buy under USD24.

Numbers to Come

Here’s when the rest of the AE Portfolio will report operating and financial results. We’ll have a roundup for those posting numbers after pixel time for this issue and before pixel time for the next issue in the September Portfolio Update, to be published on Sept. 14, 2013.

Note that Transurban Group’s (ASX: TCL, OTC: TRAUF) fiscal 2013 results are discussed in one of this month’s Sector Spotlight features. We also touch on Australia and New Zealand Banking Group Ltd’s (ASX: ANZ, OTC: ANEWF, ADR: ANZBY) fiscal 2013 third-quarter trading update in this month’s In Focus feature.

Conservative Holdings

• Aberdeen Asia-Pacific Income Fund (NYSE: FAX)–N/A (fund, reports holdings on a quarterly basis)
• AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY)–Aug. 28, 2013 (confirmed)
• APA Group (ASX: APA, OTC: APAJF)–Aug. 21, 2013 (confirmed)
• Cardno Ltd (ASX: CDD, OTC: COLDF)–Aug. 20, 2013 (confirmed)
• Envestra Ltd (ASX: ENV, OTC: EVSRF)–Aug. 22, 2013 (confirmed)
• M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF)–Aug. 26, 2013 (tentative)
• Ramsay Health Care Ltd (ASX: RHC, OTC: RMSUF)–Aug. 29, 2013 (tentative)
• SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF)–Aug. 21, 2013 (confirmed)

Aggressive Holdings

• Amalgamated Holdings Ltd (ASX: AHD, OTC: None)–Aug. 23, 2013 (estimate)
• Ausdrill Ltd (ASX: ASL, OTC: AUSDF)–Aug. 28, 2013 (confirmed)
• BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–Aug. 20, 2013 (confirmed)
• GrainCorp Ltd (ASX: GNC, OTC: GRCLF)–Nov.15, 2013 (estimate)
• Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY)–Aug. 20, 2013 (2013 H1, confirmed)
• Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY)–Aug. 22, 2013 (confirmed)
• Spark Infrastructure Group (ASX: SKI, OTC: SFDPF)–Aug. 26, 2013 (2013 H1, confirmed)
• Woodside Petroleum Ltd (ASX: WPL, OTC: WOPEF, ADR: WOPEY)–Aug. 21, 2013 (2013 H1, confirmed)