GrainCorp Ltd (ASX: GNC, OTC: GRCLF) and other interested parties have been assured, via an interim order executed by Australian Treasurer Joe Hockey, that a final regulatory decision by Australia’s Foreign Investment Review Board (FIRB) on Archer Daniels Midland Co’s (NYSE: ADM) proposed acquisition of the AE Portfolio Aggressive Holding “will be made by 17 December 2013.”

The transaction is subject to approval from the FIRB because it will give ADM control over seven of the eight ports that ship grain in bulk from Australia’s east coast.

ADM has offered AUD12.20 per share plus AUD1 per share in dividends, a total of AUD3.2 billion. GrainCorp’s board has recommended acceptance of the offer by shareholders.

The shares took a steep dive on Nov. 15 trading on the Australian Securities Exchange (ASX) due to a report in The West Australian that the Australian government may block the deal.

GrainCorp was down as much as 6.4 percent from its Nov. 14 close of AUD12.19 on the ASX to AUD11.41. As of this writing–late in the evening of Nov. 14 on the East Coast of the US, mid-morning on Nov. 15 in the Land Down Under–the shares are changing hands at around AUD11.50. That’s about USD10.74 based on the prevailing Australian dollar-US dollar exchange rate.

The West Australian reported that Prime Minister Tony Abbott plans to veto the deal or impose conditions that would make Decatur, Illinois-based ADM’s proposed acquisition unviable, citing Coalition lawmakers it didn’t identify.

Mr. Abbott hadn’t commented on the report. Mr. Hockey said earlier this month he wouldn’t be pressured by opposition to a foreign acquisition of GrainCorp.

GrainCorp management reported on Nov. 14 that fiscal 2013 net profit declined 31.2 percent to AUD140.9 million from AUD204.9 million for fiscal 2012, as one-time items took a AUD33.6 million bit out of the bottom line.

These items included AUD12.8 million of advisory costs related to ADM’s takeover proposal, AUD18.4 million for acquisition and integration costs related to GrainCorp Oils and AUD2.4 million related to the acquisition of GrainCorp Malt.

Revenue for the year was up 34 percent to AUD4.46 billion from AUD3.33 billion for fiscal 2012. CEO Alison Watkins noted strong grain volumes with above-average grain exports and carry-in of 4.3 million metric tons.

GrainCorp will pay a final dividend of AUD0.20 per share, bringing full-year dividends, including a AUD0.05 special dividend, to AUD0.45 per share.

Ms. Watkins also noted that drought conditions in key agricultural regions of Queensland and New South Wales have affected yields in the 2013-14 winter harvest but that crops further south look larger than average.

Management expects fiscal 2014 carry-in of 2.3 million metric tons, below the long-term average. GrainCorp’s storage and logistics division’s margins might be hit by the crop profile, with production concentrated in southern New South Wales and Victoria. 

GrainCorp is now trading at a 52-week low on the report that Mr. Abbott will cave to pressure from members of Parliament from the National half of the Liberal-National Coalition who object to a foreign entity taking control of the company.

At these levels it’s yielding more than 5 percent. We’re also happy to own a company strategically placed to help Australia serve the growing appetites of Chinese and other Asian consumers.

And should Australia offer up what now seems a surprise approval of the deal upside from here to the AUD12.20 per share plus AUD1 per share dividend, a total of AUD13.20 per share, is about 14.8 percent.

If your trade closes before Nov. 26, the ex-dividend date for the AUD0.20 final dividend that will be paid Dec. 16 to shareholders of record on Dec. 2, your upside is about 16.5 percent.

At the same time, we included GrainCorp among our original “Eight Income Wonders from Down Under” because it’s a high-quality company with easily identifiable cash flows. Management continues to make moves that complement the core business.

It of course remains to be seen what the Australian government will do, first, with the Foreign Investment Review Board decision on the ADM proposal and then, second, how it will help GrainCorp and the nation’s farmers compete in Greater Asia.

But we are happy to own a piece of a solid business with bright prospects and the proven ability to support and grow a dividend. GrainCorp is a buy under USD11.50.

Downgrade

Our thesis for maintaining Ausdrill Ltd (ASX: ASL, OTC AUSDF) among our Aggressive Holdings over the past several months, as the stock has cratered from AUD2.92 on the Australian Securities Exchange (ASX) as of March 15, 2013, when we added it to the Portfolio, to AUD0.96 as of this writing, has developed a significant hole.

In between the stock has closed as low as AUD0.79, sliding to that point on July 1 in the aftermath of management’s profit warning for fiscal 2013, and then rallied to AUD1.88 on Sept. 5, buoyed by investor belief that its revenue model, skewed to the production as opposed to the exploration phase of the mining cycle, would prove resilient during this sector slowdown.

Alas, management has provided fiscal 2014 guidance that undermines this cause for optimism.

After entering into a “trading halt” on Tuesday, Nov. 5, 2013, on the ASX ASL released an update to the market on current trading conditions. This update included initial quantitative guidance for the current fiscal year, with forecast revenue of AUD825 million to AUD925 million and net profit after tax (NPAT) of AUD35 million to AUD45 million.

Prior to the announcement the consensus among analysts was revenue of AUD1.06 billion and NPAT of AUD76.1 million. At the midpoint of management’s fiscal 2014 guidance revenue and normalized NPAT would be down 22 percent and 60 percent, respectively, versus fiscal 2013 levels.

In its announcement management also noted that it expects first-half earnings to be lower than second-half earnings.

The magnitude of the deterioration of Ausdrill’s numbers is startling. Our case for the stock had been built around the conclusion that its exposure to mine production volumes in Western Australia gold and iron ore and West African gold would support stronger revenue and earnings.

Industry data suggests volumes in these sectors have remained relatively resilient in spite of the pullback in commodity prices. What’s concerning is that Ausdrill’s fortunes don’t seem to be tracking this activity, that in fact is linkage to production is not as strong as we believed it to be.

Mining customers seem to have been able to pull back from use of ASL’s services rather easily during this industry slowdown, cutting back their waste and overburden clearing in order to save cash and lower operating costs.

ASL has completed a number of contracts in Australia and Africa and has also seen changes to mine operations at other site. But it’s been unable to win new work to offset these reductions.

But the steep reduction in earnings also suggests a significant impact from a range of non- production linked businesses.

It also raises questions about the timing of recent growth investment such as the Best Tractor Parts acquisition, which have increased exposure to more cyclical businesses including equipment hire and mineral exploration, not to mention the impact on debt levels.

Ausdrill has sufficient cash flow generation to improve working capital and rein in capital expenditure to reduce gearing.

But the pullback in demand is a concern; any further deterioration will slow down deleveraging efforts and leave the company exposed to potential violations of its debt covenants.

Management pointed to contract work currently in the tender phase, which would likely commence in early calendar 2014 and wouldn’t require additional CAPEX, as it has excess equipment available. These potential contracts form part of management’s expectations for the second half of fiscal 2014 to improve over the first half.

Exploration-exposed operations remain under pressure from subdued market conditions. Management is optimistic that major miners will drive a recovery of demand in calendar 2014.

Management noted that conditions are “expected to remain subdued until the beginning of 2014” and is also looking for a recovery in fiscal 2015, as CAPEX deferrals and excess industry capacity unwind.

Ausdrill continues to focus on expanding relationships with existing customers to sell a greater range of its services, improve service delivery and offer operating efficiencies. Management is also reducing costs and improving operating performance at Best Tractor, Energy Drilling Australia and MinAnalytical.

It’s also cutting back CAPEX and reducing net working capital, particularly inventories.

The balance sheet is still in solid shape, though deleveraging will likely to take longer. Management noted in its guidance announcement that the company “remains comfortably within its debt covenants” and that “Ausdrill remains in a sound financial position.”

Debt repayments are approximately AUD80 million, AUD60 million and AUD90 million in fiscal 2014, fiscal 2015 and fiscal 2016, respectively, and then approximately AUD320 million in fiscal 2020. Right now these seem manageable.

S&P has placed ASL on “Creditwatch Negative” following this announcement on concerns of a further deterioration of operations.

Ausdrill has clearly succumbed to cyclical pressures, and though we may not be exactly there yet it appears we’re nearing a bottom for its earnings.

Miners have been deferring discretionary spending for almost a year and can’t continue indefinitely. The risk-reward calculus for junior exploration now looks pretty good, and prices for well-managed, good-quality gold miners are solid, setting the stage for consolidation in the sector followed by a round of new mine development.

The company is well positioned to benefit from a rebound in this context. We are, however, downgrading Ausdrill to hold until we see a few new contract awards and some signs that the aforementioned scenario is actually playing out.

Conservative Roundup

Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY) is among those Australia-based companies with ample and expanding presences in China, its “super-regional” strategy putting it in good position to capitalize on the increasing needs of a rising middle class for financial services.

ANZ reported statutory net profit after tax (NPAT) of AUD6.3 billion for fiscal 2013 and a cash profit after tax of AUD6.5 billion, both figures up 11 percent versus fiscal 2012. Earnings per share (EPS) were up 9 percent to AUD2.39.

Australia’s third-largest bank by market capitalization declared a final dividend of AUD0.91 per share, taking the total dividend for fiscal 2013 to AUD1.64, a 13 percent increase over fiscal 2012.

Customer deposits grew by 12 percent, with net loans and advances up 10 percent.

Credit quality improved further, with gross impaired assets down 18 percent and provision charges down 5 percent.

Return on equity (ROE) for the year was up 20 basis points (bps) to 15.3 percent. ANZ invested more than AUD1.3 billion in growth and transformation initiatives across the bank during the year, including the “Banking on Australia” program and expansion in Asia.

Management reported a Common Equity Tier 1 ratio up 47 basis points to 8.5 percent and an internationally harmonized Basel 3 Common Equity Tier 1 ratio up 76 basis points to 10.8 percent.

ANZ’s Australia Division lifted its profit by 11 percent, driven by 7 percent income growth and a 2 percent decrease in expenses. ANZ had the strongest overall growth among Australia’s “Four Pillars” across home loans, deposits and credit cards. Home loans have grown faster than the national average for the past 14 quarters, and branch home loan sales increased 16 percent during the year.

ANZ added 30,000 new Commercial and Corporate Banking (C&CB) customers; the C&CB business has grown its lending at above average rates for the past six quarters.

The International and Institutional Banking division boosted its profit by 15 percent, as expenses declined 3 percent and provisions for bad loans were down by 30 percent.

A third of Institutional customers now deal with ANZ in multiple countries, and 48 percent of revenue came from Asia Pacific Europe & Americas (APEA) in 2013.

Products linked to trade and investment flows experienced double-digit volume growth, with Trade up 27 percent, Foreign Exchange (FX) turnover up 35 percent and Cash Management deposits up 15 percent.

An expanded product range, particularly in FX, helped to deliver 11 percent growth in Global Markets income, which topped AUD2 billion, with a record-high percentage of income coming from APEA in the second half of the fiscal year.

ANZ’s Asian Commercial business has posted a compound annual growth rate of 29 percent over the past three years and has proven a valuable source of markets and trade finance revenue. Asia Pacific Retail deposits grew 24 percent during fiscal 2013 to AUD12.9 billion.

The New Zealand division posted a 29 percent income gain, as expenses were down 15 percent and provisions declined by 76 percent. The Global Wealth Division grew profit by 36 percent, profit before provisions grew 20 percent with income up 5 percent and expenses down 2 percent.

Management noted that a full-year dividend payout ratio of between 65 percent and 70 percent of cash profit “is sustainable in the medium term, with a bias toward the upper end of the range in the near term.”

Australia & New Zealand Banking Group, based on the 13 percent growth in its annual dividend, is now a buy under USD34 on the Australian Securities Exchange (ASX) using the symbol ANZ and on the US over-the-counter (OTC) market using the symbol ANEWF.

ANZ also trades on the US OTC market as a Level I, sponsored American Depositary Receipt (ADR) under the symbol ANZBY. ANZ’s US OTC-traded ADR represents one ordinary, ASX-listed share. ANZ’s ADR is a buy under USD34.

GPT Group (ASX: GPT, OTC: GPTGF), in addition to reporting results for the third quarter of 2013, on Oct. 27, 2013, revealed the outcome of its strategic review.

Management will continue to be a sector specialist in retail, office and logistics, but investment decisions will be determined by the quality of assets rather than any predetermined portfolio weighting.

The core portfolio strategy is to remain diversified. Management noted that an important finding of its strategic review was that “there is no compelling evidence to suggest that one sector will outperform over another in the long term,” supporting its effort to be more flexible and tactical in the approach to sector weightings.

The A-REIT is targeting AUD10 billion of growth in funds under management, which will lift “active” earnings from 3 percent to 10 percent, by increasing the size of existing funds and creating new funds.

GPT plans to launch a metropolitan office fund and an industrial fund. Progress on the latter is already evident, as on Nov. 13 management announced the acquisition of the Optus Centre Brisbane for AUD110 million as a “seed asset.”

Management described it as a “well located, well leased metropolitan office with quality tenants.”

The asset is an A Grade office building located in a prime urban renewal precinct. It has a weighted average lease expiry of approximately 8.3 years and is 99 percent leased to high-quality tenants including SingTel Optus, Queensland Urban Utilities, Papuan Oil Search and Regus.

Although it intends to maintain its overall defensive profile in order to preserve a low cost of capital, GPT can drive its key metric, total return, by boosting “active”–or fee–earnings to 10 percent without jeopardizing its broader status.

Since 2010 GPT has raised 15 percent of all the capital raised in the wholesale sector and has the two best-performing unlisted wholesale funds in the market. The A-REIT has demonstrated that it can execute well in this space. As management noted, “This expansion is a natural progression.”

GPT will continue its frugal approach, on the principle that efficiency is correlated to REIT performance, noting an average management expense ratio (MER) of 47 basis points for the most efficient REITs globally.

GPT’s goal is an MER of less than 45 basis points. Maintaining its “fortress” balance sheet will allow the A-REIT to be opportunistic as it expands its portfolio.

GPT has one of the strongest balance sheets in the sector, with gearing at 21.2 percent, well below its policy gearing rate of 25 percent to 35 percent and covenant levels. Both the GPT Wholesale Office Fund and GPT Wholesale Shopping Centre Fund have low gearing, at 12.1 percent and 16.4 percent, respectively.

Management has guided to 6 percent earnings per share growth for 2013 and reiterated its targeted 80 percent payout ratio based on realized operating income. Occupancy across the portfolio was 96.8 percent as of Sept. 30, 2013.

GPT Group remains a buy under USD4.

Transurban Group (ASX: TCL, OTC: TRAUF) announced an agreement to acquire The Royal Bank of Scotland’s (London: RBS, NYSE: RBS) senior secured debt exposure to the Cross City Tunnel (CCT) in Sydney for AUD475 million, subject to regulatory approvals and final asset inspections.

Traffic and other conditions could boost the total purchase price to AUD502.5 million.

It’s a precursor to a potential outright acquisition of the asset.

The 2.1 kilometer CCT links Darling Harbour on the western fringe of the Sydney Central Business District to Rushcutters Bay in the eastern Suburbs. It also includes connections to the Eastern Distributor, in which Transurban holds a 75.1 percent interest.

RBS is the CCT’s sole senior secured creditor. In September 2013 receivers were appointed to oversee the CCT holding and operating entities and commence a sale process for the asset.

Transurban and RBS have agreed during this transitional process to instruct the receivers to continue with the sale process for the asset. Transurban intends to participate in the sale process. The outcome of that process will determine Transurban’s future ownership interest, if any, in the asset, again subject to regulatory approvals.

Transurban will use corporate debt facilities to fund the debt acquisition, with this part of the deal expected to complete by the end of 2013. The conclusion of the asset sale process is anticipated in early 2014.

Transurban’s fiscal 2014 distribution guidance of AUD0.34 per security would be unchanged by the transaction to acquire the debt. Successful outright acquisition of the CCT could, however, have a positive effect on the distribution.

Transurban is a buy under USD6.50 on the Australian Securities Exchange (ASX) using the symbol TCL or on the US over-the-counter (OTC) market using the symbol TRAUF.

Aggressive Roundup

Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHF) posted a strong 2013 third-quarter production result, with output of 1.78 million barrels of oil equivalent (MMboe) in the three months to Sept. 30 up 9.2 percent versus 1.63 MMboe for the prior corresponding period.

Management noted that full-year production is tracking toward the upper end of its 6.2 to 6.7 MMboe guidance range.

Oil and gas sales declined 19 percent to 1.53 MMboe from 1.89 MMboe for the third quarter of 2012. Total revenue was off 14.4 percent to USD175.3 million. Timing of shipments accounted for the lower sales and revenue versus production; this should unwind in coming quarters.

The key PNG LNG project remains on budget of USD19 billion and at 90 percent complete is on track for first gas deliveries in the second half of 2014.

Oil Search, with a high-quality asset base and a solid growth pipeline, remains a buy under USD8 on the ASX using the symbol OSH and on the US over-the-counter (OTC) market using the symbol OISHF.

Oil Search also trades as an American Depositary Receipt (ADR) on the US OTC market under the symbol OISHY. Oil Search’s ADR represents 10 underlying shares traded on the ASX and is a buy under USD80.

Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY) reported a 17 percent sequential increase in output for its exploration and production business to 38 petajoules equivalent (PJe) and a 38 percent quarter-over-quarter increase in sales revenue for the unit to AUD307 million.

Production growth was driven by increased availability at BassGas and the commencement of production from the Otway Gas Project’s Geographe 2 well. The sales increase was the result of increased production, higher third-party sales volumes and higher average prices across all commodities.

Management noted “significant progress” on the Australia Pacific LNG project, with overall work “being progressed at the rate of 3 to 4 percent per month.” The project remains on track to deliver first LNG by mid-2015.

Origin owns 37.5 percent of AP LNG. ConocoPhillips (NYSE: COP) owns 37.5 percent and China Petroleum & Chemical Corp, better known as Sinopec (Hong Kong: 386, NYSE: SNP) owns the remaining 25 percent.

As of Sept. 30, 2013, the upstream component of the project was approximately 50 percent complete, the downstream component approximately 54 percent complete.

In late October the Origin-led AP LNG consortium reached an agreement with the Gladstone LNG consortium, led by fellow Australian Santos Ltd (ASX: STO, OTC: STOSF, ADR: SSLTY) on gas-swap and infrastructure connection agreements that should improve capital and operational outcomes.

The two groups jointly announced the deal on upstream cooperation that they say will make gas transportation from the Surat and Bowen basin fields more efficient. It also will reduce the need for additional pipeline systems.

The two groups are already venture partners in a number of permits in the basins. The new agreements will enable both parties to more efficiently access and transport their equity gas so that they can meet the requirements of their respective LNG plants on Curtis Island, near Gladstone on the central Queensland coast.

Origin trades on the ASX under the symbol ORG and on the US over-the-counter (OTC) market under the symbol OGFGF.  It also trades on the US OTC market as an American Depositary Receipt (ADR) under the symbol OGFGY. The ADR is worth one ordinary, ASX-listed share.

Origin Energy is a buy on the ASX using the symbol ORG and on the US OTC market using the symbol OGFGF under USD15. Origin’s ADR, which represents one ordinary, ASX-listed share, is also a buy under USD15.

Numbers to Come

Here’s when AE Portfolio Holdings will report their next sets of financial and operating numbers.

A couple Holdings have “confirmed” dates, while for others we’ve provided an “estimate.”

For most this will cover the first half of fiscal 2014, which ends Dec. 31, 2013. We’ve noted for others that report on a different schedule the period to which the announcement pertains.

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)–Feb. 26, 2014 (FY 2014 H1, estimate)
• APA Group (ASX: APA, OTC: APAJF)–Feb. 19, 2014 (FY 2014 H1, estimate)
• Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF)–Feb. 6, 2014 (2013, estimate)
• Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY)–Oct. 29, 2013 (FY 2013, confirmed)
• Cardno Ltd (ASX: CDD, OTC: COLDF)–Feb. 18, 2014 (FY 2014 H1, estimate)
• CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY)–Feb. 12, 2014 (FY 2014 H1, estimate)
• Envestra Ltd (ASX: ENV, OTC: EVSRF)–Feb. 20, 2014 (FY 2014 H1, estimate)
• GPT Group (ASX: GPT, OTC: GPTGF)–Feb. 13, 2014 (2013, estimate)
• M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF)–Feb. 24, 2013 (FY 2014 H1, estimate)
• Ramsay Health Care Ltd (ASX: RHC, OTC: RMSUF)–Feb. 25, 2014 (FY 2014 H1, estimate)
• Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY)–Feb. 6, 2014 (FY 2014 H1, estimate)
• Transurban Group (ASX: TCL, OTC: TRAUF)–Feb. 4, 2014 (FY 2014 H1, estimate)
• Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY)–Feb. 13, 2014 (FY 2014 H1, estimate)

Aggressive Holdings

• Amalgamated Holdings Ltd (ASX: AHD, OTC: None)–Feb. 20, 2014 (FY 2014 H1, estimate)
• Ausdrill Ltd (ASX: ASL, OTC: AUSDF)–Feb. 25, 2014 (FY 2014 H1, estimate)
• BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–Feb. 19, 2014 (FY 2014 H1, estimate)
• GrainCorp Ltd (ASX: GNC, OTC: GRCLF)–Nov. 14, 2013 2013 (FY 2013, confirmed)
• Mineral Resources Ltd (ASX: MIN, OTC: MALRF)–Feb. 13, 2014 (FY 2014 H1, estimate)
• Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY)–Feb. 25, 2014 (2013, estimate)
• Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY)–March 20, 2014 (FY 2014 H1, estimate)
• Rio Tinto Ltd (ASX: RIO, NYSE: RIO)–Feb. 13, 2014 (2013, estimate)
• SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF, ADR: SMSUY)–Feb. 19, 2014 (FY 2014 H1, estimate)
• Spark Infrastructure Group (ASX: SKI, OTC: SFDPF)–Feb. 24, 2014 (2013, estimate)
• Woodside Petroleum Ltd (ASX: WPL, OTC: WOPEF, ADR: WOPEY)–Feb. 19, 2014 (FY 2013, estimate)
• WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY)–Feb. 12, 2014 (FY 2014 H1, estimate)