In a move that was telegraphed but that still caught many observers, at home and abroad, by surprise, on Nov. 29, 2013, Australian Treasurer Joe Hockey decided against allowing US-based agribusiness giant Archer Daniels Midland Co’s (NYSE: ADM) acquisition of GrainCorp Ltd (ASX: GNC, OTC: GRCLF), the largest grain handler on Australia’s east coast.

Mr. Hockey’s move sent GrainCorp’s share price spiraling lower, as investors wiped out the takeover premium built in since Oct. 21, 2012, when ADM made its initial offer. From a close of AUD12.25 on the Australian Securities Exchange (ASX) on Nov. 1 GrainCorp has plunged to AUD8.20 as of Dec. 12.

An original member of the AE Portfolio, Aggressive Holding GrainCorp’s total return since the Sept. 26, 2011, debut of Australian Edge is 27.8 percent in US dollar terms.

Mr. Hockey’s decision to prohibit the deal was made on the basis that it “would not be in our national interest.” The Australian Treasurer also noted his belief that competition in the Australian grain market is not sufficiently robust.

GrainCorp controls seven of the 11 grain port terminals on the east coast of Australia and handles about 85 percent of eastern Australia’s bulk grain exports.

But this decision was more about domestic politics than international concerns or competition.

What’s done is done, and we’re left now to evaluate GrainCorp’s underlying fundamentals. Things appear a bit more complicated than they otherwise would be, what with the steep decline from lofty levels as well as the resignation of CEO Alison Watkins to take the managing director’s role at Coca-Cola Amatil Ltd (ASX: CCL, OTC: CCLAF, ADR: CCLAY).

What remains in place is GrainCorp’s portfolio of grain storage and logistics assets, global exposure to the grain industry and its proximity to Asia.

GrainCorp’s dominant eastern Australian grain network includes 280 sites with about 21 million metric tons of storage capacity, seven of 11 bulk ports with 16 million metric tons of elevation capacity, two packing facilities handling containerized grain exports and up to 20 grain trains with more than 5 million metric tons of freight capacity, including four company-owned trains.

This infrastructure network can’t be easily replicated, and its replacement value is significantly higher than the current carrying book value.

GrainCorp and Australia are also well positioned vis-à-vis import-dependent growth markets for grain and processed products, including malt and canola oil, such as the Middle East, Africa and Asia, giving it some freight advantage. These areas account for about 85 percent of the 110 million metric ton increase in the global wheat trade expected through 2050.

Over the next five years demand from Southeast Asia–not just China–is forecast to increase by 11 million metric tons. The question is, where is that wheat going to come from?

GrainCorp estimates Australia’s proximity to Asia delivers it a freight advantage worth about USD10 per metric ton of grain. Australia has a significant ocean freight advantage to service Asia, but it’s critical that investment is made to keep the costs of other parts of the supply chain down. The risk of inaction is that the cost advantage disappears.

The Australian government is likely to help fill this infrastructure gap in the aftermath of its decision to deny ADM the opportunity to acquire GrainCorp and invest its capital in the business.

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.

GrainCorp’s gain over the past year-plus has been wiped out by Mr. Hockey’s decision. Selling pressure may well persist in the short term until all “event-driven” money has cleared out and fundamental investors, such as we were in Sept. 26, 2011, revisit the stock based on its merits.

When we included GrainCorp in the original “Eight Income Wonders from Down Under” it was trading at AUD6.82 on the ASX. We were intrigued by its dominant market position, diversified earnings profile and dividend growth potential.

The possibility that it might be a candidate for takeover by a larger company did cross our minds, but we were in it for the long haul.

The takeover premium is gone. GrainCorp’s dominant market position and diversified earnings profile are still very much in place, as is its dividend growth potential.

Existing investors should continue to hold their shares. New investors can buy GrainCorp under USD10 on the ASX using the symbol GNC and on the US over-the-counter (OTC) market using the symbol GRCLF.

Worley’s Woes

WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY) has slumped to a half-decade low in the aftermath of management’s fiscal 2014 first-quarter trading update, which also included a revision to earnings guidance for the year. 

At the company’s annual general meeting on Oct. 10, 2013, management reiterated guidance for fiscal 2014 “increased” earnings compared to fiscal 2013’s net profit after tax (NPAT) of AUD322 million.

Based on results since July 1, as WorleyParsons has “experienced a delay in upturn” in its market, management adjusted its forecast and now expects to report underlying NPAT of AUD260 million to AUD300 million for fiscal 2014, with first-half underlying NPAT of AUD90 million to AUD110 million.

The steep decline in the share price–WorleyParsons dropped from AUD21.59 on the Australian Securities Exchange (ASX) on Nov. 19 to AUD15.72 on Nov. 21 and is now trading around AUD15.37–reflects skepticism that the company can make even its revised full-year target.

This is the second downward revision management has issued this calendar year.

WorleyParsons’ policy is to pay out 60 percent to 70 percent of NPAT in dividends to shareholders, with the balance retained to fund growth. The payout ratio for fiscal 2013 was 70.8 percent based on a full-year dividend of AUD0.925.

At the low end of management’s new guidance the fiscal 2014 dividend would be approximately AUD0.75, at the high end approximately AUD0.86.

In its statement management noted that professional services revenue was lower than the prior corresponding period, with particular weakness in its relatively large Australian and Canadian businesses, to a lesser extent in Latin America and the Middle East.

The company is seeing stronger results in the US, Southern Africa and Europe, though not to a degree sufficient to offset the declines in Australia and Canada, as management had previously anticipated.

The decline in the Australian business has been greater than expected due to the fact that oil and gas projects in Northern Australia are moving into the final construction and delivery phase, where Worley’s services are in lesser demand. And the Minerals & Metals business Down Under remains weak.

Earlier in 2013 WorleyParsons won contracts for Canadian oil sands projects such as MacKay River, Joslyn North and Fort Hills from companies including Suncor Energy Inc (TSX: SU, NYSE: SU) and Total SA (France: FP, NYSE: TOT). But those projects have been delayed due to pressure from the glut of cheap, competing supplies produced from US shale.

CEO Andrew Wood expects some of the deferred oil sands projects to be revived in 2014.

The Canadian business has also suffered due to higher costs at its construction and fabrication business WorleyParsonsCord.

The unit has incurred additional expenses on the late accounting of costs for projects that are now complete. But management has stated that Cord has a full workload and remains confident in the longer-term outlook.

The Latin American business has been impacted by the soft global minerals and metals market, while business in the Middle East has also experienced a slow start to the year as a result of delays in the ramp-up of a number of projects that have been awarded.

Mr. Wood noted that WorleyParsons has had a number of contract wins that should support second-half results, but these projects haven’t ramped up as fast as expected.

In October Suncor decided to start work on its long-delayed Fort Hills mine, while Royal Dutch Shell Plc (London: RDSA, NYSE: RDS/A) said it planned to move ahead with its Cameron Creek project in Canada. These are signs that the oil sands industry is still considered viable for the long term.

And management expects the benefits of a “rigorous” cost-reduction program to begin to show up in the second half of fiscal 2014.

In May WorleyParsons downgraded its profit guidance for fiscal 2013 due to an abrupt slowdown in Australia mining investment that caught the company off guard.

Revenue had been shielded somewhat because of the company’s far greater exposure to the energy industry, which has been supported by Asia’s demand for cleaner-burning fuel such as liquefied natural gas (LNG). But many Australian LNG producers are putting expansion plans on hold too amid growing competition from North America supplies.

Near-term headwinds have certainly had an impact on WorleyParsons. Client caution, uncertain macroeconomic conditions and concerns on project cost inflation have led to delays and deferrals of work in its core global hydrocarbons business.

Lower commodity prices have weakened CAPEX intentions in the global resources sector, so there’s less work available for bid, more intense competition and pressure on margins. Work that is available is in lower-margin, higher-risk areas.

At the same time, medium- and long-term dynamics favor WorleyParsons. In particular, continued industrialization and growth in developing economies should support commodity prices, including oil and gas, which should see continued investment in new projects.

Investment in new oil and gas projects is also supported by the slow decline in production from and availability of conventional sources and the shift toward unconventional production.

Investment in existing assets in the energy and resources sector to sustain and increase output is also likely over the long term. WorleyParsons is also well positioned to benefit from other major global trends, including rising infrastructure investment.

This downgrade comes quick on the heels of the early October reiteration of guidance for growth versus fiscal 2013 numbers and follows earlier profit warnings. There is solid foundation for skepticism.

And it will take time for management to demonstrate the effectiveness of its cost-cutting measures, which will likely include staff reductions.

We added WorleyParsons to the AE Portfolio Aggressive Holdings in February 2012, and from then until Nov. 19, 2013, the stock had trended lower. Now we’re looking at a negative total return of more than 50 percent.

The key driver of these downgrades is cyclical in nature. Based on commentary from WorleyParsons’ global engineering peers, delays and deferrals appear to be easing. In addition to work in hand, additional contract awards would make the big second-half burden much easier to bear. And WorleyParsons continues to book work with high-quality companies all over the world.

New money is probably looking at a compelling long-term value play, with WorleyParsons priced at just 11.75 times fiscal 2013 earnings and 13.53 times estimated fiscal 2014 earnings and a price-to-book value of 1.75 times.

Those who bought on our initial recommendation in February 2012 are saddled with a 50 percent loss at this point. That’s not good news.

But should the cycle indeed be turning to the positive WorleyParsons will reap significant benefits.

We’re maintaining WorleyParsons in the Portfolio, though we’re reducing our buy-under target to reflect market realities.

WorleyParsons is a buy under USD16 on the ASX using the symbol WOR and on the US OTC market using the symbol WYGPF if you don’t already own it.

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 USD16 if you don’t already own it.

Conservative Roundup

Stymied in its attempt to acquire 100 percent ownership of fellow Conservative Holding Envestra Ltd (ASX: ENV, OTC: EVSRF), APA Group (ASX: APA, OTC: APAJF) continues to see solid operating results on the ground.

And that’s translating to positive financial developments.

APA, Australia’s largest gas infrastructure business, announced an increase in its fiscal 2014 guidance for earnings before interest, taxation, depreciation and amortization (EBITDA) to AUD730 million to AUD740 million, an increase of approximately 2 percent on the previous guidance of AUD715 million to AUD730 million.

Management noted the strong performance of both APA’s assets and the company’s investments during the first half of the year as well as the visibility that APA has of its expected business performance through June 30, 2014.

APA has also revised down its interest cost guidance. Management now expects net interest cost to be within the range of AUD315 million to AUD325 million, a decrease of approximately 4 percent on the previous guidance of AUD330 million to AUD340 million.

APA Group is a strong buy for long-term growth up to USD6.50 on the ASX using the symbol APA and on the US OTC market using the symbol APAJF.

GPT Group (ASX: GPT, OTC: GPTGF) announced an estimated distribution for the six months to Dec. 31, 2013, of AUD0.103 per security, taking the total estimated distribution for the year to AUD0.204 per security.

That’s up 5.7 percent from the AUD0.193 paid for 2012.

GPT, meanwhile, is caught up in a battle with Dexus Property Group (ASX: DXS, OTC: DXSPF) for control of Commonwealth Property Office Fund (ASX: CPA, OTC: CWHPF).

Dexus, along with its partner the Canadian Pension Plan Investment Board (CPPIB), have raised their offer for the office fund controlled by Commonwealth Bank of Australia (ASX: CBA, OTC: CBAUF, ADR: CMWAY) to AUD1.268 per share, or AUD3 billion.

GPT made an offer of AUD1.272 per share on Nov. 19, topping the original Dexus/CPPIB offer of AUD1.2052 per share.

The offer is 0.141 GPT shares per CPA share and AUD0.75325 in cash for every CPA unit, though the cash component will be reduced by the amount of any distribution paid on a CPA unit following Nov. 19. Based on GPT’s closing price on Nov. 18 the offer valued CPA at AUD1.272 per share.

Dexus and the CPPIB raised the cash component of their bid to AUD0.7745 from AUD0.7265 while maintaining the stock portion of the offer at 0.4516 Dexus share for each CPA security.

The revised bid has no minimum threshold to begin accepting CPA shares, compared with a requirement of 75 percent support for its previous offer and 50.1 percent under GPT’s proposal.

The independent board of CPA’s manager, Commonwealth Managed Investments Ltd, will consider the increased offer from Dexus and the CPPIB and will issue an opinion on the bid and GPT’s earlier proposal “in due course.” It advised shareholders to take no action on the new Dexus offer.

Commonwealth Property Office Fund, known as CPA, owns a AUD3.9 billion portfolio of office buildings located across Australia’s central business districts.

Dexus, which has a 14.9 percent interest in CPA, has said it would keep its stake, which would prevent GPT from gaining full control of the target. GPT controls 7.97 percent of CPA.

Dexus also plans to pay AUD41 million to Commonwealth Bank for the management rights to the fund. GPT’s offer doesn’t include any extra payment for management rights.

Commonwealth Bank will discuss the transfer of CPA’s management rights to Dexus, the lender said in a separate statement today. The sale of the management rights will depend on Dexus acquiring 50.1 percent of CPA.

Dexus and the CPPIB first made an offer for CPA valued at AUD1.15 a share in October, which CPA’s manager rejected. They followed that with a sweetened AUD1.2052 a share bid last month, which CPA’s manager accepted, allowing Dexus exclusive access to details of the fund’s operations.

GPT entered the fray the following week, saying it didn’t need to examine the fund’s books. CPA’s manager revoked Dexus’s exclusive access to CPA, while letting the company continue with due diligence, which ended Dec. 9.

GPT is now reportedly in talks to recruit one of CPA’s former senior executives, John Dillon, and has hired form Macquarie Group head of Asia real estate research Callum Bramah.

GPT’s share price already seems to reflect fear that this battle will escalate, with a bidding war won by the A-REIT that overpays for the target.

GPT closed at AUD3.41 on Dec. 12 on the ASX, a 10 percent discount to its net tangible asset value (NTA), down from AUD3.73 in late November. Dexus shares closed at AUD0.995, or about 5 percent below NTA. CPA, of course, closed at AUD1.275, or about 6 percent above NTA.

GPT noted in its recent strategy announcement that it was targeting AUD10 billion of asset growth, which would lift “active” earnings from 3 percent to 10 percent. That was clearly a signal that the A-REIT would be a player for prime real estate. CPA’s portfolio of assets does fit that description.

And 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.

GPT has already made an aggressive move for CPA, but its road to full control will be a tough one, not simply because of the higher bid it will likely require but also because of Dexus’ existing ownership stake.

GPT’s existing portfolio is a strong one, and management has the capacity to grow the business as well as the track record to suggest it will do so in an efficient manner. GPT remains a buy under USD4.

Aggressive Roundup

During its Nov. 20, 2013, annual general meeting Mineral Resources Ltd (ASX: MIN, OTC: MALRF, ADR: MALRY) management endorsed the market consensus forecast for fiscal 2014 NPAT of between AUD247.8 million and AUD252.8 million, which at the low point represents 37 percent year-over-year growth and at the high point a 39 percent increase.

Management of the mining services provider and mineral producer noted several variables that could impact the result, including iron ore price moves, iron ore export volumes, the US dollar conversion rate, weather events, Chinese demand and operational issues.

The company does expect iron ore prices to soften marginally during calendar 2014, though there is no repeat of the 2012 decline on the horizon.

Management noted improving demand for its iron ore output, as its Yilgarn and Pilbara are developing a reputation in end-markets for reliable quality. Mineral Resources is currently negotiating a number of term contracts with high end users and traders. The company has recently established new opportunities in China and Korea and is nearing a deal for Japanese sales.

Management expects to boost export volume to 8 million metric tons per annum (Mmtpa) with the ability to grow it another 15 percent to 20 percent. The company exported 2.1 million metric tons during the first quarter of fiscal 2014, so the 8 Mmtpa target is certainly conservative.

On the services side of the business, Crushing Services International (CSI) has 130 Mmtpa crushing capacity in place for fiscal 2014 versus 110 Mmtpa crushed in fiscal 2013. Process Minerals International (PMI) has also seen an increase in demand for its services, including mine-site accommodations and logistics.

Mineral Resources is now working on an increased volume of engineering, procurement and construction (EPC) work, including the Nammuldi Ore Processing Facility and the Jerriwah Village accommodation site, and is looking to expand in this higher-risk space.

Management is also looking to grow into areas such smaller-scale plant installations, beneficiation, volume enhancement projects and infrastructure developments, areas that are also higher-risk.

Mineral Resources’ mining services exposure provides one of the strongest linkages to mine production, somewhat mitigating the more aggressive exposure to iron ore prices its mining operation provides.

Mineral Resources continues to post solid earnings and dividend growth, though company is in an investment phase. Projected CAPEX is approximately AUD300 million for fiscal 2014, down from AUD419 million for fiscal 2013 but still high relative to company history.

Management’s medium-term target is 10 Mmtpa of iron ore capacity, though mining is a non-core business. As we’ve noted in previous discussions of Mineral Resources, management will likely look to exit the iron ore mining business over the long term, though a sale will happen only when the company gets closer to its production target and costs are reduced.

Mineral Resources is a buy under USD11 on the ASX using the symbol MIN and on the US OTC market using the symbol MALRF.

Mineral Resources also trades on the US OTC market as an ADR under the symbol MALRY. Mineral Resources’ ADR, which is worth one ordinary, ASX-listed share, is also a buy under USD11.

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)–Feb. 14, 2014 (FY 2014 Q1, estimate)
• 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. 24, 2014 (FY 2014 H1, tentative)
• 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)–May 15, 2014 (FY 2014 H1, estimate)
• 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)