AE Portfolio Aggressive Holding BHP Billiton Ltd (ASX: BHP, NYSE: BHP) continues to adjust to the end of the global commodity super cycle and a slower rate of growth.

The world’s largest mining and resource company remains well positioned to generate strong revenue, earnings and cash flow that will support a stepped-up capital management program.

As new CEO Andrew Mackenzie continues to focus on cutting costs and reducing capital expenditures, investors will likely benefit from a more aggressive dividend policy.

Over the past couple years BHP has sold billions of dollars of operations, including divestments in Australia, the US, Canada, South Africa and the UK of petroleum, copper, coal, mineral sands, uranium and diamonds assets, as management looked to cut debt and boost shareholder returns.

According to multiple reports, the process of establishing a leaner company is likely to accelerate: A team of BHP executives advised by Goldman Sachs (NYSE: GS) and using the name “Project River” is evaluating a number of strategic options for non-core businesses, including a demerger and individual asset sales.

On the chopping block are aluminum, manganese and nickel assets. The end result would be a company focused on four core resources, iron ore, petroleum, coal and copper, and a potential long-term “fifth wheel,” potash.

Management confirmed the essentials reported by financial media in an April 1 statement, noting that “the simplification of our portfolio is a priority.”

BHP also stated that a portfolio “focused on our major iron ore, copper, coal and petroleum assets would retain the benefits of diversification, generate stronger growth in free cash flow and a superior return on investment.”

The share price has responded extremely well, as BHP has surged to above USD72 on the New York Stock Exchange as of midday April 9, 2014, from below USD64 in mid-March.

In a March 21, 2014, analyst briefing Mr. Mackenzie confirmed that BHP’s capital program, including its dividend policy, would be discussed by the company’s board of directors ahead of management’s announcement of fiscal 2014 results in August.

Mr. Mackenzie noted in the briefing that planned cost and productivity improvements totaling USD5.5 billion are sustainable, with more to come in future years. This suggests BHP will have ample room for a significant upward re-basing of its dividend policy.

Management’s top priority is to reduce costs, improve productivity and boost performance of its largest businesses, to do “more from the same, and the same for less,” in the words of the CEO.

BHP is on track to cut its net debt to USD25 billion by the end of fiscal 2014 (June 30, 2014), another piece of evidence in support of an upside dividend surprise with the August earnings announcement.

Mr. Mackenzie stressed that BHP’s forecast USD15 billion per annum CAPEX budget is a “ceiling” rather than a “floor.” The company doesn’t employ volume-growth targets, focusing instead on free cash flow generation and long-term growth in cash returns to shareholders.

As for the potential build-out of the Jansen potash project in Canada, a resource of massive scale but significant return potential as well, 

Mr. Mackenzie emphasized the importance of a patient approach to project planning, pointing out that a delayed timetable can often lead to better solutions. The CEO expressed his view that the mining industry in general has destroyed value by rushing projects in an attempt to catch commodity price waves.

On a more immediate note, Mr. Mackenzie noted that the recent weakness in the iron ore price wasn’t a material deviation from BHP’s expectations, with new supply expected to outstrip demand growth during 2014.

BHP maintains the view that China continues to manage its transition to a consumer-driven economy well, supporting a positive long-term outlook for copper, and, in time, fertilizers.

BHP Billiton is a buy up to USD40 on the Australian Securities Exchange (ASX). BHP trades on the New York Stock Exchange (NYSE) as an American Depositary Receipt (ADR) that represents two ordinary shares traded on the ASX. Buy BHP on the NYSE up to USD80.

Aggressive Roundup

Management, shareholders, analysts and observers were gobsmacked by the Australian government’s Nov. 29, 2013, decision to deny approval of GrainCorp Ltd’s (ASX: GNC, OTC: GRCLF) acquisition by US-based global agribusiness giant Archer Daniels Midland Co (NYSE: ADM) for total consideration of AUD13.20 per share.

The decision by Australian Treasurer Joe Hockey–made on the basis that an ADM takeover of GrainCorp “would not be in [Australia’s] national interest”–sent the target’s share price into a tailspin. On Nov. 28, 2013, GrainCorp, which had been weakening on rumors Mr. Hockey would block the deal, closed at AUD11.20, down from a post-ADM-agreement high of AUD12.83.

It skidded to AUD8.72 on Nov. 29, 2014, and appears to have bottomed at AUD7.52 on Feb. 5, 2014.

Now comes word that the Australian government quite possibly could look a little more favorably on an ADM-GrainCorp tie-up, perhaps because it realizes–with some recent help from GrainCorp–the depth of the infrastructure investment hole that’s hampering the grain trade on Australia’s east coast and its ability to supply fast-growing Asian markets.

In late March, Andrew Robb, Australia’s Minister for Trade and Investment, told an investor conference in Hong Kong that “there may be another opportunity at some stage” for ADM to pursue GrainCorp.

When he rejected the outright takeover Mr. Hockey said he was open to ADM increasing its stake in GrainCorp to nearly 25 percent.

Mr. Robb said he thought the opportunity for ADM to increase its stake was “intended as a signal that the timing was wrong” for its initial takeover attempt.

“At the time, it was seen primarily from a competitive point of view,” Mr. Robb said about the deal. There were concerns “that it would cut across some very constructive transition and the buildup of competition that had been taking place in that sector after many years of being under a statutory authority,” he added.

Back in November Mr. Hockey also said the 24.9 percent limit on ADM’s GrainCorp stake would “provide a platform for ADM to build stakeholder support for potentially greater participation in the Australian industry as it develops.”

ADM Chairman and CEO Patricia Woertz recently noted that the company was pleased with its 19.8 percent stake in GrainCorp and had no plans to sell it. In fact the company, according to an April 1, 2014, statement by President and Chief Operating Officer Juan Luciano at the Financial Times Commodities Global Summit in Lausanne, Switzerland, ADM will try to increase its GrainCorp stake over time.

“We are committed to Australia,” said Mr. Luciano, according to a report in The Wall Street Journal. “I think we got slammed a little bit by a wave of fear and nostalgia. We are committed to working with the government and farmers to placate those fears.”

In another development, GrainCorp has asked the government for approximately AUD100 million to fund the upgrade of the rail network serving Australia’s east coast.

Federal and/or state funds could help offset the impact of the loss of the AUD200 million Archer Daniels Midland promised to kick into a co-investment fund for upgrading rail services in a last-ditch effort to win support for its AUD3.2 billion takeover bid for GrainCorp.

The company has ­repeatedly criticised a lack of ­investment in rail lines that has allowed them to fall into disrepair or restricted the speed and capacity of trains.

The upgrades GrainCorp advocates would allow faster trains to carry heavier loads and would reduce the need for farmers to use trucks to haul grain.

Assuming AUD5-per-metric-ton savings in the cost of moving grain from farms to port, the AUD100 million would be repaid over an average 20 million metric ton harvest in one year.

The economic case is sound on those terms alone. Better rail service would also remove approximately 1,000 trucks from the road, saving that network from wear and tear and alleviating congestion.

Increased rail spending would also have a positive impact on the rationalization of GrainCorp’s network of 280 collection points along the east coast.

The company collects 80 percent of grain from 100 larger sites and is reviewing a large number of lesser sites as it looks to ­improve returns amid a lean ­harvest and heightened compe­tition from grain exporters.

GrainCorp will make a “significant investment” in the network to improve the operation of fewer, larger sites. Part of its proposal contemplates handing over sites to growers who want to maintain a central collection point and could operate them more cheaply than GrainCorp.

Smaller depots that are uneconomic for the company may work for these growers as an alternative to farm storage.

GrainCorp Chairman Don Taylor has submitted the proposal to both Infrastructure Minister Warren Truss and Agriculture Minister Barnaby Joyce.

GrainCorp, which has enjoyed a steady rise off its early February low, is a buy under USD10.

Mineral Resources Ltd (ASX: MIN, OTC: MALRF, ADR: MALRY) has revised its estimate of iron ore sales for fiscal 2014 based on continuing solid sales volumes in the third quarter.

Management now expects to ship between 9.5 million metric tons and 10 million metric tons for the full year.

This revised target is in line with the upper range figure previously provided by management for fiscal 2014 of 8 million metric with the potential for 15 percent to 20 percent improvement.

Third-quarter sales were down compared to the second quarter at 2.5 million metric tons, due primarily to poor weather and rail and port constraints. Management is confident the company will be able to deliver on the revised full-year volume.

Strong production over the first three quarters of the fiscal year has established a foundation to lift the target, as both Mineral Resources’ iron ore regions, in the Yilgarn and the Pilbara, test new levels of production.

The Chinese market remains a key variable as Mineral Resources develops its longer-term iron ore strategy. Management has consistently noted that the production segment remains a non-core operation, secondary to its main focus on mining services.

Despite lower iron ore prices and recent strengthening in the Australian dollar that will impact commodity revenues, management reiterated full-year fiscal 2014 profit guidance of AUDD247.8 million to AUDD252.8 million.

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.

WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY) announced a restructuring of its business into three operational units and one focused on managing capital and innovation as it attempts to shake up its corporate culture and free up “bogged-down” executives to spend
more time with customers and tackle complex engineering projects more effectively.

The move follows a series of profit warnings that prompted a strategic review.

A big part of the restructuring effort will involve a “cultural change” program to be overseen by the head of WorleyParsons’ human resources division.

Under the revamp the Services division to take on responsibility for the bulk of the company’s engineering contracts. The Services unit represents approximately 70 percent of WorleyParsons’ current revenue.

The Major Projects division will manage larger contracts. And the Improve division will provide WorleyParsons’ asset management services.

WorleyParsons did not specify the number of jobs it will cut, how much the restructuring will deliver in terms of savings or how, specifically, it would improve profit margins.

CEO Andrew Wood said only that the restructure would lead to “improved” profit margins beginning in fiscal 2015 and that he would provide more details along with the company’s full-year results in August.

Management did note that it will recognize approximately AUD35 million in restructuring costs as a result of the implementation of the strategic review in its fiscal 2014 financial results. The reorganization takes effect May 1,  2014, with financial reporting changes effective July 1, 2014.

The market reacted positively to the announcement, however vague at this stage, driving a 6.9 percent one-day rally from an April 8 close of AUD15.48 on the ASX to AUD16.55 as of the end of trading on April 9, the day of the announcement.

Management reiterated full-year guidance for underlying net profit after tax of between AUD260 million and AUD300 million.

WorleyParsons is a buy on the ASX using the symbol WOR and on the US OTC market using the symbol WYGPF under USD16.

WorleyParsons also trades on the US OTC market as an ADR under the symbol WYGPY. The ADR is worth one ordinary, ASX-listed share. WorleyParsons’ ADR is also a buy under USD16.

Conservative Roundup

Natural gas pipeline and infrastructure owner/operator APA Group (ASX: APA, OTC: APAJF) is weighing the merits of abandoning the plan of arrangement via which it would acquire the 66.7 percent of natural gas distributor and fellow AE Portfolio Conservative Holding Envestra Ltd (ASX: ENV, OTC: EVSRF) it doesn’t already own in favor of an on-market takeover attempt.

Two Envestra board members who represent Cheung Kong Infrastructure Holdings Ltd (Hong Kong: 1038, OTC: CKISF, ADR: CKISY), which owns approximately 17.5 percent of Envestra, have recommended that shareholders vote against APA’s offer because it isn’t in their interests.

The plan of arrangement must be approved by at least 75 percent of Envestra shareholders other than APA.

APA’s offer, sweetened in December 2013, provides Envestra shareholders the option to receive either 0.1919 APA shares for each of their shares or a combination of stock and cash. As of Dec. 10, 2013, the offer valued Envestra at AUD1.17 per share, based on APA’s price at the time of AUD6.10.

APA closed at AUD6.43 on the Australian Securities Exchange (ASX) on March 27, 2014, Envestra at AUD1.13.

APA has interests in approximately 9,000 miles of pipelines, which deliver around half of Australia’s annual gas use. Gaining 100 percent ownership of Envestra would give it full control of Envestra’s 13,950 miles of regulated gas distribution networks in South Australia, Victoria, Queensland and New South Wales, which serve approximately 1.2 million consumers.

In a separate matter, Envestra management welcomed a decision by New South Wales Minister for Resources and Energy Anthony Roberts to revoke regulatory coverage of the company’s Wagga Wagga gas distribution network effective immediately.

Gas distribution charges for the region will no longer be regulated by the Australian Energy Regulator (AER). Envestra’s Wagga Wagga gas distribution network serves around 20,000 consumers and accounts for about 2 percent of company revenue.

Management noted that the revocation decision won’t materially impact Envestra’s revenue or financial performance but is “an important step in removing the regulatory burden on business.”

Envestra will pass on to gas customers in the region the saving in regulatory costs arising from the decision, estimated at more than AUD1 million for fiscal 2015. The company will also limit any adjustment to its distribution charges for the five-year period commencing July 1, 2014, to no more than the annual rate of inflation.

APA Group remains a buy under USD6.50 on the ASX using the symbol APA and on the US over-the-counter (OTC) market using the symbol APAJF.

Envestra is effectively a hold pending resolution of the APA negotiations.

AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY) has filed an application with the

Australian Competition Tribunal (ACT) for permission to acquire the assets of state-owned Macquarie Generation in New South Wales.

This follows the March 4, 2014, announcement by the Australian Competition and Consumer Commission that it would oppose AGL’s proposed AUD1.5 billion acquisition of MacGen, which owns two coal-fired power plants and two development sites.

The ACT has a three-month period to consider the application, which may be extended by up to a further three months if it decides that the matter can’t be dealt with in the initial three month period.

AGL Energy is a buy all the way up to USD17.25 on the ASX using the symbol AGK and on the US OTC market using the symbol AGLNF.

AGL Energy also trades on the US OTC market as an ADR under the symbol AGLNY. AGL’s ADR, which is worth one ordinary, ASX-listed share, is also a buy under USD17.25.

Australand Property Group (ASX: ALZ, OTC: AUAOF) has generated a total return of 67.8 percent in US dollar terms and 89.9 percent in Australian dollar terms since we added it to the AE Portfolio Conservative Holdings in the March 16, 2012 issue.

The S&P/Australian Securities Exchange 200 Index is up 23.7 percent in US dollar terms and 40 percent in local terms during this timeframe. The S&P/ASX 200 A-REIT Index is up 24.8 percent in US dollar terms, 41.2 percent in Australian dollar terms. The S&P 500 Index is up 37.5 percent.

The most recent up-leg over the past month has come in the aftermath of fellow A-REIT Stockland’s (ASX: SGP, OTC: STKAF) purchase of a 19.9 percent stake in Australand at an average price of AUD3.78 per unit.

Since closing at AUD3.87 on March 17, 2014, Australand has surged to AUD4.27 as of the close of trade on April 9, 2014, on the ASX.

Stockland’s move came amid Singapore-based CapitaLand’s sale of its 39.9 percent interest in Australand.

The major catalyst for Australand’s 10 percent-plus unit-price surge: Stockland has hired investment bankers from Citi, UBS and Bank of America Merrill Lynch to advise it on a possible bid for all of Australand, with an announcement possible as soon as the former’s fiscal 2014 third-quarter update on April 30, 2014, or shortly thereafter.

Analysts expect an all-unit offer of AUD4.20 to AUD4.30, though AUD4.40 could be the ultimate dealmaker.

Stockland is interested in Australand’s industrial development pipeline and its investment portfolio. Australand would also give Stockland the opportunity to reinvigorate its apartments business. Australand’s expertise in developing medium-density residential projects is another factor in the decision-making process.

Australand Property Group is effectively a hold at these levels.

Tale of the Technical Tape

This month, as we do every month, we present a set of “technical” data points for AE Portfolio Conservative and Aggressive Holdings.

Our analysis of underlying businesses begins with criteria that establish a AE Safety Rating, including payout ratios (dividends as a percentage of earnings), earnings visibility, the absolute level of debt a company carries, debt maturing between now and the end of 2015 and reliability of revenue and dividends.

The “Conservative Technicals” and “Aggressive Technicals” tables look at our Holdings in a slightly different way, by considering more technical factors. They are:

Market capitalization (in billions of Australian dollars) is basically the market value of each company, measured by multiplying the total number of units by the unit price. It’s shown in Australian dollars, which for comparison purposes is worth about USD0.9372.

Larger companies are usually more adept at weathering market cycles. Smaller companies have an easier time moving the profit meter, and a low market cap can attract takeover interest as well.

Shorts/Float measures the total short volume as a percentage of total shares of stock in circulation. Short sellers borrow units of a company and sell them in the market, with the goal of buying them back later at a lower price.

Higher short volume indicates more bets against a company, but if shorts are wrong they can be forced to sell at rising prices. A very high volume of shorts can cause a short squeeze, as short sellers are forced to buy at any price to stanch losses.

Institutional Ownership measures mutual funds and other large shareholders’ percentage ownership of each Australian company. Higher numbers can indicate greater volatility.

I like to see large percentages of Insider Ownership, but bigger companies usually have more spread ownership and less influence from insiders.

Insider Additions shows the percentage change in insiders’ total holdings of a company over the past six months. Obviously, I like to see a rising percentage here, though a falling percentage isn’t necessarily the kiss of death.

Starting from the left in the Analyst Buy–Hold–Sell column, the first figure shows the number of analysts who rate the stock a “buy,” the second shows the number of “holds” and the third the number rating the stock a “sell.”

I like to see more “buys” than “holds” or “sells” all else equal. However, a large number of skeptics can bring a lot of upside by shifting sides, should a company beat expectations.

Beta is a measure of volatility relative to the S&P/Australian Securities Exchange 200 Index. Higher numbers indicate greater volatility. Not surprisingly, Conservative Holdings tend to have lower betas than Aggressive Holdings due to less commodity-price sensitivity.

2013 Total Return and 2014 Total Return is the bottom line for each Holding and provides a good gauge for price momentum of these holdings. The 2014 figure is through April 8.

Like everything else about a stock these technical factors should be viewed along with everything else about a company, primarily, of course, business fundamentals.

Full-Year Numbers

Here are estimated dates when AE Portfolio Holdings will report their next sets of operating and financial numbers.

For most this will cover results for fiscal 2014, which ends June 30, 2014. 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)–Aug. 27, 2014 (FY 2014, estimate)
• APA Group (ASX: APA, OTC: APAJF)–Aug. 20, 2014 (FY 2014, estimate)
• Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF)–July 23, 2014 (2014 H1, estimate)
• Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY)–Apr. 30, 2014 (FY 2014 H1, estimate)
• Cardno Ltd (ASX: CDD, OTC: COLDF)–Aug. 20, 2014 (FY 2014, estimate)
• CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY)–Aug. 13, 2014 (FY 2014, estimate)
• DUET Group (ASX: DUE, OTC: DUETF)–Aug. 15, 2014 (FY 2014, estimate)
• Envestra Ltd (ASX: ENV, OTC: EVSRF)–Aug. 21, 2014 (FY 2014, estimate)
• GPT Group (ASX: GPT, OTC: GPTGF)–Aug. 11, 2014 (2014 H1, estimate)
• M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF)–Aug. 25, 2014 (FY 2014, estimate y)
• Ramsay Health Care Ltd (ASX: RHC, OTC: RMSUF)–Aug. 28, 2014 (FY 2014, estimate)
• Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY)–Aug. 7, 2014 (FY 2014, estimate)
• Transurban Group (ASX: TCL, OTC: TRAUF)–Jul. 31, 2014 (FY 2014, estimate)
• Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY)–Aug. 14, 2014 (FY 2014, estimate)

Aggressive Holdings

• Amalgamated Holdings Ltd (ASX: AHD, OTC: None)–Aug. 21, 2014 (FY 2014, estimate)
• BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–Aug. 19, 2014 (FY 2014, estimate)
• Crown Resorts Ltd (ASX: CWN, OTC: CWLDF, ADR: CWLDY)–Aug. 22, 2014 (FY 2014, estimate)
• GrainCorp Ltd (ASX: GNC, OTC: GRCLF)–May 15, 2014 (FY 2014 H1, estimate)
• JB Hi-Fi Ltd (ASX: JBH, OTC: None)–Aug. 11, 2014 (FY 2014, estimate)
• Mineral Resources Ltd (ASX: MIN, OTC: MALRF, ADR: MALRY)–Aug. 14, 2014 (FY 2014, estimate)
• Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY)–Aug. 19, 2014 (2014 H1, estimate)
• Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY)–Aug. 21, 2014 (FY 2014, estimate)
• Rio Tinto Ltd (ASX: RIO, NYSE: RIO)–Aug. 7, 2014 (2014 H1, estimate)
• Spark Infrastructure Group (ASX: SKI, OTC: SFDPF)–Aug. 25, 2014 (2014 H1, estimate)
• Sydney Airport (ASX: SYD, OTC: SYDDF)–Aug. 21, 2014 (2014 H1, estimate)
• Woodside Petroleum Ltd (ASX: WPL, OTC: WOPEF, ADR: WOPEY)–Aug. 20, 2014 (2014 H1, estimate)
• WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY)–Aug. 13, 2014 (FY 2014, estimate)