TABCORP Holdings Limited (ASX: TAH)

TABCORP Holdings Limited (ASX: TAH) is one of the world’s largest publicly listed gambling companies. It is the leading player in the Australian market with a suite of customer brands that include TAB, Keno, Luxbet, TabcorpSky Racing and Sky Sports. We like this company for several reasons:

  1. its integrated nature given its media platforms;
  2. a defensive earnings profile with recurring earnings and relatively high barriers to entry;
  3. an above-average dividend yield of 5.7% fully franked.
  4. Last but not least is its potential merger with Tatts Group, the sole lottery operator in SA, NSW, QLD and VIC.

While this merger has received the green light from the Competition Tribunal, the ACCC is appealing the decision.

We believe the current share price reflects little, if any value, from the marriage of these two companies which would likely reap up to $130 million in savings.

If the merger does proceed, we believe the share price will receive a free kick along. We see minimal downside risk from current levels should the merger be knocked on its head due to the high dividend yield, which is one of the highest in the market place.

We believe the current weakness represents an ideal entry point into this company.


Isentia Group Limited (ISD)

ISD is the largest media intelligence agency in the Asia-Pacific region. The company provides its customers with real-time media information, analysis and advice, from filtering over 250 million online news articles and 2.6 million print articles monthly, and 8 million social media posts and 1,750 television and radio programs daily.

Its customers use this media intelligence to enable better decision making, create effective marketing campaigns, and protect their brand and reputation. The business ticks a lot of boxes for us given that they have a competitive advantage through their 90% market share in Australia and New Zealand, a high level of recurring income, a high client retention rate, strong returns on invested capital and a strong balance sheet.

Looking forward, their growing presence in Asia will likely augment earnings, as this market remains in its infancy compared to other markets around the world. The threat of competition is ever present given the possibility that a global player like Dow Jones Insight might look to increase its market share in our region.

While this risk should not be underappreciated, we believe the company’s dominant market position places them in a strong position to ward off competitive threats. According to our forecasts for 2017, the company is trading on 20 times earnings and paying a dividend yield of 2.5% partly franked.

We believe these numbers are undemanding for a company with a dominant market share in Australia, and strong growth prospects in Asia, where the market remains in its infancy.

Contact us to discuss if this company is right for you. 

Primary Health Care (PRY)

Primary Health Care is the largest medical centre operator and the second largest pathology provider in Australia. The jewel in the crown is its portfolio of 58 GP medical centres, which provide the company with a cost advantage through the increased buying power of the group.

In terms of pathology, the company’s market share is approximately 35%, with more than 1500 pathology collection centres located in close proximity to medical centres. Looking forward, the bulls argue that an ageing population will continue to drive demand for health services at a faster rate than the underlying economy.

Risks are largely regulatory in nature with the government looking to reduce its expenditure on healthcare. According to our prospective forecasts, the company is trading on 18 times earnings and paying a gross dividend yield of 5.03% at current levels; multiples which we believe are undemanding for a company positioned in an industry with structural growth.

This is a slow growth solid income company, I do not expect to see the price run but at current valuation there is still a good 9% up side in the share price. It is currently trading around $4 with a fair value of $4.35.

The company provides solid exposure to the health sector which will be a growth sector in the coming year as the population ages.  

Fairfax Media Ltd (FXJ)

Fairfax is best known for its newspaper the Sydney Morning Herald, The Age and the Financial Review. The media landscape is changing dramatically and it would be more accurate to describe FXJ as a digital media company going forward.

The majority 51% of earnings are derived from real-estate listing site; Australian and New Zealand news media, both digital and paper accounts for 39% of earnings; and radio accounts for 10% of earnings. Domain's earnings have been growing rapidly (+33% last year) while media assets have been in steady decline as readers move away from paper to digital.

Fairfax also owns half of streaming service 'Stan', currently running second to Netflix in the new market domestically. While not yet profitable they do have 600,000 subscribers in Australia and are forecast to become profitable by 2018. In future years Domain and Stan are likely to form the core of Fairfax.

You buy Fairfax for its digital assets. If the newspapers can retain a level of profitability that is a bonus. Expect to see Fairfax moving to digital only on some mastheads and culling the least lucrative.

On underlying earnings Fairfax trades on a PE of 13x, below the market average, discounted on account of its old media assets and declining earnings. Consider that (REA) Domain's main rival trades on 30x earnings. Fairfax is a company in transition, earnings have been on a slide recently but its showing signs of new life.

Debt is now at 18% of equity after efforts to reduce debt in recent years. The balance sheet is now in a strong position, and the company now has reasonable growth potential. Dividend yield is 6.5% gross and at current levels FXJ is well below our fair value of$0.91. Investors may be in for a bumpy ride but Fairfax has the potential to offer income and growth over the next few years.


Show me a company which provides consistent gains and I will invest every day of the week. Once again 1300SMILES has done just that in a time which the economy is struggling, the government wrestling with huge debt and companies across Australia are downsizing.

Their results showed that revenue from ordinary activities stayed the same. This is important as growth came of being innovative and agile. Instead of paying too much for acquisitions and buying revenue the company focused on improving efficiencies and fully utilising current resources.

Net profit was up 16%, we all know net profit is more important than revenue. This has flowed through to dividends which were increased to $0.115 for the half year bring the yearly dividend to $0.225 or 4.5% gross yield based on the average price of $7.00 for the year.

Some of the key drivers of their result were the upgrade of corporate management software, consolidation of two practices and sale of a practice which is underperforming.

From day one 1300SMILES has only acquired practices which make a contribution to the bottom line and ensured that they run efficiently. It has been the regional practises which are providing the best efficiency and has been the main focus of acquisitions for the company over the past years. More acquisitions are expect but only when they make sense.  

Since the results have been the released the stock has been trading around $7.20 and as high as $7.30. This is up from the lows over the past year of $6.60. As you can see from the below chart 1300SMILES has outperformed the ASX 200 over the last financial year. With the Price Earnings ratio sitting at 22 we expect that there is more upside in the stock from here. The company highest price this year was $8.47.

BHP Billiton Limited (BHP)

BHP reported their 2016 year results this week, the media circus would have you thinking that it was all over for BHP, when in fact the share price rallied on the back of the report. Not because it was great news but it was better than expectations. See below chart.

The result was down on the previous year as commodity demand and pricing is driven by global economic activity, in particular Chinese economic growth. Poorly timed acquisitions within the commodity price cycle and write-down of Samarco mine to nil value contributed to substantial asset write-downs of US$7.7bn in FY16

The overall result was nevertheless a bottom of the cycle figure at US$1.2bn, down 81% on last period. Controllable expenses were good with unit costs down 16% and a further 12% decline is forecast for FY17. Gearing of 30% is high but strong free cash flow will see this fall over time. We expect improvement in times ahead given the low financial year 20016 base and with a lower cost structure and greater financial discipline.

The dividend was cut as expected. BHP may not be a raging buy at present but certainly one to continue to hold for now. It is looking cheap at the current levels but the slump in sales is expected to continue for some years yet.

Altium (ALU)

Altium (ALU) is a developer of Printed Circuit Board (PCB) design software, ‘Altium Designer’ being its biggest seller. Formerly of Tasmania Altium now have offices in Sydney, San Diego, China, Germany and the Netherlands. ALU’s software is used to design products across any industry involving electronics. 

Customers include Tesla, Siemens, Lenovo, Cochlear and NASA. The company is in a strong position to benefit from the ever increasing use of electronics in our lives. Currently the company has ~10% of the world market for PCB design – the emergence of superior competitors remains Altium’s biggest risk. So far tiny Altium with a market cap of just over $800m has been able to eat market share away from Japanese and American industry Goliaths with market caps of over $25Billion.

With sales growing by 48%pa over the last 5 years. Revenues are primarily recurring in the form of annual subscriptions. Their balance sheet is strong allowing the ability to make acquisitions or pursuit capital management initiatives. The company’s PE of 27x is justifiable given the companies past growth and future potential. I consider ALU a high quality company if you’re looking for growth and long term potential. Our research has a 12 month target of $7.22 on Altium.

G8 Education (GEM)

G8 Education Limited is a childcare center operator, with more than 400 centers in Australia and a small number in Singapore. The company has made a significant number of acquisitions since 2009, with many of these at very attractive prices. These acquisitions in addition to the ability of management to increase occupancy rates whilst containing a lid on expenses have driven strong growth in earnings. Looking forward, the bulls argue this growth will continue, underpinned by further acquisitions, cost control and cost advantages stemming from increased scale.

The bears point to a number of risks including the likelihood of competitive pressures in bidding for new assets, the threat to occupancy levels from rising unemployment, possible changes to childcare rebates, and weak equity markets tempering the company’s ability to tap capital markets to fund new acquisitions. While these risks should not be downplayed, we have confidence in the ability of management to circumnavigate issues given their strong track record. We believe the current share price offers an excellent entry point into this company.

The company is paying 8.3% yield and has an upside price target of 12%. With both major parties now promising increase in day care subsidies G8 is in prime position to improve performance over the long term.

Isentia Group (ISA)

Isentia Group Limited is the media intelligence company in the Asia-Pacific region operating across Australia, New Zealand and Asia. It operates a Software-as-a-Service (SaaS) and Value Added Service (VAS) business that provides many of the leading brands, companies, agencies, industry bodies and governments with media intelligence services. The main components are Media monitoring, social media monitoring and analysis, Media measurement and analysis, Contract management, and Media release distribution.

 Isentia Group use software and other systems to capture, enrich, search and relevance-match specific brands, topics, opinions or issues across media and social media content sources to gather relevant information to inform and alert clients.

The use of software algorithms and subject matter experts delivers quantitative and qualitative insights to assist clients in understanding the effectiveness of their communications, media and marketing strategies. This assists the client to more effectively develop and execute their communications strategies to ensure communications are reaching the relevant media influencers and audiences.

Of interest since Malcolm Turnbull became prime minister the government has spent around $1.8 million on media monitoring. This is a big business which will get bigger as companies and people look to persuade you as to where you spend your dollar or how you should vote.

Given that Isentia has 90% of the market share in Australia in a growing business it appears to be good long term growth investment. There is however a new player from Norway called Meltwater group who are also looking to break in the Australian market.

The company is trading at $3.88 with a target price of $4.00; they pay a 2.1% dividend 50% franked. At present at the current price the stock is not a compelling story, for the long term investor it might be worth looking to pick up a small holding which you can add to later. I will continue to watch this company looking for an opportunity to buy at a lower price of improved trading conditions.  

McGrath Limited (MEA)

McGrath Limited (MEA) is a residential real estate service provider in Australia. McGrath is an integrated residential real estate services business operating four business units that provide a range of services including residential property sales and management, mortgage broking, Franchise services and Training. McGrath operates a hybrid business model consisting of Company Owned Offices and Franchise Offices.

McGrath operates Company Owned Offices that provide high quality sales and property management services within its various operating locations. It generates revenue by charging the vendors of residential property a commission for successfully selling a property.

McGrath partners with franchise groups who operate McGrath branded offices. Each office also provides high quality sales and property management services. Franchise fees are largely consistent across the network

MEA's Oxygen Home Loans is a mortgage broker. It has a client base that services McGrath and non-McGrath generated referrals.

MEA initials listed at $2.10 in January 2016, since then the price has fallen to lows of $0.90 and is currently trading at $1.10. We are not recommending this company at this time although the recent price falls makes it look attractive.

The fall in the value of the company is directly related to the decline in the property market in Sydney and Melbourne. MEA has had to write down their pro forma full year earnings by $4 Million dollars on the back of a 25-30 per cent decline in listings in the Sydney’s north and north western suburbs.

Given that the property sector looks high and is expected to pull back over the coming years MEA is to high risk to invest in. It is a good example of how a solid company can be affected by changes in the economic climate.  

Australian Share High Yield ETF (VHY)

The Vanguard Australian Shares High Yield ETF provides exposure to ASX listed securities expected to deliver higher after tax yields than the market average. Given the lower turnover nature of the Fund it may be most suited to investors seeking a tax effective income stream from their equity investments. VHY is a share class of the Vanguard Australian Shares High Yield Fund (‘the Underlying Fund’).

It is important to note that the Fund’s distributable income is derived from a portfolio of listed assets, and as such, distributions can fluctuate as listed companies are not obligated to maintain a certain level of, nor pay, dividends on a regular basis. This is unlike what is normally associated with traditional income producing assets (for example, fixed interest).

VHY represents an efficient, liquid and cost effective means for investors to gain index exposure to an income focused equity fund. The underlying index that the Fund seeks to replicate offers a broad representation across high yielding ASX listed securities.

Index constituents are drawn from the universe of securities listed on the ASX and which are currently in the FTSE ASFA Australia 200 Index, a broad market index of ordinary and preferred equity securities. The securities are ranked according to each security’s median 12 month forecast dividend yield with companies not forecast to pay dividends in the next 12 months and property trusts being eliminated.

Companies with the highest forecast dividend yield are included in the index until 50% of the float adjusted market capitalisation of the eligible securities is met. No more than 40% of the index can be invested in any one industry, and no more than 10% can be invested in any one company to ensure adequate diversification is achieved.

This ETF suits investors looking for high dividend yields, current Gross 10% yield while at the same to reducing risk to holding one investment through the index style approach.

Medibank Private Limited (MPL)

From the 1st of April 2016 the department of health has approved a 5.64% increase in premiums for MPL; this is good for shareholders but not great news policyholders. Rates increase for private health providers ranged from 4.94% up to 5.69%. This increase in premium to policyholders is expected assist in revenue growth.

However flat growth in policy numbers and with 1%-1.5% of policy holders continuing to either downgrade their policy or increase their excess will limit any growth in revenue. The recent announcement has seen the price of MPL spike.

In times of a poor economy and high unemployment we can expect people to take a closer look at their expenses and exactly what they are receiving for the money paid. Recent figures form iSelect indicate that one in four member have thought about cancelling their policies, one in six have taken the next step and changed health funds looking for a better deal and one in ten have changed their policy within their existing fund. They go on the say that 28 per cent of Australians have considered dropping their policy.

With Medibank Private currently trading above our price target of $2.15 and the private health sector seeing increase demand for services by the older population, at the same time younger policyholders who are looking for a better deal will opt out completely. This will limit any revenue growth. Private health insurance at present is relaying on the Department of Health to increase premiums and therefore revenue.

Given current price spike on the back on the premium increase it would make sense to take profits on this company.  It is a sector to continue to watch but perhaps it is safer on the side lines for now.



McGrath LTD (MEA)

McGrath was initially floated on the market in December 2015, the initial float price was $2.10, the company is currently trading at $1.40. This is a drop 30% since listing, the stock fell further since it announced it first half results this week.

The results showed revenue up 33% to $54.3 million however earnings before interest tax depreciation and amortization was down 37% and Net Profit after tax was down 82% with a profit of $400,000 for the half year.  The acquisition of the Smollen Group which was financed through the listing of the company has been successful allowing the increase of market share for McGrath.

The cost of the listing and the slowdown in Chinese buyers in the pre-Christmas period has had an effect on the business performance in the near term. There was no dividend announced with the results however this is in line with the prospectus. The prospectus indicated that the divided could be up to $0.045 for the full year and McGrath are still confident that the full year result will be in line with the prospectus forecast.

 McGrath listed the challenges facing the sector over the second half of the year will be the slowdown in Chinese buyers, stock market volatility, APRA regulatory changes and concerns about possible changes to negative gearing.

The property sector is a tough one at present with unemployment high, government looking to change tax rules around negative gearing and the talk of a property bubble. I expect both first home owners and investors alike are cautious on entering into this sector. The one positive is that interest rates look set to stay low longer.

At present the property sector looks too high risk to invest in, we have already seen the banking sector lose ground this week as overseas Hedge funds reduce their positions on the speculation of an Australian property bubble. For now McGrath is on my wait and see list.

Centuria Metropolitan REIT (CMA)

CMA focuses on investing in office and industrial assets in metropolitan markets across Australia. The Fund comprises Centuria Metropolitan REIT No. 1 and Centuria Metropolitan REIT No. 2, being two stapled registered managed investment schemes.

The Fund's portfolio comprises five office and three industrial assets with an independent valuation of $322.1 million, reflecting a weighted average capitalisation rate of 8.4% and an initial yield of 8.7%. CMA's Property portfolio - 3 Cariingford Rd, Epping NSW 44 Hampden Rd, 1 Richmond Rd, 9 Help St, 14 Mars Rd, 555 Coronation Dr, 149 Kerry Rd, 13 Femdell St, 35 Robina Town Ctr Dr, 54 Marcus Clarke St, 60 Marcus Clarke St. & 131-139 Grenfell St.

We are more confident CMA can execute around the two key areas of risk (1) Sale of  Carlingford, Epping assets as a residential site, and (2) Lease up of vacancy in Canberra  (occupancy 87% from 76%). CMA has lagged the rest of the sector, trading at a 4.2%  discount to NTA ($2.05) and looks attractively priced on an 8.3% distribution yield.

CMA has largely alleviated a key concern of the Canberra vacancy, in a difficult market, CMA has increased Canberra occupancy to 87% from 74% since acquiring the two assets in April 2015. CMA's balance sheet looks solid at 32% gearing versus 50% covenant, 4.4yrs debt maturity. CMA is trading on an 8.6% distribution yield with 2.2% DPS growth in financial year 2016.

Currently trading at $2.08 we have a price target of $2.20 over the next 12 months, providing a 5% upside. Given the stock is trading at a discount this is a good opportunity for those looking to increase their exposure to property to build a holding. Note the dividend is not franked but is expecting to grow from $0.17 this year to $0.19 by 2020.

Orora Limited (ORA)

Orora Limited is focused on fibre packaging and beverage packaging in Australia and packaging distribution in North America. ORA operations consist of 39 manufacturing plants and 85 distribution sites across seven countries. ORA have two main business units being: Australasia and North America.

Australasia business unit consists of four divisions: Beverage, Cartons and Bags, Paper and Recycling, and Fibre Packaging. The unit supplies various products to companies across Australia and New Zealand. These products include Bags, Closures, Fibre Packaging, Glass, Recycling, Beverage Cans, Fibre Displays, Folding Cartons and packaging solutions. Customers in this business unit include food beverage & industrial markets in Australia and New Zealand.

North America business unit consists of two divisions: Landsberg Packaging Distribution and MPP and CK. Landsberg offers a range of stock and custom packaging products including primary, secondary and tertiary options. MPP manufacturers a variety of custom and stock corrugated products. CK manufactures linerboard into corrugated sheets and offers product options designed to help solve packaging needs. Customers in this business unit include industrial, food, warehousing and shipping, technology and healthcare industries.

Orora is looking to expand its business in America through acquisitions of small player in a fragment market. They are looking invest $200 million per year on acquisitions which is a comfortable rate given their balance sheet. This is expected to increase earnings and improve profits; they have a forecast dividend of 4.2% for the 2016 year which will be partially franked given a gross return of 4.7% yield. Dividends are paid by cash flow; company has net tangible assets of $1 billion and is trading just over this level.

The company is currently trading around $2.21 our price target is $2.80 giving it an upside of around 20%. This is a boring solid business with good income and growth potential, would suit those investors with a long term view.  

Commonwealth Bank (CBA)

CBA's result this week contained few surprises and we think the underlying franchise remains in good shape. The highlights were Revenue up 5%, mortgages up 2.7%, Institutional lending up 12%.  Costs up 4%, Cost to Income at 42%, Pre-Provision Profits up 6% and bad and doubtful debts is a touch higher while Impaired and troublesome loans are stable.

Another area which raised an eyebrow was CBA's rapid growth in Institutional lending. CBA indicated this related to its participation in a few large infrastructure & utilities transactions and despite competitive pressures these transactions cover its cost of capital.

CBA also believes "there is no such thing as a domestic institutional bank" and it is building global capabilities in its chosen segments of resources, infrastructure, transport and financials. We would raise questions about this strategy given few global Institutional banks cover their cost of capital in the current rate environment and it  further concentrates CBA into industries Australia is already heavily exposed to.

CBA is currently trading around $74 per share and our price target is $82 per share and they have forecast a dividend of 5.8% for 2016 and 5.9% 2017. Overall CBA is looking to be in good condition as such for most of us who hold the company I would continue to hold. It seems business as usual and overall a boring result however this is how we like these companies to be.

If you do not hold CBA then now is a good time to start to build a holding however be cautious as the market is volatile and the Banks make up a large part of our index as such any large movements in the index will affect the banking sector and make these companies volatile. 

AGL Energy Limited (AGL)

By Jason Fittler

GL Energy Limited is an integrated energy company that has been in existence for more than 175 years.
It includes retail and merchant energy businesses, power generation assets and an upstream gas portfolio.
AGL has Australia's largest retail energy and dual fuel customer base, supplying around 4.1 million customer accounts. This includes customers supplied with gas and electricity through AGL's joint venture partnerships, ActewAGL and AlintaAGL.
AGL has a diverse power generation portfolio, including base, peaking and intermediate generation plants.
We view the earnings uplift from incremental Qld gas sales and NSW tariff changes as non -recurring and largely in the share price.
The key to the share price will be the delivery of cost savings and asset sales flagged at the strategic review.
The upside for AGL could result from monetization of its gas reserves in both QLD and NSW and benefits from deregulation of NSW electricity markets. Acquisition of cheap base load capacity via NSW Government sell down could also provide upside.
An improvement in prices received by generators following the end of the carbon tax could lead to higher returns.
The downside would result from any restrictions being imposed again on NSW CSG extraction or difficulty in selling QLD gas.
If the Australian economy moves quickly towards a decarbonised economy, this could pose significant threats to AGL given its coal fired generation portfolio.
Further downside risk exists in tighter retail margins. Upcoming catalysts are the delivery of cost savings and asset sales flagged in the strategic review.
AGL is a good long-term holding in a portfolio with solid history and income, on weakness it is worth adding to your portfolio.


Seven West Media (SWM)

By Jason Fittler,

SWM’s AGM trading update made the following comments.

The financial year 2016 is expected to trade at the bottom end of the minus 5 -10% guidance range that TV market growth has been relatively flat and publishing advertising revenues face ongoing pressures. 

Overall, it is not a great time in the media sector. However, the stock looks to have bottomed and is expected to pay a 13.5% gross dividend. The company is trading below our price target of $1 by around 30%.

SWM is inexpensive trading on a PE of 5, although admittedly with a declining earnings and dividend profile.  Potential positive catalysts include license fee cuts; content cost renegotiations, and digital monetisation.

Negatives remain including structural pressures facing the overall industry, revenue share risk from a resurgent TEN, and SWM's relatively aggressive gearing profile.

TV generates the bulk (c70%) of SWM revenue and remains the key valuation driver.

Our base case forecasts factor long-term free to air metro TV market growth of 2% pa; with SWM’s long-term revenue share trending back to 38.5% from 40% in 2013.

The risk to our forecasts exists if a resurgent TEN and or Nine materially lowers SWM long-term revenue share, and if fragmentation of viewing leads to lower than expected overall industry growth.

Lowering our TV multiple to 4.5 times, would reduce our valuation to $0.75.

This industry is going through a major disruption due to technology and how we now access our entertainment.

Although not dead, the industry needs to reinvest if they are to stay competitive. 

Current pricing and dividends make the company attractive however, I advise caution as it could go either way if management gets it wrong.


By Jason Fittler

1300SMILES held its Annual General meeting this week to announce their results for the 2015 year.

This year’s result was again a testament to the hard working team at 1300SMILES, with revenue up 23%, Net Profit after tax up 32%, Earnings per Share up 32% and Dividends per Share up 32% to $0.192 per annum.

The good news story is larger than these figures; the company has also recovered from the changes the government made to critical dental care that affected the 2014 year putting the company back on track for its growth strategy.

This has come about due to their product offerings including the DMA Dental Vouchers that allows patients to undertake more extensive essential treatment programs by spreading the cost over many months.

They also offer the $1 per day dental care plan that continues to receive support. The ongoing acquisition of new practices will increase the bottom line from day one.

The 1300SMILES profile is rising thanks to: 

  • The mission to deliver affordable dental care to all.
  • Providing dental care to the people of Papua New Guinea through YWAM. 
  • Being naming rights sponsor to the Cowboy’s stadium and their Grand Final win.

The market has rewarded 1300SMILES with share price growth of 26% over the past year.

With Glen Richards as a new director at 1300SMILES, you can be assured growth is the focus. As a result, I expect to see 1300SMILES share price increase.

Our price target of $7.95 gives an upside of 4.6% from current prices plus a gross dividend of 3.5%.

1300SMILES suits long-term investors looking for income and growth.

Santos (STO)

By Jason Fittler,

Santos has outlined a suite of capital initiatives to reduce its net debt. 

The initiatives include the sale of its 35% stake in the Kipper gas field for $520m to Mitsui, $500m placement to Chinese private equity firm Hony Capital at $6.80/share and $2.5bn raised via a 1 for 1.7 accelerated pro-rata renounceable entitlement offer at $3.85/share. 

In total, STO has reduced its net debt by $3.5bn. 

STO also announced the appointment of a new CEO, Kevin Gallagher, previously CEO of Clough Limited. 

Also, the company changed its dividend policy, which will see it pay out a minimum of 40% of NPAT, and has flagged possible impairments of up to $2.4bn (after tax).

Although these measures are welcome, the oil price is still historically low which has had a major effect on the price of STO. 

On Friday, the company’s price fell 7% reducing the discount on the recently announced rights issue making the offer a lot less attractive. 

The long-term play here is the oil price. At present, there seems little indication that the oil price will recover in the short-term increasing the risk associated with STO. 

The institutional component of the entitlement offer is closed; however, the retail component closes on 30th November. 

With the new CEO expected to commence in early 2016, we expect STO to consolidate its business over the next 12-months, given the rapid fall in oil prices and staff cuts that have occurred. 

STO still has growth exposure via PNG LNG T3 and Darwin LNG backfill, but the cost and operational efficiency will be the primary focus area. 

We estimate that the $3.85 entitlement price is equivalent to a US$57 per barrel implied oil price for STO oil is currently trading at $40 per barrel. 

Earnings per share are reduced by 17%, 30% and 38% in financial 2015, 2016 and 2017, primarily due to dilution. 

We retain our Buy call on STO, with valuation reduced by 18% to $5.75/share.

Note this is for the higher risk investor.