SPECIAL REPORT 5 BEST BUYS SEPTEMBER Best Buys

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1 SPECIAL REPORT 5 BEST BUYS SEPTEMBER 2007 Best Buys

2 SPECIAL REPORT/5 BEST BUYS SEP 2007 Clues to the Westfield puzzle Malcolm Gladwell recently published an article in The New Yorker titled Enron, intelligence, and the perils of too much information. In it he suggests that people in certain professions, such as that of investment analysis, would be better served thinking in terms of mysteries rather than puzzles. WESTFIELD GROUP (WDC) $ Sep 2007 BLUE CHIP INDUSTRIAL $38bn $18.11 $23.49 BUSINESS RISK 2 out of 5 SHARE PRICE RISK 2.5 out of 5 LONG TERM BUY Accumulating information can solve puzzles. Mysteries, Gladwell explains, require judgments and the assessment of uncertainty, and the hard part is not that we have too little information but that we have too much... Puzzles come to satisfying conclusions. Mysteries often don t. Westfield has a seemingly bulletproof franchise. And it s worth bearing in mind that in trying to predict what might derail the juggernaut, we re probably dealing with a mystery rather than a puzzle. It s probably the risks we cannot see today that have the greatest potential to cause harm, and there s not a lot that can be done about it. Before we consider the risks, though, let s reflect on why we hold Westfield in such high regard in the first place. The Lowy factor For one thing, the Lowy family whose members occupy the role of chairman (Frank), deputy chairman (David) and joint managing directors (Peter and Steven) own almost 10% of this $42bn group. So while most other property trust managers have a huge incentive to increase their asset base in order to reap extra fees, Westfield s managers have an incentive to expand only when it s beneficial for securityholders. If the group went on a buying spree adding overpriced properties to the portfolio, it would severely hurt management s own wealth in the long run. Put simply, management s interests are closely aligned with those of securityholders. Unfortunately an expansion-at-any-price attitude will likely prove fruitful for many other property trusts managers, but probably not for their unitholders. Secondly, we think Westfield s management will be smarter with securityholders money regardless of the incentives. Westfield has been in the shopping centre business for nearly half a century and, more importantly, it has been operating in America for 30 years. At 30 June, 40% of the group s assets were in America, consisting of investments made over the past three decades. Compare that with, say, Macquarie CountryWide, which owned no American property six years ago, but which has 74% of its property assets there today. Slow and steady wins the race is a motto that applies equally well to investments as to inter-species running contests. Also, a big part of Westfield s incredible success has been in property development, rather than just ownership. While development is technically a risky game, it s a field in which Westfield is truly world class. We think that buying shopping centres with development potential, and then letting the best in the game develop those assets, is a much safer strategy than paying exorbitant prices for more mature assets a strategy that many other trusts are currently following. The key to success is development experience, combined with patience and aggressive opportunism when it counts. While many trusts are now looking to Asia, and particularly China, as the next big thing, Frank Lowy once explained in a newspaper interview: The business of Westfield is not pioneering, maybe we will pay more for these properties later on, but we will know it is really working. Example Fortunately in Westfield s case, you don t have to rely on rhetoric. Here, we ll look at a couple of individual shopping centres, whose stories are replicated all over the Westfield portfolio. Last year one of our analysts, Gareth Brown, was walking down the famed Magnificent Mile in Chicago when he was hit by the earliest autumn snowstorm in the city s history. Finding refuge in the Westfield North Bridge, he had plenty of time to explore and think. Fantastic location The North Bridge centre is not the biggest shopping centre you ve ever seen, but it is in a fantastic location in the retail heart of a huge city. And Westfield owns the management rights not only to the enclosed mall but also to some other retail space in the immediate vicinity. This asset only came under Westfield s control in 2003, and it s in the company s books based on the value of those assets as they stand today. But if we fly to Chicago in a decade s time, we re not expecting to find those assets looking anything like they do today. You can be sure the Lowys are imagining something bigger, more profitable and, dare we say it, more dominating in this area. This is an asset whose value could be greatly enhanced through further development. And, if history is any guide, every dollar the company puts into it will create a lot more than a dollar of value for shareholders. A few days later, Gareth ended up in the very large Westfield San Francisco Centre, a centre much closer to reaching its maximum potential. The company acquired a stake in the centre in 2002 and has since developed the largest urban shopping mall west of the Mississippi river, bang in the middle of San Francisco. The location is now so prominent that it overshadows the traditional retail centre of that city, the nearby Union Square. Big prize For years, Westfield s American assets have had lower 2 The Intelligent Investor PO Box 1158, Bondi Junction NSW 1355 Phone: (02) Fax: (02) info@intelligentinvestor.com.au

3 valuations and lower tenancy levels than their Aussie equivalents. We suspect that may be because suburban America is generally pro-development, and competition is fierce. But one place Westfield is finding greater monopoly power over there is in big urban centres, constrained by geography and generally unfriendly local authorities. Anyone who can safely negotiate the minefield finds a big prize at the end: a city centre location with limited competition. Westfield does it better than anyone, and this is their most crucial competitive advantage. This skill will prove a boon on the other side of the Atlantic, where the company is developing the huge 1.6bn Westfield London. While all the red tape that Westfield has cut through for this development has no doubt been a pain, those same restrictions will now form a major barrier to entry for its competitors. Westfield Group statistics NTA per share ($) interim distribution ($) expected final distribution ($) Expected distribution date Feb 08 Forecast yield (%) 5.5 Now that we ve considered all that is good about Westfield, let s analyse the risks that could undermine returns from an investment in Westfield. Succession In terms of the known risks, with so much experience concentrated in chairman Frank Lowy, succession risk is an obvious place to start. Lowy s three sons, David, Peter and Steven, have spent decades in the business already. But perhaps the boys will lose the urgency to increase and preserve what their father has spent a lifetime building. Or perhaps they ll have trouble working together when Frank is no longer there to keep order. Eldest son David no longer holds an executive position at Westfield. But he is deputy chairman, as well as being a board member of Publishing & Broadcasting and the founder and president of Temora Aviation Museum (he s also an accomplished acrobatic pilot). If his younger brothers were to follow in his footsteps and stand back from the operational side of the business at some point, it would be a big blow to the group. Compounding large numbers Frank s lifetime of hard work has generated returns for shareholders unparalleled in Australian history. But success on such a large scale brings with it many challenges. Growth at past rates will be impossible, especially in Australia. Most of the prime locations have already been snapped up and extreme competition for the remainder could make development much less attractive, if not uneconomic. This could force Westfield into new markets, bringing with it a range of new risks: less developed markets can be unstable and it may not be possible to replicate Westfield s brand and reputation. damage to Westfield s business. When a visit to the shops increases the odds of contracting a fatal flu, people will soon find other ways to entertain themselves. Terrorism is also worth considering. That could be an actual act of terrorism at a Westfield or other shopping centre, or even just a publicised threat to damage these bastions of capitalism. Thinking back to the poisoned Mars Bar episode, even empty threats can damage a company s image and profitability. Currency and interest rates With 49% of the group s revenues earned in the US and UK, a sustained appreciation of the Aussie dollar would devalue repatriated profits. Although hedging is usually in place for a few years at least, beyond this hedging becomes less practical and more expensive. Higher interest rates tell a similar story. Management can only fix borrowing costs out so far before it becomes impractical. And, in a double whammy, higher interest rates also curtail shoppers discretionary income. Lower profits from tenanted stores means lower profits for Westfield. Worse, though, would be a long and protracted economic slowdown. When unemployment levels rise, shoppers peg back their spending on non-essential items. Looking around our local Westfield, there s a lot of frivolous trading that s bound to dry up in a tougher environment. The stagnant Japanese economy of the past decade is a good example of this death by a thousand cuts scenario. Any sign of the risks we ve discussed here could cause jitters in Westfield s stock price. Its premium rating could evaporate quickly if interest rates suddenly increased, for example. But this is a market risk, not a business risk, and if the stock price fell to $15 tomorrow, we wouldn t be all that concerned. In fact, all things being equal, we d upgrade to Buy. Highs and Lowys Good management can do a lot to prepare for knowable risks, but other risks remain outside its control. For those risks, the best defence comes in the form of a low purchase price for the stock. Westfield s stock doesn t currently represent a major bargain, but the price is fair and we re comfortable with it. The Lowys have done a wonderful job over the years, and this counts for plenty. LONG TERM BUY. SPECIAL REPORT/5 BEST BUYS SEP 2007 Shoppers depart What about the risks that might keep shoppers away? An outbreak of bird flu could cause immense short-term Disclosure: Staff members own shares in Westfield Group and Publishing & Broadcasting, but they don't include the authors, Nathan Bell and Gareth Brown. The Intelligent Investor PO Box 1158, Bondi Junction NSW 1355 Phone: (02) Fax: (02) info@intelligentinvestor.com.au 3

4 SPECIAL REPORT/5 BEST BUYS SEP 2007 The tide turns for Infomedia This producer of electronic parts catalogues isn t out of the woods yet. But things are looking up. INFOMEDIA (IFM) $ Sep 2007 SECOND LINE INDUSTRIAL $212m $0.56 $0.875 BUSINESS RISK 3 out of 5 SHARE PRICE RISK 3.5 out of 5 BUY Infomedia provides electronic parts catalogues (EPCs) to the automotive industry. Its main product, Microcat, is a comprehensive database of vehicle parts to which dealers can refer when servicing or repairing a car. If, for example, you re a Toyota dealership in Germany, you can subscribe to Microcat and access parts information in German for every Toyota vehicle made since Infomedia sells the product in 160 countries with customers including Ford, Toyota, Daihatsu, Hyundai and Land Rover. At the moment, there are more than 50,000 subscribers to this flagship product. With profit margins in excess of 40% (higher than Microsoft s) it s a pretty attractive business. When Infomedia listed in August 2000, its marketleading position and growth prospects captivated investors. The $1.00 shares quickly soared to a high of $2.65 in November before the prospectus forecasts proved a tad optimistic. Infomedia still grew, but not as quickly as expected. You probably know enough about The Intelligent Investor by now to guess we wouldn t have been interested as the share price soared. But we are interested in high profit margins and prolific cash generation, at the right price. With the share price down almost 75% from that peak, our interest has been sparked. Plummeting share price Over the past few years, everything that could go wrong has gone wrong. Infomedia and its largest competitor, Snap-on Tools, do not own the data they use to produce the catalogues. That data is provided by the manufacturers and, without data, there would be no product. Snap-on and Infomedia dominate the provision of third-party EPCs, with an estimated 90% of the market, but this is only half the story. Many manufacturers produce their own EPCs. Peugeot, in particular, is renowned for having one of the best EPCs in the world. It s an attractive idea for all manufacturers. They own the data, so why not produce the catalogue and keep the profits, and control, for themselves? The answer is that they re car makers not software developers. They generally can t make as good a product as the focused teams at Infomedia and Snap-on, and it tends to cost them more, but that doesn t stop them trying. Three years ago, about 18,000 of Infomedia s 50,000 Microcat subscribers related to one client, Ford Europe. So when Ford Europe decided it would produce its own catalogue to compete with Infomedia, it heralded the first serious setback for the company. This problem was compounded when General Motors North America announced it wouldn t renew Infomedia s data licence in Both losses resulted in serious damage to Infomedia s bottom line but they also highlighted the main risk to the business that the company is dependant on a small number of massive suppliers. It s this risk that still has investors running scared. To its credit, Infomedia s management team has been focused not on its run of bad luck but on improving the company while times were tough. Despite losing more than half of the 18,000 customers from Ford Europe and 3,500 or so from GM North America, the number of subscribers to Microcat are at record levels again. That s because its Toyata business continues to grow and Infomedia has kicked a few goals with Kia and Hyundai. The cycle of insourcing and outsourcing will continue, but we re backing the outsourcing trend to win out in the long term. Superservice takes up the growth mantle Infomedia is also constantly working on developing new products for the automotive industry. With one in particular, it seems to have a winner. Subscriptions to Superservice Menus soared 158% to 1,671 in the financial year to June As at June this year, the number was more than 2,500. The product enables dealerships to provide fast, accurate service quotes, as opposed to the inaccurate and frustrating process you may be familiar with and it looks set to contribute significantly to future profitability. On the costs side of the business, management have used a couple of tough years to cut a large hole in business s overheads and bring the distribution of its products in house. We often see companies make the most significant progress when times are tough and that s definitely been the story with Infomedia. In this case, though, the progress has been hidden by a rising Australian dollar. Half of Infomedia s revenues are generated in US dollars and another third in euros. So the rapid ascent of the Aussie dollar has wreaked havoc on Infomedia s bottom line and covered up all the progress being made on the operations side of the business. That s why we think it s a great opportunity: currency fluctuations will come and go but the underlying business growth will eventually shine through. Infomedia s complete dependence on automobile manufacturers will never disappear. But, given this company s growth potential, a PER of 14 is more than enough compensation for the risk. Best of all, we get paid a 6.2% fully franked dividend yield while we wait for the value to be realised. BUY. Disclosure: The author, Steve Johnson, owns shares in Infomedia and so do other staff members. 4 The Intelligent Investor PO Box 1158, Bondi Junction NSW 1355 Phone: (02) Fax: (02) info@intelligentinvestor.com.au

5 Timbercorp ripe for picking The market has drastically overestimated the effect of changing tax rules on this agribusiness manager. It looks dirt cheap. TIMBERCORP (TIM) $ Sep 2007 SECOND LINE INDUSTRIAL $622m $1.755 $3.19 BUSINESS RISK 2.5 out of 5 SHARE PRICE RISK 3 out of 5 BUY If you have a short attention span, we can sum up this opportunity in a paragraph. There are clouds on the horizon for Timbercorp because, on 1 July 2008, one of its main profit generators will, most likely, be put out of business by the tax office. Mr Market has overreacted, though, and in a big way. The stock is now trading on a PER of around 9, but the company has locked-in future revenue increases, related to past sales, that will almost offset the loss of income elsewhere. It looks dirt cheap. Timbercorp sells small farms to investors with a tax problem. Such fortunate souls can lease a 1/4 hectare block of land on which Timbercorp will plant and manage a crop. Your options include timber, olives, mangoes and avocados, but the real attraction is the ability to claim 100% of the investment as an upfront tax deduction. Property booms, stockmarket booms and the lowest unemployment rate in 40 years have generated an unprecedented number of people with tax problems and Timbercorp s business has bloomed accordingly. The share price fall, though, conjures up images more akin to a cold winter frost than a spring blossoming. Dutton takes axe to almond trees The reason for the 50% share price fall is that the Federal Minister for Revenue, Peter Dutton, has put the kybosh on Timbercorp s business. With investors in these managed investment schemes (MISs) claiming deductions in the order of $1bn a year, it s not surprising that the Government bean counters have got the hump. The result of a series of Dutton inquiries is that, subject to some ankle-high hurdles, investors in timber-related schemes will still be able to claim a 100% upfront deduction in future. But, from 1 July 2008, investors in non-timberrelated (that is, horticulture) products will not be able to claim a deduction. Horticulture represented 73% of Timbercorp s operational earnings so it s little surprise that Dutton s axe has lopped a large chunk off the share price. There s still value here though, and lots of it. Annuity stream locked in An almond project runs for 27 years and an olive project 23 years (compared with 10 years for your average timber plantation). Almond trees don t start producing until their third year of life and don t reach maturity until their fourth or fifth year, and Timbercorp receives rent and management fees that escalate as the trees reach maturity. So, whilst upfront profits represent a large portion of total profits right now, there s an annuity stream locked in that will last more than 20 years. Over the past few years, horticulture products have been selling like hot cakes and the annuity revenue from these projects is yet to start flowing. In 2006, annuity-style profit from the horticulture business was $29m. That will more than double over the next few years. By 2009, this part of the business will be generating more than $70m in profit or about $49m after tax and it s locked in for the next 20 years. At the end of the project the cash will stop flowing from investors but Timbercorp will be left owning land, irrigation and water rights. And don t forget that all deductions will be allowed on projects bought before 1 July 2008, which gives Timbercorp another two financial years to sell new products. This year's sales results look like they'll come in around $105m (Timbercorp has a 30 September yearend but most of the sales are made before 30 June) and, combined with next year's sales, we reckon the profit is worth $75m. This is the reason Timbercorp is cheap. It s being priced as if this division is going to disappear. Yet there are still two years of profits to come and, by the time the rules change, the annuity revenue will have grown to the point that, overall, the company won t be earning much less than it is today. We value Timbercorp s horticulture business at $775m. It s comprised of $75m for the post-tax earnings over the next two years plus $700m for the ongoing business including a growing annuity stream for the next 23 years and the value of the land, infrastructure and water at the end. Horticulture pain, forestry gain Then there s the business specifically excluded from the tax office s change in interpretation. Timbercorp owns 91,700 hectares of land on which it manages hardwood timber plantations (the woodchip used to make paper). The company intends to maintain a plantation of approximately this size (90, ,000 hectares) on a year rotation. In other words, it intends to sell 8,000 10,000 hectares of new projects every year, forever. That should generate an annual profit of around $22m or $15m after tax which, using a post-tax multiple of 10, would be worth $150m. While there will probably be more demand for the timber products once the non-timber projects get shut down, we ve got our doubts about this part of the business (see our feature from 4 July 06, Don t be felled by the timber glut). However, the $257m of net assets employed in the forestry division mostly land give us confidence [ CONTINUED ON PAGE 6 ] SPECIAL REPORT/5 BEST BUYS SEP 2007 The Intelligent Investor PO Box 1158, Bondi Junction NSW 1355 Phone: (02) Fax: (02) info@intelligentinvestor.com.au 5

6 SPECIAL REPORT/5 BEST BUYS SEP 2007 Timbercorp ripe for picking [ CONTINUED FROM PAGE 5 ] that our $150m valuation is conservative. The majority of investors borrow most, if not all, of the money needed to make their investment from Timbercorp (you wouldn t expect to pay for the tax deduction, would you?). Whilst that has caused the company plenty of cash flow problems over the years it still needs to buy the land and water rights and plant the crops it now has a loan book worth $337m, on which it earns very acceptable rates of interest. But the loans are offset by a large pile of Timbercorp s own debt. In fact, at 31 March 2007, the $624m of net debt more than offset the company s combined loan book and cash, to the tune of $287m. So that s $287m we need to subtract from our valuation. There is a risk here. You would think that people with tax problems would have high incomes and would therefore be a good credit risk. But the provision for doubtful debts (an estimate of the percentage of loans that aren t expected to be repaid) jumped from 0.8% to 2.1% last year. Valuation numbers BUSINESS VALUE Horticulture business ($m) 775 Forestry business ($m) 150 Industrial ($m) 40 Select Harvests and Tradefresh ($m) 112 Net debt ($m) -287 Corporate overheads ($m) -50 Total ($m) 740 Shares on issue (m) 305 Value per share ($) 2.43 in Tradefresh (which owns 80.75% of the listed Costaexchange. Subtract the corporate overheads and you end up with a per share value of $2.43. So, as it stands today, the stock is at a 21% discount to our conservative appraisal of the company s value. Significant upside The biggest swing factor in our valuation is the final outcome of the tax office clampdown. While the ATO has indicated it won t be allowing deductions after 1 July 2008, it has asked the industry for a test case to run through the courts before then. We ve assumed the worst case, but there s a reasonable chance of the non-forestry MIS industry eventually resuming with similar restrictions as those applied to the forestry industry. That would add dollars per share to the valuation. A few more years of record sales could make our estimate of the annuity stream seriously undercooked. Management s estimate of the annuity stream, as things stand, is significantly above ours and the industrial business could be much more valuable than we ve estimated. In short, if a few things go the company s way, the value could be multiples of the current share price. Our main concern is that the tax driven investors who buy Timbercorp s products could end up very disappointed with the returns they receive. Farming isn t the most profitable game to start with and, with Timbercorp grabbing more than its fair share, its hard to see how much of the pie can be left for those investors. As shareholders, though, most of the profits will be in the bag, but it does make you think twice about owning this business. No doubt investors aren t too happy about paying loans back if the associated investments aren t providing adequate returns. We ll have more to say about this in a moment but, as we don t think the projects have much chance of providing an adequate return, it s no surprise bad debts are on the rise (although one or two large defaults can make this number swing around from year to year). A significant rise in default rates would put a dent, though not a fatal one, in our valuation. Other odds and ends On top of the traditional MIS business, Timbercorp has been building an industrial business to process and sell the produce from the timber and olive projects. Revenue from this business will double to more than $100m this year and it will contribute a few million to earnings. Management tells us the returns have been low because they ve been paying early investors above-market rates, but that they expect to start generating pre-tax margins of 12 18%. We ll believe that when we see it and have put a value of $40m on this part of the business, but it s potentially worth more. Finally, we need to add in Timbercorp s $41m stake in the listed company Select Harvests (which manages all of the almond projects) and $71m investment Locked in annuity stream ($m) What that means for your investment decision we ll leave up to you. But what we can say is that Timbercorp is dirt cheap. Even if the whole MIS sector comes to a screaming halt as investors realise the error of their ways, Timbercorp has ridden the wave to become one of the major landowners and farmers in Australia. It is going to continue making money for a long time to come. This business is not without its risks but the current price offers an excellent margin of safety. BUY. Disclosure: The author, Steve Johnson, owns shares in Timbercorp and so do other staff members. 6 The Intelligent Investor PO Box 1158, Bondi Junction NSW 1355 Phone: (02) Fax: (02) info@intelligentinvestor.com.au

7 Platinum set for a grand entrance It s rare that we recommend a recent float, and even rarer that we recommend one trading at a premium to its float price. But Kerr Neilson s funds management business is one of a kind. PLATINUM ASSET MANAGEMENT (PTM) $ Sep 2007 BLUE CHIP INDUSTRIAL $3.94bn $5.80 $9.11 BUSINESS RISK 2 out of 5 SHARE PRICE RISK 2.5 out of 5 BUY In early 1994, I was interviewed by Kerr Neilson at his home on Sydney s lower North Shore. Young and wet behind the ears, I had applied for a trainee analyst role at his new funds management venture, Platinum Asset Management. Presumably my resumé looked fine but, in the face of a drop-dead view of the Sydney Harbour Bridge and Neilson s no-nonsense demeanour, I mustn t have measured up. I didn t get the job. Roll forward 13 years, and Platinum Asset Management has listed on the stock exchange. And I m sort of glad I wasn t hired. Neilson is known for working his analysts hard, and I ve grown used to my weekends or most of them, anyway. Neilson s own work ethic is legendary, and he expects a great deal from his analysts, one of whom used to work for The Intelligent Investor. But it s not all about hard work, and Neilson has a couple of other qualities we admire. The first is that he is undoubtedly a great stock picker. He can be credited with having made Bankers Trust Australia s reputation for funds management during the 1980s, and his own reputation has been considerably enhanced at Platinum. The company s flagship International Fund has produced an average return of 17.3% a year since inception in 1995, compared to its benchmark of 8.0%. Watchful eye on costs We also admire Neilson s stinginess. Like all good businessmen, he keeps a watchful eye on costs. Platinum s largest expense might be for staff, but its analyst salaries aren t high. If their portfolios perform well, however, their bonuses can be. But the stinginess is much more prominent in the rest of the business. For one thing, few listed companies claim they do not employ any sales or marketing staff (its investment performance, after all, speaks for itself). For another, Platinum is the only $2.8bn listing we can remember whose prospectus is devoid of photographs (except for its admirably staff-focused cover). So that s what we think of Neilson. What about Platinum s business? From a standing start back in 1994, Platinum now manages unlisted funds totalling $22.0bn, as well as the relatively small listed investment company Platinum Capital. Platinum s first result as a listed company has beaten the prospectus forecast, as we suggested it might on 20 Apr 07 (Subscribe $5.00). Pro forma revenue came in at $309m, while net profit was $189m (excluding one-off float and restructuring costs). This company is, as we noted in April, obscenely profitable. No dividend was declared, as expected, with the first one likely to be paid in March The performance of the company s flagship International Fund was a fairly lacklustre 6.2% for the year. Managing director Kerr Neilson also noted that investors had been making redemptions from its Japanese funds following their poor performance (the Japan Fund was down 9.6% for the year). That, and apparent investor concerns over the commitment of staff following the float, resulted in funds under management coming in at $21.2bn on 30 June, slightly lower than forecast in the prospectus. At 21 August, Platinum had funds under management of $21.5bn. Contrarian approach delivers Of course, the short-term performance of Platinum s funds isn t important (although it can have some effect on fund inflows and funds under management, as we ve just seen). We ve every reason to believe that Platinum s sound investment approach which has delivered excellent long-term returns is intact, even though its managers views are often out of step with prevailing sentiment (not unlike our own). Table 1: Platinum financials 2006 (A) 2007 (A) Revenue ($m) Staff costs ($m) Other expenses ($m)* Profit before tax ($m) Tax ($m) Net profit after tax ($m) Adjusted earnings per share (c)* 33.0 Price to earnings ratio 19.3 *Excluding float costs of $22m Management sensibly refused to provide earnings guidance, stating that to do so would be fraught with danger and potentially misleading given the number of variables involved. We d echo those sentiments, and issue the same caveat about the potential 2008 profit numbers we plucked out of the air on 20 Aug 07 (Buy $6.25). We remain very comfortable with Platinum. But with the share price moving away from our opportunistic buy price, we d probably downgrade the recommendation a notch were it to rise too much further. For now we re sticking with BUY. Disclosure: The author, James Greenhalgh, owns shares in Platinum Asset Management, as do other staff members. SPECIAL REPORT/5 BEST BUYS SEP 2007 The Intelligent Investor PO Box 1158, Bondi Junction NSW 1355 Phone: (02) Fax: (02) info@intelligentinvestor.com.au 7

8 SPECIAL REPORT/5 BEST BUYS SEP 2007 The good oil on ROC Oil is a precious commodity and Roc Oil is an expert at finding and producing it. ROC OIL (ROC) $ Sep 2007 BLUE CHIP RESOURCE $1.1bn $2.62 $3.90 BUSINESS RISK 4 out of 5 SHARE PRICE RISK 3.5 out of 5 BUY Roc Oil is another conservatively financed, well-managed company with a great track record, but it is an oil explorer and that s about as racy as we get. We first recommended Roc back in issue 130/Jun 03 (Buy $1.13). It is somewhat out of character for us to be still recommending a company after its share price has almost trebled in such a short space of time. This unusual state of affairs has come about because our assessment of Roc s intrinsic value has moved up at least as quickly as its share price. There are two parts to the equation: the assets the company owns that are already producing which are relatively easy to value and its exploration assets which are nigh on impossible to value. On the production front, Roc has a number of projects, located in Western Australia, Mauritania, China and the United Kingdom, that are either producing or nearing production. In issue 208/Sep 06 (Buy $3.34) we took a look at each of these projects in some detail. You should read that review, as we don t have the space here to review each of the assets, but when we add it all up we estimate their combined worth at about $5 per share (after adjusting for the recent rights issue). You ll notice straight away that this estimate is more than the current share price. That s the way we like it the exploration potential, which is very difficult to value but definitely worth something, is thrown in for free. Prospective territory This is where the big upside lies. The company has a number of prospective exploration assets, particularly in China and Angola. Top of the list is Angola. Management bought into the area in 2001, amid a civil war, and paid an absolute song for the block. About a year later, the country emerged from the funk of its 27-year civil war and Roc was left in pole position to explore this very prospective territory. The company has already spent tens of millions gathering data (and clearing the civil war s leftover landmines), and will spend plenty more. It plans to drill three holes in Angola this year, and potentially another three depending on various factors. The first two wells, Massambala-1 and Caju-1, are being drilled by separate rigs as we write. And there s already been some good news from Massambala. While it s too early to comment on the amount of recoverable oil, initial calculations suggest it is a significant find. With five more wells to drill, we re hoping for plenty more. Then there s China. In May 2006, the company announced a significant oil find in the South China Sea, an area that has proved to be a great oil and gas resource over the years. Roc s Wei-6-12S-1 well is a few kilometres from the earlier Wei discovery, which in turn is only a few kilometres from oil lines owned by China National Offshore Oil Corporation (CNOOC) which run to the Weizhou Island Oil Terminal. Being close to CNOOC infrastructure, and considering CNOOC s option to buy into the project, the economics could be mouthwatering. Management icing on the cake The final clincher is that we re big fans of the management team. Roc s annual reports specifically the commentaries by chief executive John Doran are some of the best we ve seen. Doran is approachable, candid and honest and he has decades of experience (including plenty of success) in the industry. You can listen to interviews with him yourself at our own website or Of course, it is the oil game and that means we should never get carried away. The risks are numerous, including the oil price, political instability, skyrocketing costs and the usual operational risks involved in the resources game. Whilst we think Roc s great value, the nature of the industry and the countries in which Roc operates mean there is a speculative dimension to this stock, so we recommend that you limit it to 8% of your portfolio even if you have a high tolerance for risk. BUY. Disclosure: The author, Gareth Brown, owns shares in Roc Oil and so do other staff members. WARNING This publication is general information only, which means it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether a particular recommendation is appropriate for your needs before acting on it, seeking advice from a financial adviser or stockbroker if necessary. The Intelligent Investor and associated websites are published by The Intelligent Investor Publishing Pty Ltd (Australian Financial Services Licence number ). DISCLAIMER This publication has been prepared from a wide variety of sources, which The Intelligent Investor Publishing Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about the investments and we strongly suggest you seek advice before acting upon any recommendation. COPYRIGHT The Intelligent Investor Publishing Pty Ltd No part of this publication, or its content, may be reproduced in any form without our prior written consent. DISCLOSURE At the time of publishing in-house staff held shares in: AEA, AHC, ANZ, ARP, CBA, CDX, CHF, COH, COS, CRS, CXP, DBS, FLT, GFF, GLB, GNC, GTP, HHV, HVN, IAS, IFL, IFM, IVC, JBH, JST, KRS, LMC, LWB, MBL, MLB, MMA, NABHA, OEQ, PTM, QMT, RHG, ROC, SFC, SFH, SGB, SGN, SIP, SOE, SOF, SOL, SRV, STO, TGR, TIM, TLS, TLSCA, TRS, TTS and WBC. This is not a recommendation. Report compiled as at 7 Sep 2007, additional content added 24 Sep The Intelligent Investor PO Box 1158, Bondi Junction NSW 1355 Phone: (02) Fax: (02) info@intelligentinvestor.com.au