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PREVIOUS ARTICLE Stock of the Week NEXT ARTICLE 18 Share Tips - 3 May 2010

Scott Marshall, Shaw Stockbroking

BUY RECOMMENDATIONS

David Jones (DJS)

Recent price weakness has created a buying opportunity for this stock. The company has a proven track record, even in difficult times, of delivering earnings per share growth. It’s generating momentum from its store rollout and refurbishment program, coupled with margin expansion. Earnings risk profile is low, and it’s well positioned to benefit from an improving environment. A solid business and credible management team.

Toll Holdings (TOL)

This transport logistics company intends to pursue acquisitions “aggressively”. While the market reacted savagely after its half year profit announcement, this has provided a buying opportunity for medium term investors who want to be involved in the transport volume story in Australia and Asia. While the first quarter was particularly weak, the company notes the second quarter has shown significant improvement, which has extended into the next quarter.  

HOLD RECOMMENDATIONS

ASX Limited (ASX)

Chi-X has been granted a licence to compete with the ASX. The ASX will no longer enjoy a monopoly and can expect lower trading fees. However, the ASX has been preparing for competition – it’s been adjusting its fee structure, improving its own platform reliability and building technology to handle the new trading strategies that Chi-X is known for overseas.

Western Areas (WSA)  

WSA recently announced settlement of a $125 million convertible bond, an associated repayment of a $60 million ANZ loan facility and a $45 million corporate loan from BHP Billiton. Bondholders have the option to convert into shares after May 19, 2010.  Expect gearing of 69 per cent to fall to 35 per cent by June 2011 due to strong cash flow. WSA does have significant leverage to nickel prices.

SELL RECOMMENDATIONS

Mt Gibson Iron (MGX)

We are downgrading our recommendations for iron ore stocks due to recent share price strength. Our long-term iron ore price forecast, used for valuations, is well below current spot prices. We believe there’s downside risk to iron ore prices. While unpredictable, MGX has the potential to be involved in merger activity, as either a suitor or a target.

Hastie Group (HST)

Margins have recently declined in all divisions except the smaller services segment. Management has forecast full-year 2010 EBIT (earnings before interest and tax) of between $80 million and $84 million, depending on the timing of project delivery and on stable exchange rates. This refrigeration group believes the bottom of their cycle has passed and expects to resume growth in 2011. But the slope of the recovery is hard to read, leading to earnings uncertainty. HST is leveraged to the construction cycle, so a recovery may be protracted in this industry.

Steven Hing, Novus Capital

BUY RECOMMENDATIONS

Metrocoal (MTE)

Metrocoal is exploring for thermal coal in Queensland’s Surat Basin, and has only been listed since February 2010. However, it’s just signed a $30 million joint venture with China Coal to stgelop its ground, which should underwrite its exploration program and accelerate the stgelopment of its tenements. The stock jumped from 20 cents to 30 cents on this announcement, but its indicated reserves and demand for coal globally suggests the company has much higher value.

Resolute Mining (RSG)

The company’s drilling results at its Ravenswood project on April 15 showed strong gold intercepts. The stock price moved from $1.15 to $1.24 on the announcement. With Newcrest Mining recently looking at acquiring Lihir Gold, there’s a lot of potential for the gold sector to go higher, particularly with the bullion price remaining strong. RSG’s most recent high in late November 2009 looks under threat, particularly if there’s further positive drilling results.

HOLD RECOMMENDATIONS

GPT Group (GPT)

Post the global financial crisis, many property trusts have either disappeared or been forced to recapitalise to shore up their balance sheets. The strong have survived and now there’s moves to acquire assets and rebuild. Keep an eye on GPT as fund managers search for the next sector to play catch up in the market.

Santos (STO)

Santos is a diversified energy company, with assets in crude oil, LNG, LPG and coal seam gas. It’s well placed to benefit from rising energy-related commodities. It’s a defensive hold as most utility stocks are.

SELL RECOMMENDATIONS

Sigma Pharmaceuticals (SIP)

The horse may have well and truly bolted here. Sigma, a manufacturer and distributor of pharmaceutical products, also owns the Amcal and Guardian pharmacy brands. After recently writing off the goodwill for its Arrow takeover, the company’s share price and market capitalisation have nosedived. The share price has fallen from $3 levels about four years ago to 47.5 cents in early morning trade on April 23, 2010. It’s hard to see the stock bouncing back.

Paladin Energy (PDN)

This uranium company has been a favourite of mine for many years. Recent takeover plays in the coal sector and growing demand suggests that stgeloping world energy will be coal based for a while, as it’s cheaper and faster to bring on line than nuclear power. Longer term, expect uranium to be a focus again, but, in the meantime, investor capital could be better utilised elsewhere.

 

James Georges, Patersons Securities

BUY RECOMMENDATIONS

Sedgman Limited (SDM)

A market leader in designing, constructing and operating coal handling and preparation plants.  It’s gained international recognition for its coal processing and materials handling technologies. Clients include BHP Billiton, Macarthur Coal and Rio Tinto. It’s leveraged to the buoyant coal sector so look to top up holdings, particularly on any pullback in the market.

Prana Biotechnology (PBT)

Prana stgelops therapies for a broad spectrum of age-related diseases, such as Alzheimer’s. It stgelops drugs for treating central disease pathways that lead to degeneration of the brain and eye. The company is focused on stgeloping PBT2, a compound with the potential to significantly slow Alzheimer’s Disease. It’s made recent announcements relating to its phase 2 trialling of PBT2 after an encouraging report on the slowing of dementia in patients. A speculative buy.

HOLD RECOMMENDATIONS

Rio Tinto (RIO)

RIO aims to operate quality long-life, low-cost mining assets, supported by a pipeline of projects to replenish and grow earnings. Management has a proven record of successfully operating and delivering low cost projects. Rio’s board appears to have found a solution to its over-leveraged position following the Alcan deal. The US$15.2 billion capital raising, a proposed iron ore joint venture and US$7.2 billion in divestments have put the company back on a positive footing.

Karoon Gas (KAR)

Karoon has a high quality portfolio with significant exploration activity in 2010 and beyond. We retain our hold recommendation with a price target of $9.19 a share. Even though our valuation is at a premium to the current share price, a significant part of our valuation relates to a risked success outcome at Kronos-1. There is significant downside if Kronos-1 results are negative.

SELL RECOMMENDATIONS

Funtastic (FUN)

Funtastic has a 20 per cent market share in toy distribution. It appears that increasing competition and softer consumer spending may temper company growth. Sell on rallies.

Qantas Airways (QAN)            

The long-term outlook for Qantas and aviation will always be challenging, given its highly cyclical nature. Strategically, industry consolidation and alliances will continue to play a big part. While Qantas is sufficiently hedged in full-year 2010, we have a bullish view on oil prices in 2011. We see greater long-term value on a risk/reward basis in other stocks. Reduce.

 

Other articles in this week’s newsletter

Stocks to sell in a top heavy market

18 Share Tips – 27 April 2010

A Clear Look At EBITDA

How do you tell whether a share is undervalued or overvalued?

Stock of the Week

The Equity-Risk Premium: More Risk For Higher Returns

Top 10 CFD stocks for the week

Market data

More breaking news

 

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