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Richard Batt, Shadforth Financial Group

BUY RECOMMENDATIONS

QBE Insurance (QBE)

This well managed insurance group offers a record of strong earnings and has an extensive risk management structure in place to protect all stakeholders. Astute acquisitions should deliver growth in profits and dividends. A top stock for long-term growth portfolios.

Woolworths (WOW)

The supermarket giant has earned a reputation for delivering strong profit results over a long period. The company offers a strong balance sheet and is currently conducting an on-market share buyback worth up to $400 million. At a time when many retailers are struggling, WOW’s operations continue to perform strongly.

HOLD RECOMMENDATIONS

Orica (ORI)

This commercial explosives maker is demerging its paint and home improvements division, DuluxGroup. The demerger will leave Orica to focus on its core mining services activities, enabling DuluxGroup to concentrate on consumer brands. The demerger will potentially provide each company with further growth opportunities, so retain holdings.

Sonic Healthcare (SHL)

The company indicated it’s likely to fall short of earnings guidance in the 2010 financial year due to an unexpected impact on Australian pathology revenues. But this fall in pathology volumes is likely to be short-lived and we believe the current share price fall is an over-reaction.
 
SELL RECOMMENDATIONS

Ausenco (AAX)

Ausenco provides consulting, engineering and project management solutions to the resource and energy sectors. The company recently announced short-term earnings have been impacted by project delays, the foreign exchange rate and capital constraints across the mining industry. Earnings potential may fall short if market conditions don’t improve. Better investment opportunities exist elsewhere.

Virgin Blue Holdings (VBA)

The airline indicated a deterioration in its operating environment due to a fall in consumer confidence. This will put pressure on earnings as average fares are expected to fall amid Virgin battling competitors for market share. In uncertain global economic times, we prefer companies that can generate recurring revenue streams as opposed to firms that rely on discretionary spending.

 

Carey Smith, Alto Capital

BUY RECOMMENDATIONS

AGL Energy (AGK)

One of Australia’s major integrated energy companies, AGK services the largest retail energy and dual fuel customer base in Australia, with investments in upstream gas activities and electricity generation. A strong balance sheet provides the group with an excellent opportunity to retain its leadership in renewable energy amid plans to stgelop between $6 billion and $7 billion of projects during the next decade.

QBE Insurance (QBE)

A global provider of general insurance and reinsurance services, this company is considered one of the best managed and profitable groups in the industry. A weakening Australian dollar should dramatically improve the group’s profitability as more than 65 per cent of income is earned in foreign currencies. Trading on a price/earnings ratio of 10 times and a dividend yield above 6 per cent, we believe the stock is trading at a discount.

HOLD RECOMMENDATIONS

Coca-Cola Amatil (CCL)

The soft drink giant recently reaffirmed previous guidance, and expects to deliver high single digit growth in EBIT (earnings before interest and tax) and net profit for the first half of 2010.  CCL is considered a defensive stock as company sales are largely unaffected by a changing economy.

Toll Holdings (TOL)

The performance of this integrated logistics provider is linked to the health of the global economy. Recent concerns about Europe’s debt crisis have resulted in a sharp share price slide.  We believe the risks have been priced in at today’s levels and are happy to hold for the long-term.

SELL RECOMMENDATIONS

OneSteel (OST)

This leading Australian manufacturer and distributor of steel and metal products is likely to be hit particularly hard by the proposed super profits tax, as the group also operates its own iron ore mines in South Australia.  The super profits tax could potentially leave this company’s steel works uneconomical, as it will have to pay the tax at the mine gate, increasing input costs and making it that much harder to compete against foreign produced imported products.  

Seek (SEK)

While there’s no doubt Seek is the premier online employment site in Australia, we question whether the group can achieve lofty consensus earnings forecasts of $113 million in 2011, which is almost double the earnings of 2009.  Even if Seek achieves its forecast 2011 earnings, it would still be trading on a 2011 price/earnings ratio of more than 20 times, which we believe is just too high.  

 

John Rawicki, State One Stockbroking

BUY RECOMMENDATIONS

Augustus Minerals (AUJ)

With drilling at its Silverwood oil and gas prospect in the US state of Louisiana scheduled to begin in mid June, expect more buying interest and bigger volumes. Silverwood has already produced two gas blowouts in previous drillings (1982 and 2008), increasing the likelihood of a successful program. With $8 million in cash, the share price has phenomenal cash backing of 20 cents a share.

Hemisphere Resources (HEM)

This company has produced outstanding results from its maiden iron ore drilling program in Western Australia. The iron ore deposit has a low strip ratio and is close to existing transport. The area tested indicates a continuous deposit that’s more than 800 metres long, 200 metres wide and up to 30 metres thick. It potentially holds more than 10 million tonnes of high grade hematite.

HOLD RECOMMENDATIONS

Australian Bauxite (ABZ)

Holding 26 high-grade tenements covering a vast area in Queensland, New South Wales, Victoria and Tasmania, this exploration company continues to release positive drilling results. Low-temperature bauxite is in short supply globally. ABZ’s first drilling prospect at Inverell in New South Wales has reported a maiden resource of 22 million tonnes from drilling less than 10 per cent of the identified bauxite deposit.

Cockatoo Coal (COK)

This company is well positioned to grow profits from a surging coal price (up 91 per cent from a year ago) and a planned 50 per cent increase in coal production. Cockatoo is a junior coal play with healthy operating margins. A $16 million exploration budget can be financed from internal cash flow, reducing the chances of a capital raising.

SELL RECOMMENDATIONS

Macquarie DDR Trust (MDT)

MDT is undertaking a re-capitalisation and is seeking to raise $198.9 million for working capital and to pay down debt. Despite this, the debt level is still too high in our view. Dilution of earnings per share and no distribution this year and possibly next year, due to high loan repayments, may be viewed in a negative light.

AWB (AWB)

AWB reported NPAT (net profit after tax) of $24.5 million for the first half of 2010, down 40 per cent on last year’s first half due to declining wheat volumes and lower sales margins. The limited size of AWB’s balance sheet may impact the company’s competitiveness in the global wheat market. We expect weaker earnings from its Australian grain marketing business in full-year 2010.

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.

 

Other articles in this week’s newsletter

Big Four Aussie Banks – Buy or Sell?

18 Share Tips – 7 June 2010

How to calculate returns on a fully franked dividend

How to buy commodity stocks low and sell high

When to sell your managed fund

Currency pairs that offer the best opportunities for range-bound trading

Top 10 CFD stocks

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