Brendan Fogarty, ALTO CAPITAL
QBE INSURANCE (QBE)
QBE remains a global leader in general insurance and reinsurance. Its business model has so far stood the test of time, despite the external environment providing more challenges than ever. QBE should prosper when the recovery begins. The market appears to have been overly harsh following QBE’s recent 2008 results – a profit of $1.859 billion against expectations of about $1.88 billion. But it’s hardly a cause for concern. A cheaper price provides a good buying opportunity for a well-managed company on a high yield of about 7.6 per cent, with likely growth potential.
While I have been loathe to buy our dominant telco in the past, Telstra’s reliable cash flows and a share price that dipped below $3 provide reasons to look for an opportunistic entry. Depending on your time frame and objectives, Telstra could well be an enticing short-term trade, with its defensive cash flows limiting downside and a potential truce with the Federal Government providing imminent upside. For those with a portfolio outlook, its worth buying on yield alone, with this year’s forecast of about 10.5 per cent fully franked.
Oz Minerals (OZL)
The merger of Zinifex and Oxiana has created a company with world class zinc and copper assets. Trouble is, the collapse in the base metals market has put extreme margin pressure on even the best-positioned producers. The assets are strong enough to have secured corporate play from the Chinese, via a cash bid from Minmetals at 82.5c a share. Naturally, the bid’s been recommended by the Oz Minerals board, because if it fails, the company may be placed in administration due to a lack of funding support. It’s a courageous play to hold, but the most likely outcome for shareholders is an exit at 82.5c cash in June this year.
Tabcorp Holdings (TAH)
For those looking to survive the credit crunch with a solid yield, Tabcorp Holdings is worth holding. Its current 9.4 per cent fully-franked dividend yield is supported by short-term cash flows from wagering, gaming and casino operations until 2012. Beyond 2012, licence uncertainty exists. Wait for further stgelopments before accumulating this income stock.
Macquarie Media Group (MMG)
Assets include radio and television under Macquarie Southern Cross Media (MSCM), and US newspaper assets via full ownership of American Consolidated Media (ACM). After recently recording a net loss of $127.3 million over writedowns on its ill-timed acquisition of ACM, Macquarie Media’s balance sheet isn’t looking good. Its ACM division holds debt of US$139.2 million due to expire in June 2010, while MSCM has a further $873 million up for renewal in November 2010. This leaves interest cover too low for risk averse investors. Sell to avoid further disappointment.
Automotive Holdings Group (AHE)
This auto retail and logistics company operates commercial dealerships in Australia and New Zealand. Longer term, there is growth potential in the business given its 86 dealerships and diverse auto brands. But the short term outlook bears too much risk. The company holds about $400 million in net debt, and high intangibles of $197 million. With new vehicle sales plummeting and margins clearly declining, sell and wait for an improving environment with fewer short term risks to the business.
Richard Batt, SHADFORTHS
AGL Energy (AGK)
This energy company offers a strong balance sheet after selling non-core assets for prices well above market expectations in this tough economic environment. Credible management and a strong list of upcoming projects potentially provide solid organic growth and shareholder returns.
An agricultural products maker, Nufarm holds leading market positions. The company’s long-term outlook is strong, particularly with good prospects in Europe and North America. Focusing on customer service is lifting the company’s market share, and new product offerings should provide higher margins.
Orica recently reported a positive result driven by a solid performance in its mining services business. The economic crisis could slow demand for Orica’s products. But the company’s competitive advantage in its explosives business, distribution networks and capital management make it suitable for long term investors comfortable with exposure to the mining and chemicals sector.
Tatts Group (TTS)
The interim result was solid. Although there are earnings concerns over losing the Victorian gaming licence from 2012, the company has a strong balance sheet. A strong balance sheet enables Tatts Group to take advantage of potential opportunities, and, in the interim, investors will be rewarded with a solid fully- franked dividend.
ConnectEast Group (CEU)
The tollway operator has a significant amount of debt that requires refinancing by November 2010. Although the company has cash from a recent equity raising, it may not be enough to cover its outstanding debts. Debt, a recent cut in distributions and a higher share price provides a timely opportunity to sell this company.
DUET Group (DUE)
This group, which invests in energy and utility assets, also has to refinance debt during 2009. Although management is confident it will successfully refinance debt, questions remain as to whether additional equity will be required to finance future growth opportunities. Based on this, we believe there are better opportunities elsewhere.
Andrew Doherty, MORNINGSTAR
This market-leading manufacturer of mining and rail equipment has been sold heavily on the rapidly subdued outlook for mining activity. The shares are cheap and offer an attractive fully-franked dividend yield. The business is trading well within debt covenants. The stock should only suit higher-risk investors, as it’s low margin, capital intensive and cyclical. Estimating Bradken’s earnings requires forecasting the prices of volatile inputs, such as steel, alloy and scrap. These are difficult to predict.
GWA International (GWT)
This manufacturer of housing products, such as toilets, hand basins and water heaters, is solid and well-managed. It has strong brands and positions in moderately competitive markets. Established distribution channels and an emphasis on product stgelopment make it difficult for others to enter the market. The company pays strong dividends, making the stock highly attractive for income investors.
New Hope Corporation (NHC)
New Hope mines thermal coal, primarily in Queensland. Group production is 5 million tonnes a year on mid-to-low costs. About 75 per cent of output is exported via its own port in Brisbane. Growth is from expansion at the Acland site. An immaculate balance sheet stems from selling the New Saraji project for $2.45 billion in September 2008. The company has about $2.6 billion in net cash. But single commodity, infrastructure and mining risk requires consideration.
A major Australian corporate success story. From a collection of basically unrelated operations, WES has created an efficient cash generating machine. Coles is its most significant business. Others include hardware retailer Bunnings and coal investments. The balance sheet is secure following recent equity raisings. But this year’s outlook is subdued, reflecting challenging economic conditions and waning consumer confidence.
Pacific Brands (PBG)
PBG manages some of Australia’s strongest consumer brands, including Bonds, Berlei and Sheridan. The banks are in control of its immediate destiny. The radical restructuring plan is an attempt to reduce costs and business complexity. Risks of disruption are high. Excessive debt puts the stock on the critical list.
Lihir Gold (LGL)
An unhedged gold producer, its major asset is the Lihir Island mine in Papua New Guinea, comprising a big high-grade resource. Nestled within a seaside volcano, keeping the ocean out and temperatures down are issues. Capital costs are high. PNG sovereign risk needs consideration. The share price overstates the company’s prospects.
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