A key stockpicking strategy for 2011 is to find stocks that will run the hardest as global markets rebound.
With this strategy in mind, TheBull approached three brokers to each identify four Top-100 and four Ex-100 stocks best positioned to capitalise on recovering global markets, a continuing resources boom and healthier dividend payouts.
Roger Leaning, Head of Research, RBS Morgans
RBS Morgan’s Roger Leaning favours stocks with solid balance sheets and cash flows with a reliable record of paying dividends.
Four buys from Top 100
1) ANZ Banking (ANZ): ANZ is Leaning’s preferred banking exposure given: 1) its underlying growth is tracking ahead of its peers, and 2) ANZ is best leveraged to an economic recovery and falling bad debt levels as Australian and NZ institutions and small businesses exhibit higher growth rates, and 3) long-term growth prospects are promising given ANZ’s increased focus on Asian banking. Trading at a 5.5 per cent discount to his $25.10 target, ANZ is expected to deliver a full year 2011 gross yield of 8.2 percent.
2) Fairfax Media (FXJ): According to Leaning, concerns that the traditional publishing part of the business may face structural challenges are already factored into the current price, while the online businesses, including Trade Me continue to grow solidly. Revenues in July and August were up more than 5 per cent compared with last year and Fairfax is on track to deliver ‘high single-digit EBITDA growth’ in the first half of full year 2011. The stock is trading at a 35 per cent discount to Leaning’s $2.00 price target, and is expected to deliver a full year 2011 gross yield of 4.1 per cent.
3) Fortescue Metals Group (FMG): One of the standout miners for growth and value, Fortescue offers a 40 per cent potential upside to net present value (NPV). Trading on a forecasted full year 2011 P/E of just 8X, Fortescue has strong production growth, and according to Leaning should enter a net-cash position by late 2011. “Iron ore remains one of our preferred commodities, with prices still strong despite the volatile macro environment,” says Leaning. The stock is currently trading at a 16 percent discount to his $5.74 target.
4) Origin Energy (ORG): News that Shell is potentially taking a major stake in Santos’ LNG project in Gladstone is great news for the CSG/LNG sector. Not only does it bring a global heavyweight to the table, but Leaning says it also adds a higher degree of credibility that should be beneficial to all the project owners looking to sign off-take agreements. Forecast to deliver a full year 2011 gross yield of 4.6 per cent, Origin currently trades on a 17.4 percent discount to Leaning’s $18.25 target.
Four buys Ex-100
1) Campbell Brothers (CPB): Leaning expects a continuing trend of improving stgelopment and exploration activity to positively benefit Campbell’s Environmental and Minerals testing laboratories. Forecast to deliver a full year 2011 gross yield of 4.4 per cent, Campbell is trading on a 19.5 percent discount to Leaning’s target of $38.42.
2) Eastern Star Gas (ESG): Ideally placed to feed gas into NSW and LNG export markets, Eastern announced plans to evaluate the feasibility of LNG exports from the Port of Newcastle. Leaning sees Eastern’s uncontracted gas resource as a logical bolt-on acquisition for numerous companies looking for more gas, the most obvious being major shareholder, Santos. The stock is trading on a 42.6 percent discount to Leaning’s $1.24 price target.
3) Gloucester Coal (GLCN): Trading at a 25 percent discount to its NPV with great growth through to 2013, Gloucester represents a great value opportunity to gain exposure to metallurgical coal. “Management now has a mandate to drive exploration, organic production growth and strategic acquisitions,” says Leaning. Gloucester currently trades on a 29.3 percent discount to Leaning’s $11.90 price target.
4) Watpac (WTP): Leaning believes property sales will be a decent sized near-term catalyst in unlocking value, freeing up capital to be redeployed to the civil & mining business, and significantly reducing the holding costs on longer-term projects that are currently expensed. He expects a $1.4 billion workbook to underpin another solid year in construction and C&M divisions and expects the C&M business to provide growth over the next three years. Forecast to deliver a full year 2011 gross yield 11.1 percent, Watpac trades on a 47.1 percent discount to Leaning’s target of $2.06.
Michael Heffernan, Senior client advisor and strategist, Austock
Austock’s Michael Heffernan expects the market to perform well in 2011 – fuelled by strong growth in SE Asian markets and improving US and EU economies.
Four buys from Top 100
1) Commonwealth Bank of Australia (CBA): Having secured a major share in the home mortgage market, Heffernan says CBA has the biggest growth footprint of the ‘big-four’ banks. Full year cash profit at $6.1 billion and DPS of $1.70 were ahead of consensus forecasts. Trading at around a 5 percent upside to consensus price targets, brokers expect CBA to deliver 13 percent EPS growth and 5.9 percent dividend yield in fill year 2011.
2) Leighton Holdings (LEI): Following a solid, yet flat full year 2010 result, the construction and contract mining giant expects increase revenue and net profit during full year 2011. The board is committed to continuing the strategy of growth through geographic and market diversity set down by outgoing CEO Wal King who grew the company’s market cap from $100 million to around $13 billion during his 23-year reign. Brokers expect Leighton’s to deliver 11 percent EPS growth and a dividend yield of 4.8 percent in full year 2011.
3) Rio Tinto (RIO): Heffernan expects RIO to continue to outperform BHP for some time yet while investors struggle to decipher its Potash acquisition. Based on a P/E of around 9.8X and a robust outlook for iron ore – which comprise over half of its earnings – Heffernan says RIO look cheap at current levels. Underlying net profit of US$5.77 billion was ahead of consensus forecasts, and brokers are looking for RIO to deliver EPS growth of around 20 percent in full year 2011.
4) Oz Minerals (OZL): Became a one-mine company last year when forced to sell all of its mines, save the Prominent Hill copper/gold mine in South Australia. It recently acquired a 17.3 percent stake in Sandfire Resources which is in the middle of an aggressive drilling program at its highly rated Doolgunna-DeGrussa copper/gold discovery in Western Australia. Potential acquisition growth, plus exploration upside make this a favoured mid-tier miner for growth-oriented investors. Forecast to deliver 18 percent EPS growth and 5.6 percent dividend yield in full year 2011.
Four buys Ex-100
1) Matrix Composites and Engineering (MCE): Following last November’s $1 share listed, the Perth-based manufacturer of specialist engineering products is now trading at around $4.62. Given that the company is in a growth phase with a strong order book, Heffernan expects robust earnings in 2011 and steadily growth thereafter.
2) Monadelphous (MND): With a healthy order-book, Heffernan says Monadelphous is well positioned to capitalise on a robust outlook for both energy and the resources sector. Brokers expect the stock to deliver 13 percent EPS in full year 2011 and a dividend yield of around 6.1 percent.
3) Mineral Resources (MIN): Heffernan expects the sale of minerals to represent an increasingly greater proportion of the mining services and processing company’s revenue. Brokers expect EPS growth of around 40 percent in full year 2011 due to growth in its contracting business and ramped-up minerals sales.
4) McMillan Shakespeare (MMS): This salary packaging business has been a strong share market performer with low debt, reasonable dividend and attractive growth prospects. Its buoyant outlook statement was re-assuring, and Heffernan says the area it operates in is ripe for growth as the outsourcing trend continues.
Andrew Quin, Research and strategy coordinator, Patersons Securities
Paterson’s Andrew Quin backs defensive stocks that pay healthy dividends as well as standout small cap stocks.
Four buys Top-100
1) QBE Insurance (QBE): One of the best managed insurance groups in the global general insurance and reinsurance industry, QBE has an enviable track record of strong earnings with extensive risk management in place to protect stakeholders. Quin’s intrinsic valuation is $26.40, and brokers expect full year 2011 EPS growth and dividend yield of 22 and 7.6 percent respectively.
2) CSL Ltd (CSL): Industry consolidation has delivered favourable pricing and lifted returns for this global manufacturer and marketer of biopharmaceutical products. Quin says control of supply, scale of operations and integration of services – from blood collection to product manufacture – gives CSL a competitive advantage difficult to replicate. “A strong industry position makes it one of our best businesses and should be a core portfolio stock at the right price, our intrinsic valuation is $36.40.”
3) Computershare (CPU): Is the only global share registrar administering more than 100 million shareholder accounts for over 14,000 corporations across 20 countries. With its expertise, strong balance sheet and low capital requirements, Quin expects Computershare to generate solid long-term growth. “Scale, including depth of technology confers a strong competitive advantage to this high quality company that’s more prudently bought when equity markets aren’t bullish. Our intrinsic valuation is $10.40.”
4) BHP Billiton (BHP): A foundation resource investment for conservative portfolios, BHP is a well managed global resource leader with a balanced portfolio of world class, long-life assets, and a full suite of conventional energy products. Brokers are forecasting 60 percent EPS growth and a dividend yield of 2.5 percent in full year 2011.
Four buys Ex-100
1. Cooper Energy (COE): Provides a lower risk, asset-backed producer with 32 CPS cash backing and Paterson’s analysis of producing reserves in the Cooper Basin suggests a further 20 CPS in value, without accounting for any exploration upside. Throughout full year 2011 Cooper will participate in seven exploration wells and four stgelopment wells in the Cooper Basin, with drilling of its Menzel Horr well in Tunisia providing another major short term catalyst.
2. CUE Energy Resources Ltd (CUE): All of CUE’s producing assets – including SE Gobe Field (3.28 percent) in PNG, the Maari oil field in NZ (5 percent) and the Sampang PSC in Indonesia (15 percent) – have solid operators including Santos (Oyong), Oil Search (SE Gobe) and OMV (Maari). Quin expects success at its Artemis prospect (15 percent CUE Share), expected to be spudded late 2010 to potentially add $1.00/share unrisked.
3. Horizon Oil Ltd (HZN): Together with its US$30 million of initial works in PNG, Horizon is well funded to pursue an enviable pipeline of stgelopment projects. These include its Beibu Gulf stgelopment, Stanley Condensate project, and a similar condensate project at the larger Elevala/Ketu discovery. The potential for aggregation of its gas resources into a liquids project and smaller scale domestic supply potential provide further upside. “With production expected to ramp up to +30kbopd in the near term, following final completion works on site, Horizon is set to benefit from its 10 percent share of cash flows,” says Quin.
4. Aspen Group (APZ): One of the smaller REITs, Quin says Aspen offers good value which, based on an NTA of $0.66 – following management’s severe asset write-down – reflects real value. He expects the groups residential land funds to provide an earnings kicker in coming years.
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.