Richard Batt, Shadforth Financial Group
Panoramic Resources (PAN)
An established nickel sulphide producer in Western Australia, operating two mines – the Savannah project in The Kimberley and the Lanfranchi project south of Kambalda. The company has a strong balance sheet with more than $100 million in cash and no debt. Going forward, Panoramic has the potential to expand the business via acquisitions, leveraging off its strong balance sheet.
A significant player in the Australian grocery market. It operates three business units – IGA Food Distribution, Campbells Wholesale and Australian Liquor Marketers (ALM). The main driver for growth is the company’s food distribution network, which through efficiencies of scale will be able to improve margins. There’s also a change in consumer trends that continues to see the independents increase market share, and MTS is well placed to benefit as it expands its store network.
Leighton Holdings (LEI)
Australia’s largest engineering services contractor, with major infrastructure, mining and construction businesses in Australia, the Persian Gulf and South East Asia. The company has a strong track record of successfully completing projects and, with a sound balance sheet, is suitable for longer term investors comfortable with exposure to the construction sector.
Billabong International (BBG)
This surfwear and sports apparel company has a strong brand image that provides it with a significant competitive advantage to its peers. BBG’s management is experienced in broadening this brand appeal, while maintaining credibility and margin. This is reinforced by a robust marketing campaign, enabling the company to add products to its portfolio and then distribute through its international channels. Suitable for long-term portfolios.
Adelaide Brighton (ABC)
Adelaide Brighton is leveraged to the resource, infrastructure and residential construction markets. The company has recently benefited from growing demand for cement in the resources sector in Western Australia and infrastructure projects in South Australia. However, a high proportion of the company’s costs are fixed, which can impact earnings if volumes decline. Increasing import competition as a result of a stronger Australian dollar could pressure earnings.
Goodman Fielder (GFF)
Goodman Fielder makes and distributes food, such as bread, milk and margarine through a range of well-known brands. The company operates in a mature market, and price wars can erode margins. Company margins are also vulnerable to rises in agricultural commodity and fuel prices. The major supermarkets have more bargaining power than manufacturers, which can put further pressure on returns. In tough times, there’s concerns that consumers can drift away from higher-margin brands to cheaper alternatives. We prefer other investments.
Mark Goulopoulos, Patersons Securities
The recent interest in acquiring AXA has caused share price weakness and an attractive entry point. As AMP is highly leveraged to the Australian superannuation industry, the company is well positioned to grow. Sustained sharemarket strength will also assist, as funds under management will increase.
Cockatoo Coal (COK)
High cash levels from operations will be used to stgelop existing assets and allow for acquisitions. And this should drive strong profit growth in future years. The company has just raised $150 million to fund the acquisition of assets from AngloAmerican. This has caused share price weakness, which provides a good buying opportunity at these levels. In early morning trade on October 15, the share price was 53 cents.
Monadelphous Group (MND)
This engineering group posted a 12.1 per cent increase in full-year profit and has a healthy workload in sectors such as resources and energy. Its revenue rose 13.5 per cent to $1.28 billion in financial year 2010. The share price has rallied 33 per cent in the past three months and is now fully valued.
This company is well positioned to take advantage of any upturn in the Australian economy as it offers an excellent portfolio of businesses and is a leader in a range of sectors. Although the company hasn’t expressed any concerns about meeting 2011 financial year guidance, the share price has gained significantly in recent times and now represents fair value.
Although the company’s cash flow was above $560 million and profit after tax was up 13.5 per cent in the 2010 financial year, weakness lies in its overseas operations. Exposure to a rising Australian dollar is significant and we expect it to continue having a negative impact on earnings going forward.
Virgin Blue Holdings (VBA)
The strong Australian dollar has helped Virgin expand, and accordingly there’s been a strong upward move in its share price. Although this has been positive, recent ongoing issues, including the failed alliances with Delta Airlines in the US and Air New Zealand, pose a threat moving into 2011.
Peter Day, Wilson HTM
A specialty pharmaceutical company involved in researching, stgeloping and commercialising new therapies for respiratory diseases. The FDA (Food and Drug Administration) in the US has approved asthma drug Aridol for marketing. The company expects to start selling in the US early next year. This approval should give the market confidence that the FDA may soon approve Bronchitol, an important drug for treating cystic fibrosis.
Ceramic Fuel Cells (CFU)
CFU is stgeloping solid oxide fuel cell (SOFC) technology to provide reliable, energy efficient, high quality and low emissions electricity in the home from natural gas. We initiate coverage with a speculative buy due to follow-on orders from existing trial customers, announcements of multi-unit sales and success in the R&D program working on process engineering.
Northern Energy Corporation (NEC)
On October 15, the NEC board rejected a takeover offer from New Hope Corporation on the grounds a $1.50 a share was inadequate. We suggest a hold as the share price is now above our un-risked valuation, and there’s potential for other companies to contest the offer.
Westpac Bank (WBC)
We don’t expect Westpac’s IT and productivity program to drive costs lower and streamline processes. Total project expenditure is $2 billion over five years. Hold for other stgelopments.
Western Areas NL (WSA)
This nickel company’s latest quarterly report was in line with market forecasts. However, we believe base metals have over shot the mark driven by speculative activity linked to a weakening US dollar. Expect a correction in base metals prices.
Fortescue Metals (FMG)
The iron ore producer’s debt reshuffle supports expansion in the Pilbara region. But the FMG investment case has become a near term earnings story versus achievable long term production rates. Among the risks is failing to deliver the project on time and on budget.
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