Nicholas Brooks, RBS Morgans


Boart Longyear (BLY)            

This drilling services company is highly leveraged to a global cyclical recovery and pricing is already starting to increase. Profit margins are increasing amid a considerable upwards move in rig utilisation rates. It’s a good time in the cycle to be getting onboard. It’s a well known company in the sector offering a solid order book and predictable earnings.

MAp Group (MAP)                              

I generally struggle to recommend anything in the aviation sector due to it’s unpredictability – however, MAp is an exception. It offers the best dividend yield – almost 7 per cent- in the sector. Several European Union countries are contemplating privatising their airports to raise funds and MAp has $750 million of firepower on its balance sheet. Traffic growth is pushing earnings higher, with more upgrades expected in the short term.


Spark Infrastructure Group (SKI)                   

A specialist infrastructure fund offering a dividend yield above 11 per cent – you are being paid to hold onto Spark. Meanwhile, its name is continually bandied about as a potential takeover target if industry consolidation happens. The utilities sector is still an attractive and defensive place to have money allocated in an investment portfolio.

Tabcorp Holdings (TAH)                         

Tabcorp is still cheap on a fundamental basis, and it’s trading at a price/earnings discount to rival Tatts Group. There’s still potential for corporate activity post its demerger, which could be the catalyst for a re-rating of the stock. Upside potential for Star City casino remains, given Crown was able to surprise on the upside in its recent result. Risk around deregulation, licensing and casino capital expenditure has been overdone.


Woodside Petroleum (WPL)                   

For short term traders, I’d be looking to sell at least part of my holdings. Shell’s indicated it’s a seller of the stock, which has created a sizeable overhang. Developments at Pluto may well have been disappointing, and there’s potentially more delays on the way. Better value exists elsewhere in the sector.

ConnectEast (CEU)                

The dividend yield is low for an infrastructure stock and distribution isn’t 100 per cent covered by its own cash flow. Distribution growth for this Melbourne toll road operator is under pressure due to slowing traffic and revenue growth. It’s unlikely to re-rate in the short term in the absence of corporate activity, which is likely to be more than 12 months away if at all.


Peter Day, Wilson HTM


Bandanna Energy (BND)

Bandanna is an emerging thermal and metallurgical coal producer, with five projects in Queensland’s Bowen and Galilee Basins at advanced stages of evaluation. BND holds a 100 per cent interest in its Bowen Basin projects, and will retain a 50 per cent interest in South Galilee. It has outlined a total of 841 metric tonnes of resources in the Bowen Basin and 982 metric tonnes in the Galilee Basin. Our un-risked share price target is $2.32 in the next 12 months. On December 10, it was trading at $1.58 a share.

Retail Food Group (RFG)

An Australian food brand manager and franchisor. It holds the intellectual property rights to Donut King and the Bb’s cafe franchise systems. It’s acquired several other franchise systems, including Michel’s Patisserie, Brumby’s Bakeries and, more recently, Big Dad’s Pies. RFG has confirmed a solid start to full-year 2011, providing growth of between 10 per cent and 15 per cent. While retail conditions remain challenging, RFG cited positive signs for new store openings and customer numbers.


GrainCorp (GNC)

GrainCorp has moderated market expectations for full-year 2011 earnings, citing the impact of adverse weather during harvest and increasing competition in malt. We had previously highlighted these issues, but the magnitude of GrainCorp’s comments surprised us. We have downgraded our net profit forecasts between 8 per cent and 14 per cent.

Northern Energy Corporation (NEC)

Predictably, the NEC response to the New Hope Corporation (NHC) $1.50 per share cash takeover offer is “it’s inadequate”. We also tested sensitivities and alternative evaluations, giving potential values for NEC shareholders of between $2.17 and $2.27 a share on a diluted basis. However, in New Hope’s hands, undiluted, we consider that NEC would be worth up to $3.49 a share, as NHC doesn’t need to raise equity. We consider the offer is too low, and retain our hold recommendation.


Caltex Australia (CTX)

While refiner margins grew in the first half of 2010, it’s since reversed in the second half. Also, growth in China’s refined product exports is likely to continue. China’s export capacity is forecast to increase on deceleration of economic growth in the second half. This will put further pressure on Caltex’s regional margins. We see little recovery in regional refiner margins until 2014 given excess capacity and subdued demand. 

Nufarm (NUF)

Nufarm has finalised a new $900 million, 12-month syndicated bank facility to replace the bilateral banking facilities due on December 15. The company says interest margin is similar to existing facilities, the covenant ratios are more flexible and the costs associated with debt refinancing will be expended over the next 12 months. We retain our sell rating, with the stock trading at a 38 per cent premium to our valuation.


John Rawicki, State One Stockbroking


Bauxite Resources (BAU)

The company holds an enormous 27,000 square kilometres of tenements at Western Australia’s Darling Range, which is known for its high-grade bauxite. With $54 million of cash in the bank, no debt, and a series of projects underway, it’s trading almost at its net asset value and well below its potential fair value. A commercially prepared company that’s already shipped samples to Chinese customers. A speculative buy.

Harvey Norman (HVN)

The current low point in this retail giant’s share price appears to be the trough of what is a highly cyclical stock. Harvey Norman has worked hard in the past few years to increase its market share and open new stores. When retail trading conditions improve, sales momentum will naturally reward companies with the biggest market share, giving HVN an advantage in the rebound.


Telstra (TLS)

Revenue from traditional copper network services may be under pressure, but these services still delivered annual revenue of $5.8 billion for full-year 2010. EBITDA (earnings before interest, tax, depreciation and amortisation) margins of 59 per cent (FY10) and significant cash flow give Telstra a financial advantage over competitors in an industry where high cash flow is tight. Telstra isn’t the cheapest provider, but it’s the lowest cost provider of telecommunications services.

Woolworths (WOW)

Despite operating in the competitive supermarket space, Woolworths has historically been able to lift profit margins, generate sufficient cash flow, deliver consistently impressive earnings and achieve consistent growth. Benefiting from a strong balance sheet, an extensive store network and an efficient supply chain, WOW is well positioned for long-term growth, while retaining defensive qualities.


Campbell Brothers (CPB)

This chemical and laboratory services company is trading on a prospective price/earnings ratio above 16 times for full-year 2012. The company appears fully valued at this point. NPAT (net profit after tax) for first half 2011 was within expectations but, in our view, future organic growth may be difficult to achieve. An interim dividend of 65 cents a share will be paid to shareholders on December 21. We are expecting earnings weakness this year, so it doesn’t justify the share price rally. The stock appears overheated.

Aristocrat Leisure (ALL)

A sharp earnings downgrade, contraction of the North American market and the rising Aussie dollar will continue undermine earnings, in our view. Aristocrat, a gaming machine maker, continues to lose market share in Australia and has failed to grab market share on the back of recent Japanese growth.


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