With a new year ahead, what are the best prospects for stock-pickers?
Many analysts are predicting volatile economic times ahead, making a good case for employing a defensive strategy. Along those lines, market analysts from CommSec, Bell Potter and Goldman Sachs JBWere are recommending stalwarts like banks, insurers and established retailers.
But there seems to be plenty of life left in the resources sector too – presuming the fears of a US downturn prove to be misplaced. Oil, gold, a company servicing the booming Far North Queensland region. Throw in an undervalued airline and a telecommunications company that’s capitalising on the fast growing Asian mobile phone market and you could have a winning line-up for your 2008 share portfolio.
Here are some of the most promising prospects for 2008 and beyond, according to Bell Potter, CommSec and Goldman Sachs:
ASX code: WOW
Share price: $34.57.
Bell Potter: It’s an old investment maxim – in tough times head towards companies providing the essentials. In this respect Woolworths is the market’s quintessential defensive stock. It is our largest grocery retailer, taking about 35¢ of every grocery sales dollar. Its supermarkets provide more than 80% of WOW’s total sales; the general merchandise group provides the other 20%. Woolworths remains the lowest-cost player in food and discount department stores; the risks are a resurgent Coles and declining consumer spending. But with 80% of sales food-based, the impact of consumers spending less should be relatively low compared with other retailers.
ASX code: WBC
Share price: $29.69.
CommSec: For the full-year to October 31 2007, WBC announced a 14% increase in cash earnings to $3.507 billion. Revenue growth was strong, comparing favorably with its peers. Credit quality remains good, but a well-capitalised WBC acknowledges that the credit environment is deteriorating. Westpac has strong momentum heading into 2008, justifying the recent run-up in its share price. WBC’s price-earnings multiple could continue to rise as the proportion of total earnings from wealth management operations increases. Despite looking fully valued this is a stock to accumulate.
Pan Australian Resources
ASX Code: PNA
Share price: $1.005.
Goldman Sachs JBWere: In volatile times it can pay investors to hedge their bets with a gold stock. One choice that offers upside – and, admittedly, some downside – is PNA. Although its last result showed a little red ink, the upside comes in the form of the construction of Phu Kham (gold, copper and silver mine in Laos) that’s ahead of schedule and within the $240 million budget with commercial production due in the middle of next year that is likely to cause a market re-rating.
ASX code: CEG
Share price: $2.61.
CommSec: This Cairns-based construction company is expanding rapidly across Far North Queensland. From owning land banks and quarries, CEC has evolved from an earth-moving and civil engineering business to a vertically integrated property stgeloper that markets house and land packages. It’s our estimate that about two-thirds of the after-tax profit will be generated from residential property stgelopment in 2008. It’s also supported by the macro environment of FNQ with the region’s population growth about 2% a year compared with the national average of 1.3%, as well as the ongoing tourism and mining booms.
Virgin Blue Holdings
ASX Code: VBA
Share price: $2.19.
CommSec: Buying an airline largely means taking a punt on the oil price. CBA Global Markets expects a barrel of oil to peak above $US100 before the end of 2007. But while expecting the price to remain volatile in 2008, it does predict the oil price moving lower in 2008. That can only be good news for Virgin Blue, which has been discounted in the market because of this factor (fuel being 26% of its costs) and for having a more volatile passenger mix compared with Qantas. First-half earnings will see a higher fuel bill, but it will have less effect in the second half with nearly all its fuel hedged at US$69 a barrel in this period.
ASX code: AUB
Share price: $4.40.
Bell Potter: Austbrokers is one of the leading insurance broker networks in Australia with an equity interest in 31 individual insurance broking businesses. [It recently announced the acquisition of 50% of Rivers Insurance Brokers for $2.3 million with an upfront payment of $1.8 million.] It is principally operated under its successful “owner-driver” business model that allows individual brokers to retain equity in their broking businesses as co-owners with AUB. The core business of the member firms is the provision of general insurance broking services to small and medium-sized enterprises and high net worth individuals. Although there are risks, its current earnings multiple (14 times full-year 2009 earnings) makes it worth buying compared with its competitors.
ASX code: PSA
Share price: $1.65.
CommSec: Every portfolio needs an oil stock and our choice is Petsec Energy, which operates in the shallow waters and nearby onshore areas in the Gulf of Mexico. It is also a participant in an oil stgelopment in the South China Sea. It is on the cusp of significant output growth.CommSec’s derived valuation, based on PSA’s reserves, is $1.67. This rises to $1.73 ifyou baseCommSec’s valuation on PSA’s own estimated reserves, assuming $US50/bbl oil from 2012 and $US6.75/mcf gas. If full value is given for PSA’s risked potential, then the valuation rises to $4.71.
ASX Code: SGT
Share price: $3.08.
Goldman Sachs JBWere: SingTel’s associate businesses continue to surprise on the upside. There’s the potential for solid growth continuing in both Telkomsel and Bharti (India’s No. 1 mobile operator; SGT’s stake is 30.5%). Based onJB Were’sforecasts, Telkomsel and Bharti drive more than 80% of the growth in SingTel’s associates’ earnings. SingTel has three factors working in its favour: earnings growth driven by high-quality assets, modest price-earnings ratio, and significant balance sheet capacity.