Ben Potter, ABN AMRO Morgans
Crown is well positioned, offering defensive and quality core assets in Australian casinos, and one of the strongest balance sheets among global gaming operators. Renegotiating the Cannery Casino Resorts deal in the US further improves its balance sheet and reduces investment risk.
Toll Holdings (TOL)
This transport logistics giant has demonstrated an ability to maintain margins despite a deteriorating economic environment impacting volumes. Flexibility in its cost base as a result of using subcontractors is proving to be a valuable strategy. Its balance sheet allows for further acquisitions.
ConnectEast Group (CEU)
A Melbourne tollway operator, traffic volumes are growing steadily, up 1.3 per cent in February on a smoothed and normalised basis. Corporate appeal exists with Transurban, the owner of CityLink, rumoured as a possible acquirer of CEU’s assets.
Sonic Healthcare (SHL)
The healthcare sector continues to be a shining light in this tough economic climate. The recent integration of SHL’s German laboratories provides potential for ongoing synergy benefits. We estimate Germany will contribute 16 per cent to SHL’s full-year 2009 earnings before interest and tax.
Boral is a building materials group and the building sector remains under pressure and should be avoided in the short to medium term. We’re concerned over a lack of clarity on BLD’s debt covenants.
Clarius Group (CND)
Clarius provides recruitment services to the IT, banking, finance and insurance sectors. In addition to a worsening macro environment, expect more downside in response to increasing competition, lack of dividend yield and a disappointing track record.
Michael Heffernan, Austock
A crop protection chemical manufacturer and marketer that’s among the top 10 in the world. It has a low cost base and a strong growth profile. It’s in an area that should offer sustained long-term growth despite potential short-term setbacks. Today’s share price presents an opportunity.
REA Group (REA)
A brilliant survivor from the internet boom era, it offers a dominant position in web-based classified property advertising. This has helped shield it from the sharpest adverse consequences of the property market downturn. With no debt and sound fundamentals, REA is an attractive investment proposition.
Computershare, the most successful Australian-based international share registry business, now enjoys market leadership in the US investor services business. It’s been a stable performer amid the sharemarket turmoil, and its recent trading update was positive.
This private sector provider of funeral services has been a strong performer in recent years. Its recent report was very impressive and it offers reasonable future growth prospects. By its very nature, it’s mostly cushioned from a downturn in economic activity.
This second-line bank recently produced a disappointing report, and future growth prospects do not match other banks. It faces intense market competition in challenging times. Other second-line banks are more appealing.
BRAMBLES INDUSTRIES (BXB)
Profits of this major CHEP pallet supplier have suffered in the past few years. The recent loss of the Pepsi Cola contract in the US, and slowing economies in Brambles’ major markets may delay a sustained recovery. There are better alternatives in today’s sharemarket environment.
Ben Polkinghorne, Patersons Securities
Independence Group (IGO)
Independence Group produces between 8000 and 9000 tonnes of high grade nickel annually from its Long Shaft nickel operation in the Kambalda region of Western Australia. The real value driver though is IGO’s 30 per cent interest in the Tropicana Gold joint venture with partner and project manager AngloGold Ashanti. IGO would substantially benefit if a cashed-up AngloGold Ashanti took over the entire project. The pre-feasibility study for the gold project is due to be released in April 2009.
Downer EDI (DOW)
A construction and engineering company servicing a diverse range of sectors, including water, rail, power and mining. Downer has a large forward order book, with work-in-hand of about $11.5 billion. It will be a beneficiary of government-backed infrastructure stimulus packages across the globe. Gearing looks to be a comfortable 37 per cent. It pays an attractive, but un-franked dividend yield of 5.8 per cent.
Owns Coles, but the outlook for the supermarket division is now more subdued in light of more information about what its competitors plan to spend. Not only did Woolworths spend $500 million more on its supermarkets than Coles in the first half of 2009, but it appears other competitors are likely to out-spend Coles in future. Coles’ supermarket returns will diminish faster unless it can match expenditure levels of competitors. Our unavoidable conclusion is that any turnaround at Coles will take longer than a year to materialise, and be evident.
Bunnings Warehouse Property Trust (BWP)
BWP offers investors a traditional style trust, that only collects rent and has no offshore exposure, or complex financial engineering. Most of BWP’s rent (95 per cent) comes from the Bunnings Warehouse Group, a wholly owned subsidiary of Wesfarmers. The balance sheet is sound with low gearing (35 per cent) and reasonable covenant headroom. For covenants to breach, we estimate that either income would need to drop 14 per cent, or property values fall 22 per cent, both of which look unlikely at present. BWP has 74 per cent of debt facilities maturing in the middle of next year.
Fortescue Metals Group (FMG)
This iron ore company will benefit from a $645 million investment by Chinese steel maker Hunan Valin. However, we are expecting weak March quarter production numbers from Fortescue. Negative iron ore price negotiations will continue to weigh on sentiment for FMG in the short term. FMG’s current share price looks a little stretched on a valuation basis.
Macquarie Media Group (MMG)
MMG investments include regional TV and radio assets in Australia and off shore. Media companies are coming under pressure in the current economic environment due to weaker advertising expenditures. MMG’s debt covenants are not clear, and the company may need to write down the value of some assets.
More articles in this week’s newsletter
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