18 Share Tips – 06 May 2019

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Jabin Hallihan, Morgans

BUY RECOMMENDATIONS

REA Group (REA)

The digital advertising company is way off its high, as a weak property market and a drop in residential listing volumes have led to lower profit forecasts. While the outlook for Australian property remains uncertain, and there may be further falls in listings, we remain confident in the group’s long term prospects. We view the share price slump as a good buying opportunity. The 12 month high was $94.12 on August 20 last year. The shares were trading at $80.51 on May 2.

Senex Energy (SXY)

Cooper Basin oil production rose in the March quarter and Roma North gas production is continuing a gradual ramp up. Catalysts include imminent drilling at 110 wells in the Surat Basin and potential for additional gas sales agreements on future Project Atlas volumes. We believe the market is discounting the value of SXY’s Surat Basin interests, which will start to be addressed by the upcoming drilling campaign.

HOLD RECOMMENDATIONS

JB Hi-Fi (JBH)

Third quarter 2019 total sales growth was a modest 2.6 per cent. Sales guidance implies almost 3 per cent growth in the second half. The share price has rallied this year, as some investors lay bets into the big liquid retailers ahead of fiscal stimulus measures and potential interest rate cuts. We think the current valuation is fair for a company with a modest growth profile.

Medibank Private (MPL)

The private health insurer is on track to stabilise Medibank brand volumes by the end of 2020. We expect hospitals and extras growth to remain subdued for the remainder of 2019. A Labor Government, if elected, is planning to cap private health insurance price increases to 2 per cent a year. Wait until the regulatory environment becomes clearer after the election.

SELL RECOMMENDATIONS

Newcrest Mining (NCM)

March quarter gold production of 623,000 ounces was down 5 per cent on the December quarter. Copper production of 25,000 tonnes was down 6 per cent. The company’s current market implied valuation is difficult for us to justify. We believe the stock has been over-bought. We retain a reduce rating.

AGL Energy (AGL)

Our outlook suggests lower wholesale revenues and higher fuel costs. This would squeeze earnings. We don’t believe the current share price reflects the changing electricity market conditions. We believe investors are too optimistic about AGL sustaining earnings in what we see as adverse market conditions.

Michael McCarthy, CMC Markets

BUY RECOMMENDATIONS

NextDC (NXT)

The data centre builder and operator was recently one of the most shorted stocks on the ASX. The chart suggests there is substantial support near $6 a share, and longer consensus growth estimates beyond 2021 are above 100 per cent. The shares were trading at $6.39 on May 2.

Smartgroup Corporation (SIQ)

This administrative outsourcing group experienced share price pressure after a fall in private car sales. Its February result was slightly below forecast, but it’s possible the relentless selling is overdone. With federal and state governments on the client roll, and a recent price/earnings multiple around 13 times on modest projections, some investors may view this as a value buy.

HOLD RECOMMENDATIONS

Commonwealth Bank of Australia (CBA)

An extended period of earnings downgrades is the conventional wisdom for the banking sector, driven by remediation and increasing costs from the banking Royal Commission. That’s on top of a slower housing market and sluggish business borrowing. Given these factors are highly exposed, there is an argument they are already priced in. Longer term investors may see CBA as a hold. More active investors may trade the range, buying closer to $70 and selling near $80. CBA shares were trading at $74.77 on May 2.

Ramsay Health Care (RHC)

The share price of this global health care company has recovered from $54 levels in December. International diversification could be viewed as a positive for RHC. Some may see this stock as a fallen angel coming back into favour. The shares were trading at $64.09 on May 2.

SELL RECOMMENDATIONS

Fortescue Metals Group (FMG)

This iron ore company’s achievements are admirable, but the share price had more than doubled in six months. This could reflect an investor scramble due to last year’s almost universal bearish opinion on iron ore. Rejection at $8 may mean a possible pullback to between $5 and $5.50. The shares were trading at $7.155 on May 2.

Woolworths (WOW)

The supermarket giant was recently trading on a price/earnings multiple of 25 times, with a consensus earnings growth outlook of 2.3 per cent. This gives WOW a starling PE/growth ratio of around 11 times – rich for any stock, but possibly outrageous for those seeking defensive investments. Failure at $32 may be a technical signal for further weakness. The shares were trading at $32.16 on May 2.

Patrick Trindade, PhillipCapital

BUY RECOMMENDATIONS

National Australia Bank (NAB)

The bank cut its 2019 interim dividend to 83 cents a share from 99 cents a year ago. First half cash earnings were up 7.1 per cent on the prior corresponding period to $2.954 billion. First half earnings included $525 million in customer related remediation costs, which the bank had previously disclosed. We retain a positive outlook on the stock, as it’s trading at a discount to our fair valuation of $30 a share. The shares were trading at $25.61 on May 2.

Otto Energy (OEL)

Explores and produces oil and gas. Otto has petroleum assets in the prolific Gulf of Mexico and Alaska. We believe the company offers a bright outlook, so we retain a speculative buy recommendation. Our 12 month price target is 10.5 cents. The shares were trading at 5.6 cents on May 2.

HOLD RECOMMENDATIONS

Telstra (TLS)

Telstra remains the dominant player in the Australian telecommunications industry. It’s the market leader in fixed voice, broadband, mobile services and the corporate/enterprise market. Telstra’s mobile division benefits from a network quality advantage that underpins a 48 per cent subscriber market share position. We’re forecasting a 4.8 per cent fully franked divided yield for fiscal year 2019/20.

Clover Corporation (CLV)

CLV is a niche food ingredients firm, focusing on producing and selling Omega-3 and DHA (an essential fatty acid) rich natural tuna oils, mostly for applications in infant formula With governments increasingly legislating the requirement for DHA in infant formula, CLV is well positioned for future growth. However, it’s trading significantly above our price target, so we have moved to a hold recommendation from accumulate. The shares were trading at $2.16 on May 2.

SELL RECOMMENDATIONS

IOOF Holdings (IFL)

Enjoys a strong market position, but, in our view, the findings from the banking Royal Commission have tainted its brand. The company announced in April it intends to defend the latest class action. In December, the Australian Prudential Regulation Authority alleged IOOF had failed to act in the best interests of superannuation members. The company announced the allegations would be defended. Better to sit on the sidelines until a clearer picture emerges.

Fortescue Metals Group (FMG)

Management is paying down debt and the company reported a particularly strong third quarter. However, this iron ore producer is trading at a significant premium to our fair valuation of $5.70. The iron ore price has surged this year on the back of supply disruptions. An increase in global supplies could pressure FMG’s share price. The shares were trading at $7.155 on May 2.

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