Samuel Crompton, Shaw and Partners
Geopacific Resources (GPR)
GPR is developing the Woodlark Gold Project in Papua New Guinea. The project is fully permitted and construction has started. Woodlark will be a standard open cut mining operation, forecast to produce about 100,000 ounces of gold a year over a 13 year mine life. The mine is expected to open within two years. After operations begin, we’re forecasting the company to generate profits of $112 million a year. In our view, GPR is the cheapest gold developer on the ASX. The shares finished at 66 cents on October 8.
Strandline Resources (STA)
The company’s Coburn project in Western Australia is a world class resource, and it’s forecast to supply about 5 per cent of global zircon demand in the future. It has all permits and approvals and partial funding. The Northern Australia Infrastructure Facility (NAIF) will provide $130 million. The balance will be generated from a combination of commercial debt, strategic equity and capital markets equity. We forecast the project will generate $228 million in mineral sands sales by fiscal year 2023.
This industrial conglomerate has enjoyed a stellar run. In our view, the company is more attractive without the capital hungry Coles supermarkets. WES has the capacity to spend $10 billion on acquisitions. However, its retail division is impacted by COVID-19, which is likely to pressure earnings. We value WES at $49 a share. The stock finished at $46.75 on October 8.
Westpac Bank (WBC)
The bank has agreed to pay a $1.3 billion fine for 23 million breaches of anti-money laundering laws. It’s the largest civil penalty in Australian corporate history. The company axed its interim dividend amid plunging profits. The bad news appears to be factored into the share price.
QBE Insurance Group (QBE)
The insurance giant announced a first half 2020 statutory net loss after tax of $712 million. The interim dividend was cut to 4 cents a share. It was a disappointing result, particularly its international performance, in our view. COVID-19 clouds the outlook. We believe better value opportunities exist elsewhere.
According to our analysis, the cost of funding, which largely reflects the cost of annuities, is increasing relative to the 90-day bank bill rate. The yield on investments is falling. Consequently, normalised profits are down and we expect them to remain under pressure. The shares have fallen from a 52 week high of $10.43 on February 20 to close at $4.13 on October 8.
Jabin Hallihan, Morgans
Macquarie Group (MQG)
MQG has a strong balance sheet. It’s highly profitable and offers quality management. In particular, we like the long term structural growth outlook involving infrastructure and renewables. MQG is well placed to ride out this pandemic, and seize investment opportunities along the way.
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TPG Telecom (TPG)
TPG’s merge with Vodafone enables it to compete more effectively with Telstra. We expect TPG to generate more cash and reduce operating costs. This, in turn, will underpin a rapidly declining debt balance. Additional free cash covers the capital expenditure forecast and also enables the company to invest for growth.
Sydney Airport (SYD)
Sydney Airport raised capital in response to COVID-19 restrictions slashing revenue. Sydney Airport is a premier asset, and we expect company earnings and the share price to rebound in line with recovering travel levels.
This global packaging business is defensive, as its operations have been recognised as an essential service throughout the pandemic. AMC has a solid balance sheet and generates good cash flow from selling packaging to the food, beverage, healthcare, personal care and tobacco industries. AMC is a stock we’re happy to hold.
Lower guidance in fiscal year 2021 leaves us with a subdued outlook for this telecommunications giant. In our view, full year 2020 results were disappointing, with net profit after tax falling 14.4 per cent to $1.8 billion. Telstra can expect fierce competition moving forward. Speculation exists that Telstra may trim its dividend going forward, so it can spend capital on generating earnings growth.
Virgin Money UK PLC (VUK)
In our view, this financial institution may have to provision for an increase in bad and doubtful mortgage debts as a result of the latest spike in COVID-19 numbers impacting the UK economy. We believe it’s best to sit on the sidelines until a clearer picture emerges about the COVID-19 outlook. The stock may respond positively on signs of good news regarding the COVID-19 outlook in future.
Tony Paterno, Ord Minnett
Aristocrat Leisure (ALL)
Apart from Victoria, most gaming venues in other states are operating. The US is continuing to open gaming venues. As expected, Macau is struggling with numbers, but the broader Asian gaming market is also opening. The outlook is brighter. Shares in this poker machine maker have risen from $25.36 on July 1 to close at $30.94 on October 8.
Origin Energy (ORG)
We remain positive about Origin, with a projected free cash flow yield of 13 per cent in fiscal year 2021 and 15 per cent in fiscal year 2022. In our view, capital management initiatives could be a key driver in fiscal year 2021, with Origin’s high cash generation and low payout ratio providing potential upside to market estimates.
Crown Resorts (CWN)
A New South Wales Independent Liquor and Gaming Authority inquiry is examining whether Crown is fit to hold a licence for its new casino at Sydney’s Barangaroo. The inquiry was continuing on October 8. Barangaroo, due to open in December, is a key catalyst and the Crown Perth earnings recovery is positive.
Bank of Queensland (BOQ)
A top-up to COVID-19 provisioning is larger than we had expected, but it may be justified. Compared to peers, a bigger percentage of BOQ’s mortgage and small to medium sized enterprise loan books are in deferral. The bank will announce its decision on dividends at its full year results on October 14.
The A2 Milk Company (A2M)
The infant formula company announced falling sales in September that’s expected to continue during the first half of fiscal year 2021. The company says disruption to the corporate daigou reseller channel and Victoria’s lockdown are behind the revenue downgrade. We continue to see downside risk to second half 2021 revenue guidance.
ASX Limited (ASX)
We’re concerned about a possible delay in replacing the Clearing House Electronic Subregister System (CHESS) with innovative distributed ledger technology. In our view, this could lead to higher capital expenditure, and eventually higher depreciation from a longer rollout period.
The above recommendations are general advice and don’t take into account any individual’s objectives, financial situation or needs. Investors are advised to seek their own professional advice before investing. Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.