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Chris Conway, Marcus Today

BUY RECOMMENDATIONS

Northern Star Resources (NST)

Chart: Share price over the year

It’s hard to go past Australian gold miners at the moment given the low interest rate environment and weak Aussie dollar. The Australian dollar gold price is at record highs above $2000 an ounce. NST is likely to lift gold production for the June quarter on the back of an improving performance at the Pogo deposit.

Pro Medicus (PME)

Chart: Share price over the year

It’s expensive and speculative, but it’s my pick for the next six months. PME provides software solutions to enable viewing and interpretation of medical imaging, and has enjoyed success in delivering large scale, complex technology to US hospitals. Expect a good fiscal year 2019 result based on revenue and margin growth.

HOLD RECOMMENDATIONS

BHP Group (BHP)

Chart: Share price over the year

The share price has soared on the back of rising iron ore prices. BHP is more diversified than competitors Rio Tinto and Fortescue Metals, so its price is more cushioned if iron ore prices correct. BHP is looking a tad expensive, but there’s no need to dump it just yet.

Woolworths (WOW)

Chart: Share price over the year

The supermarket giant enjoyed a nice rise after announcing it will demerge its retail liquor and hotels business into a new entity – Endeavour Group. The demerger is positive and enables WOW management to totally focus on the food business. Further capital management measures could be on the agenda.

SELL RECOMMENDATIONS

ASX Limited (ASX)

Chart: Share price over the year

A strong monopoly and a great company, but we believe it’s fully valued. Recently trading on 33 times 2020 earnings and overbought technically, the stock has jumped more than 50 per cent since the December low. The dividend yield was recently below 3 per cent. Consider taking profits.

Caltex Australia (CTX)

Chart: Share price over the year

We believe operations are under pressure, with the refining business barely turning a profit amid an absence of growth in the retail segment. Competition remains fierce and it’s difficult to see where improvement will come from. The recent share price belting might encourage some bargain hunting, but outside of that, better opportunities exist elsewhere, in our view.

Jabin Hallihan, Morgans

BUY RECOMMENDATIONS

Sonic Healthcare (SHL) 

Chart: Share price over the year

The global health care company is backed by defensive earnings and is ideally positioned as it offers diverse income streams. It generates revenue in Australia, the US, Germany, Switzerland and the UK. The company’s acquisition of Aurora Diagnostics increases scale in anatomical pathology and offers cross-selling opportunities in clinical pathology. The acquisition should support improving margins, profit growth and a strong balance sheet.

Senex Energy (SXY) 

Chart: Share price over the year

This oil and gas company focuses on operating and developing energy sources in Australia’s Cooper, Eromanga and Surat basins. In our view, SXY has all the vital ingredients, including access to markets, reserves, funding and a good management team. We expect the market to gain confidence in SXY while progressing this year’s drilling programs in the Surat. We believe it remains a takeover target given attractive key assets and a strong balance sheet.

HOLD RECOMMENDATIONS

Bellamy’s Australia (BAL) 

Chart: Share price over the year

Patience is required in this infant formula company until trading conditions improve. BAL is waiting for SAMR (State Administration for Market Regulation) accreditation, which is required to sell product in mainland China retail outlets. Rising e-commerce platform prices are a positive sign. We have revised our forecasts towards the bottom end of guidance.

Bega Cheese (BGA) 

Chart: Share price over the year

BGA has endured another tough year due to dry conditions and significantly increasing farming costs. Milk is a vital ingredient for making cheese and falling supplies is leading to fierce competition. Our revised forecasts are lower and materially below consensus. Despite prevailing dry conditions, the Bega business is sound over the long term.

SELL RECOMMENDATIONS

Fortescue Metals Group (FMG) 

Chart: Share price over the year

The iron ore miner is benefiting from soaring iron ore prices on the back of supply disruptions. Brazilian iron ore major Vale will bring its 90 million tonnes per annum of suspended capacity back online sooner rather than later. The supply constraint issue is more than priced in. While momentum can carry prices higher, we believe iron ore is trading 45 per cent above long term sustaining levels. We expect the iron ore price to retreat. In our view, FMG is trading at a premium.

Commonwealth Bank of Australia (CBA) 

Chart: Share price over the year

Australia’s biggest bank had a stellar quarter. It was recently trading on a full year 2020 price/earnings multiple of about 16 times. In comparison, other banks were trading on a price/earnings multiple of about 11 times. Although CBA consistently trades on a P/E premium compared to peers, we expect the P/E gap to narrow. Consider trimming CBA stock as better value emerges in other banks.

Tony Paterno, Ord Minnett

BUY RECOMMENDATIONS

James Hardie Industries PLC (JHX)

Chart: Share price over the year

The company is the dominant player in the fibre cement market in the US. We believe JHX is well placed to continue penetrating the US cladding market. Through the acquisition of Fermacell, the medium to longer term opportunity depends on whether JHX can drive fibre cement sales in Europe and reach its targeted €1billion of sales at typical JHX margins within 10 years. There would be significant upside risk to our forecasts if this were achieved.

Origin Energy (ORG)

Chart: Share price over the year

We like Origin for its attractive valuation. On consensus numbers, Origin’s 12 month forward price/earnings multiple of 11 times is below its major peers in the oil, gas and utilities sector. Balance sheet repair and improving cash flows at the Australia Pacific LNG project should reduce debt and lift dividends. We expect fiscal year 2020 dividends could rise to 34 cents a share, equivalent to a 4.5 per cent net dividend yield.

HOLD RECOMMENDATIONS

AGL Energy (AGL)

Chart: Share price over the year

In a surprise announcement, AGL Energy has withdrawn its $4.85 a share bid for telco Vocus Group less than a week after starting the due diligence process. AGL’s announcement appears to suggest it deemed the offer price too high. In our view, bidding for Vocus suggests a lack of growth within AGL’s core business. We expect AGL to continue seeking growth opportunities, but if none emerge then increased capital returns could be on the agenda.

Metcash (MTS)

Chart: Share price over the year

Food EBIT (earnings before interest and tax) is forecast to fall due to the loss of the Drakes South Australia contract. However, the decline in food deflation is a positive. Hardware has enjoyed significant synergy realisation from the successful Home Timber & Hardware acquisition. The company is trading at our valuation.

SELL RECOMMENDATIONS

WiseTech Global (WTC)

Chart: Share price over the year

The share price of this global software solutions group has risen about 60 per cent above our target price. Since February, fiscal year 2019 revenue guidance has increased by $4 million, largely due to the acquisitions of Containerchain and Xware. We believe there’s potential for fiscal year 2020 organic revenue to disappoint, particularly given the share price re-rating. WiseTech is a high quality software company, but we consider the valuation stretched.

Coles Group (COL)

Chart: Share price over the year

At its investor day, Coles Group management noted cost savings would build to $1 billion by fiscal year 2023. Food like-for-like sales growth was better than some feared, but this was due to food inflation. In our view, the Coles strategy is sound, although growth is skewed to low margin channels, such as convenience and online, and the 40 per cent private label target remains. In our view, questions remain around execution and competition, with major supermarket rival Woolworths in a much stronger position than during the previous Coles turnaround.

 

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