John Rawicki, Ord Minnett
BUY RECOMMENDATIONS
iiNet (IIN)
Chart: Share price over the year to 25/11/2011 versus ASX200 (XJO)
We believe iiNet offers an interesting exposure to a fast-consolidating broadband market ahead of the NBN roll-out. Its recent acquisition of TransACT for $60 million cash is expected to be earnings per share accretive in the next 12 months. TransACT will add 40,000 customers and generate revenue of $80 million for iiNet.
Seven Group Holdings (SVW)
Chart: Share price over the year to 25/11/2011 versus ASX200 (XJO)
Underlying conditions remain strong for SVW’s main operating asset, the Caterpillar dealership WesTrac. SVW offers good valuation support at the current share price, trading around a 34 per cent discount to the ASX Industrials (excluding financials) price/earnings ratio. If the National Hire acquisition is successful, SVW will have secured assets with strong short-term earnings growth potential. The shares were trading at $6.36 on November 24.
HOLD RECOMMENDATIONS
Slater & Gordon (SGH)
Chart: Share price over the year to 25/11/2011 versus ASX200 (XJO)
The company’s recent purchase of Brisbane-based firm Conveyancing Works is a positive move. We believe SGH has done well to capture a big market share in what is a very fragmented market. SGH is well managed with a strong local brand, a defensive earnings stream and plenty of growth options.
QR National (QRN)
Chart: Share price over the year to 25/11/2011 versus ASX200 (XJO)
Despite port data for October showing continuing weakness in Queensland’s coal export volumes, we expect there will be a gradual recovery in coal production. Our revised operating earnings forecast of $622 million for full-year 2012 is still about 8 per cent above company guidance of $578 million. But we recognise continuing risk to coal haulage volumes given an uncertain production outlook.
SELL RECOMMENDATIONS
David Jones (DJS)
Chart: Share price over the year to 25/11/2011 versus ASX200 (XJO)
The toughest retail trading conditions in decades resulted in the company reporting a significant 11.2 per cent decline in 2012 first quarter sales to $414.3 million. Although David Jones is well prepared for the Christmas trading period, retail spending is much weaker due to the negative wealth effects of a sagging equity market, a soft housing market and the likely contagion of the European debt crisis. Ord Minnett’s strategy excludes the retail sector at this time.
WorleyParsons (WOR)
Chart: Share price over the year to 25/11/2011 versus ASX200 (XJO)
While Worley Parsons is well positioned for growth in its core hydrocarbons markets, we believe the share price already factors this in. But what isn’t factored in are short term risks, including delays in client decision making, strong competition and rising input costs. While a quality engineering company, we believe better growth at lower risk exists elsewhere.
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Clive Briggs, RBS Morgans
BUY RECOMMENDATIONS
Incitec Pivot (IPL)
Chart: Share price over the year to 25/11/2011 versus ASX200 (XJO)
The full-year 2011 result was in line with our expectations. Outlook commentary was relatively upbeat given solid fertiliser prices, improving seasonal conditions and expectations for a modest recovery in North American explosives demand. Highlights were strong operating cash flow (+36 per cent) and the final dividend (8.2 cents), which reflects the board’s confidence. IPL remains good value.
Bradken (BKN)
Chart: Share price over the year to 25/11/2011 versus ASX200 (XJO)
We take note of Caterpillar’s solid third quarter update. What we take from the Caterpillar update is a positive outlook for Bradken, as its engineering products division supplies similar markets. Continuing growth in mining production volumes provides strong visibility to Bradken’s consumables business.
HOLD RECOMMENDATIONS
Brambles Limited (BXB)
Chart: Share price over the year to 25/11/2011 versus ASX200 (XJO)
BXB has signed a three-year service agreement with PepsiCo, enabling it to recover volumes it had previously lost to iGPS. Although earnings will only lift by a modest 1 per cent, it’s positive for sentiment. Our hold recommendation is retained on valuation grounds.
Hills Holdings (HIL)
Chart: Share price over the year to 25/11/2011 versus ASX200 (XJO)
Declining consumer and corporate confidence and weak non-residential construction are the key drivers behind the latest downgrade. Valuations aren’t demanding, but continuing cyclical and structural pressures prevent a more positive rating.
SELL RECOMMENDATIONS
McPherson’s (MCP)
Chart: Share price over the year to 25/11/2011 versus ASX200 (XJO)
Annual general meeting commentary confirmed conditions have deteriorated in the first quarter of 2012. Earnings have been impacted by the loss of sales from impulse merchandising, escalating product and operational costs and other competitive pressures. The printing division is also adversely impacted by poor market conditions. Better opportunities exist elsewhere for the time being.
Fairfax Media (FXJ)
Chart: Share price over the year to 25/11/2011 versus ASX200 (XJO)
We continue to trim our FXJ earnings expectations. Although the stock is very cheap, trading conditions are weak. Advertising revenue in the past six months has been softer than usual. Conditions will eventually improve. But at this point, we regard FXJ as a short term trading sell. The shares were trading at 78.5 cents on November 24.
Cleo Nanni, Alpha Broking
BUY RECOMMENDATIONS
Commonwealth Bank (CBA)
Chart: Share price over the year to 25/11/2011 versus ASX200 (XJO)
As a major Australian bank, the company provides retail, business and institutional services. It’s also a major fund manager, with growing market shares in life and general insurance. The price action has come back to support at $47. This represents a solid buying opportunity for long term investors seeking a high yielding company. On November 24, the shares were trading at $46.80.
Westpac Bank (WBC)
Chart: Share price over the year to 25/11/2011 versus ASX200 (XJO)
Offers significant banking businesses in the corporate and institutional sectors. WBC recently went ex-dividend, with shareholders to receive 80 cents a share, fully franked, next month. With the share price falling from about $23.50 to $20, Westpac presents another good long term buying opportunity. On November 24, the shares were trading at $19.99.
HOLD RECOMMENDATIONS
Woodside Petroleum (WPL)
Chart: Share price over the year to 25/11/2011 versus ASX200 (XJO)
The oil and gas giant sells product across the globe. It produces liquefied natural gas, condensate, crude oil and liquefied petroleum gas. Recent share price action has been disappointing and it’s due to rally based on company fundamentals. We consider Woodside a long-term hold and it can be part of any balanced portfolio.
Newcrest Mining (NCM)
Chart: Share price over the year to 25/11/2011 versus ASX200 (XJO)
Newcrest is a quality gold and copper producer, offering growth and strong exploration upside. Its main operations are in Australia and Indonesia. The Lihir Gold merger last year increases exposure to Papua New Guinea and West Africa and raises the proportion of revenue from gold.
SELL RECOMMENDATIONS
OneSteel (OST)
Chart: Share price over the year to 25/11/2011 versus ASX200 (XJO)
An integrated miner, global manufacturer, distributor and recycler of metals and steel related products. In our view, weak guidance from the company reflects the steep decline in iron ore prices in the past two months. The share price action has been very poor. OST has fallen from a February 2011 high of $3 to a recent low of 80 cents. On November 25, the shares were trading at 81.5 cents.
BlueScope Steel (BSL)
Chart: Share price over the year to 25/11/2011 versus ASX200 (XJO)
A major company, supplying flat steel products to the building, manufacturing, automotive and packaging industries. A recently announced $600 million capital raising at 40 cents a share paints an uncertain future in our view. Increasing uncertainty makes it difficult to value BSL.
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