18 Share Tips – 18 February 2013

James Samson, Lincoln Indicators

BUY RECOMMENDATIONS

RCG Corporation (RCG)

Chart: Share price over the year to versus ASX200 (XJO)

Despite a lull in the Australian retail market following a surprisingly weak December retail sales figure, footwear company RCG has continued to report strong company fundamentals and, more importantly, consistent growth throughout the cycle. We believe RCG’s share price is undervalued amid the company paying a strong fully franked dividend yield of about 6 per cent. RCG stands to benefit from any uplift in consumer sentiment. The shares closed at 50.5 cents on February 13.

Silver Lake Resources (SLR)

Chart: Share price over the year to versus ASX200 (XJO)

This gold production and exploration company has put some steady runs on the board in the past three years and is in the process of acquiring Integra Mining. Despite added acquisition risk, a recent softening in the company’s share price suggests value may exist for the opportunistic investor. The shares closed at $2.59 on February 13.

HOLD RECOMMENDATIONS

RCR Tomlinson (RCR)

Chart: Share price over the year to versus ASX200 (XJO)

A profit upgrade in January and a sharemarket recovery have strongly driven up the share price of this engineering services company. While RCR is well placed to report strong full year 2013 results, we have reservations about its growth potential in 2014 and beyond. Subsequently, RCR needs to build a longer term order book. In the meantime, we believe it’s best to take a wait-and-see approach.

Tox Free Solutions (TOX)

Chart: Share price over the year to versus ASX200 (XJO)

TOX provides waste and recycling services to a myriad of industries. In recent times, the company has won contracts in the materials and energy sectors and continues to grow via acquisitions. While we believe the business has a strong long-term future, the market is fairly pricing the company’s potential at present.

SELL RECOMMENDATIONS

Sedgman (SDM)

Chart: Share price over the year to versus ASX200 (XJO)

This coal mining services business is suffering from demand concerns regarding the outlook for Queensland-based coal exporters. Fundamentally, we believe SDM is a good business, but company earnings and cash flow may be impacted by external pressures. SDM is also facing integration risk relating to its recent acquisition of MDM Engineering Group.

Aurizon Holdings (AZJ)

Chart: Share price over the year to versus ASX200 (XJO)

Formerly QR National, Cyclone Oswald caused considerable damage and disrupted rail services on its major Blackwater network. The impact is yet to be felt. Also, we believe the company is trading at high levels, leaving little room for error should any further adversities arise.

Carey Smith, Alto Capital

BUY RECOMMENDATIONS

Resolute Mining (RSG)

Chart: Share price over the year to versus ASX200 (XJO)

Annual gold production for 2012/13 is forecast between 400,000 and 420,000 ounces from its three mines at a cash cost of $840 an ounce. RSG, the second biggest gold producer on the ASX, is hedge free. Reserves and resources of 4.4 million and 9.8 million ounces respectively provide significant upside. Net cash exceeds $90 million.

Salmat (SLM)

Chart: Share price over the year to versus ASX200 (XJO)

As long as there are retailers, there will be junk mail catalogues and SLM is the dominant Australian force in this space. SLM announced it intends to return $40 million to shareholders after the recent sale of its BPO (Business, Process Outsourcing) division left the company debt free. With more than $60 million in excess franking credits available, we wouldn’t be surprised to see a special dividend of up to 25 cents announced soon.

HOLD RECOMMENDATIONS

Downer EDI (DOW)

Chart: Share price over the year to versus ASX200 (XJO)

The share price of this leading engineering and construction company has strongly rebounded in the past seven months on the back of a brighter outlook for the construction and investment markets. The share price increase may be a little over done in the short-term, but the company remains an attractive long-term proposition.

Telstra (TLS)

Chart: Share price over the year to versus ASX200 (XJO)

Australia’s dominant telecommunications company has seen its share price increase from $2.60 in 2011 to $4.60 levels in response to investors chasing income. With the dividend yield now about 6 per cent, we have lowered TLS’s investment rating to a hold. We believe the large capital gains of the past two years are a thing of the past.  But it’s still a good source of reliable income. 

SELL RECOMMENDATIONS

Lynas Corporation (LYC)

Chart: Share price over the year to versus ASX200 (XJO)

Much publicised opposition to its Malaysian processing plant in recent months has delayed cash flow generation. We believe it faces more problems and challenges and expect the share price to remain under considerable pressure. 

Aurora Oil & Gas (AUT)

Chart: Share price over the year to versus ASX200 (XJO)

The US oil and gas shale sector has proved to be a company maker, with its share price soaring since 2009 and its market capitalisation approaching $1.7 billion. Today’s share price implies that ongoing development of its oil and gas fields will progress perfectly without a hitch. For this reason, we suggest investors take profits.

Nathan Zaia, Morningstar

BUY RECOMMENDATIONS

Woodside Petroleum (WPL)

Chart: Share price over the year to versus ASX200 (XJO)

The oil and gas giant has successfully managed the development of LNG projects for more than 20 years. And in a world with a growing thirst for energy, combined with WPL’s low-cost advantage, this business is sitting pretty. Woodside’s growth prospects appear undervalued on a price/earnings ratio of about 15 times and a fully franked 4 per cent yield.

AMP (AMP)

Chart: Share price over the year to versus ASX200 (XJO)

AMP benefits from high market shares, a strong brand and relatively low costs. It timed the AXA acquisition superbly, with investment markets now improving and investor confidence starting to recover. The wealth management group’s leverage to equity markets will support strong growth in 2013 and 2014. 

HOLD RECOMMENDATIONS

Telstra (TLS)

Chart: Share price over the year to versus ASX200 (XJO)

Australia’s dominant telco is benefiting from customers willing to pay a premium for better coverage and speed. Investors have flown to Telstra in search of secure dividends. A fully franked dividend yield above 6 per cent is still attractive.

News Corporation (NWS)

Chart: Share price over the year to versus ASX200 (XJO)

The combination of its television production studios and national broadcast network provides the firm with a sustainable competitive advantage in creating video content. We also think the firm’s dominant cable networks are well positioned.

SELL RECOMMENDATIONS

BlueScope Steel (BSL)

Chart: Share price over the year to versus ASX200 (XJO)

In November, BlueScope guided it was approaching breakeven for the first half of 2013. Returning to sustainable profit will be challenging. BlueScope must deal with high Australian labour costs and low capital productivity. But unlike the miners, it hasn’t benefited from strong prices to offset these challenges.

Cabcharge Australia (CAB)

Chart: Share price over the year to versus ASX200 (XJO)

Cabcharge previously enjoyed a near-monopoly in taxi fare processing, but has been losing market share in recent years, largely due to the 2.5-to-4 per cent rebate for drivers offered by the third party operators. The current 10 per cent surcharge is also under heavy scrutiny. Lowering its service fees will put significant pressure on earnings.

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