18 Share Tips – 8 October 2013

Darren Jackson, Calibre Investments

BUY RECOMMENDATIONS

Challenger (CGF)

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

Challenger’s funds management division performed extremely well in fiscal year 20113.  Funds under management increased 33 per cent and normalised earnings were up 62 per cent. We expect outperformance to continue in response to an increase in the superannuation guarantee levy and record highs in equity markets making for strong tailwinds.

CSL (CSL)

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

This blood products group is a stellar performer. Revenues grew and, with the help of a share buyback, earnings per share were up by 24 per cent. Recently trading on 24 times earnings, this may be considered quite cheap to the usual premium enjoyed by the company in the past year.

HOLD RECOMMENDATIONS

Kathmandu Holdings (KMD)

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

Kathmandu proves that traditional retailing, if done properly, can still be lucrative. In fiscal year 2013, Kathmandu achieved record sales and profit, while gross profit margin was an enviable 63 per cent. The new store rollout for 2014 will help to deliver future growth. Offers strong relative value to other retailing peers.

G8 Education (GEM)

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

G8 Education has been a great growth story, successfully expanding childcare centres in Australia and Singapore. The company recently completed a large capital raising to finance the purchase of more childcare centres. The purchase was done at a low earnings multiple, so it should be earnings accretive to the company.

SELL RECOMMENDATIONS

Harvey Norman (HVN)

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

Arguably Harvey Norman is fully priced. The company isn’t delivering growth, with like-for-like sales down 1.5 per cent on the previous year. The absence of growth comes at a time of higher disposable income due to record low interest rates.

Woodside Petroleum (WPL)

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

We recommended a buy in May 2013. We are now recommending investors take profit. A possible tapering of quantitative easing in the US may switch investor focus from yield to growth. More importantly, oil prices have considerably eased since their two-year highs.

Andrew Arvanitopoulos, Alpha Securities

BUY RECOMMENDATIONS

NIB Holdings (NHF)

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

The recent full year 2013 report shows NIB Holdings achieved a return on equity of 22 per cent, which has been gradually improving over time, from a low of 6.9 per cent in 2008. The share buyback scheme has seen earnings per share marginally improve for this health fund. The change of government should provide opportunities for further expansion going forward.

The Reject Shop (TRS)

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

The Reject Shop’s full year 2013 result reveal a return on equity of 18 per cent, which is expected to grow through operational efficiencies targeted in coming years. The company operates on minimal debt, with a focus on organic growth. We forecast earnings per share and underlying new profit growth to double over the next three-to-four years, which should translate into significant share price and dividend growth.

HOLD RECOMMENDATIONS

Sydney Airport (SYD)

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

Sydney Airport reported strong international passenger growth in August, increasing 5.6 per cent on 2012 numbers. For the first six-months of 2013, the group reported a rise in revenue to $538 million, up 6.8 per cent on the corresponding period. In the year-to-date, total passenger numbers travelling through the airport are up 3.1 per cent.

Brickworks (BKW)

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

Brickworks recently reported an 8.8 per cent lift in revenue to $606.5 million and a 26.9 per cent increase in normalised net profit after tax to $100 million. This translated into a 26.7 per cent increase in earnings per share to 67.7 cents and led the board to declare total dividends in line with the prior year of 40.5 cents a share.

SELL RECOMMENDATIONS

Treasury Wine Estates (TWE)

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

The shares declined after chief executive David Dearie announced he was leaving immediately. Whether a new CEO can fix the company’s US issues remains to be seen, but it seems TWE is at a disadvantage in the US market. It may be too small to compete effectively with its much larger rivals.

David Jones (DJS)

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

David Jones has made progress in addressing structural challenges, but this isn’t yet reflected in earnings. Sales are declining and the gross margin improvement has slowed. We also anticipate earnings will continue to decline in full year 2014 before turning around in 2015.

Charles Thomas, Bell Potter Securities

BUY RECOMMENDATIONS

Bega Cheese (BGA)

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

Supplies dairy products and has a presence in more than 40 countries. Bega Cheese is a unique exposure in the dairy segment, with a high level of contracted volumes underpinning a more consistent returns profile than is typically associated with an agricultural investment. Offers share price upside.

Vocus Communications (VOC)

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

In our view, Vocus is well positioned in cloud services, with extensive infrastructure and colocation facilities to host these services. The heavy lifting in terms of sizeable capital expenditure and network expansion is largely behind the company and there’s plenty of leverage on offer should VOC continue to grow capacity across its network. Our price target is $3. The shares were trading at $2.67 on October 2.

HOLD RECOMMENDATIONS

Sydney Airport (SYD)

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

We downgrade Sydney Airport to neutral on recent outperformance. With the share price nearing our valuation, we see upside potential limited in the near term. Sydney has outperformed the ASX 200 index by 25 per cent since early March. We continue to like Sydney’s unique positioning, its yield and growth outlook.

Regis Resources (RRL)

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

The recent fall in RRL’s price broadly aligns with our valuation metrics on a revised fiscal year 2014 earnings basis. Therefore, we upgrade our recommendation to a hold, acknowledging that 2014 will continue to be a transition year, with the Duketon gold project nearing its full potential by fiscal year 2015 (with the addition of Erlistoun and Rosemont in production). The risks to our hold recommendation include further Australian dollar gold price volatility and the possibility of management participating in further value accretive corporate activity.

SELL RECOMMENDATIONS

RCR Tomlinson (RCR)

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

RCR’s acquisition of Norfolk Group signals a significant change in earnings composition away from resources to infrastructure. However, this has been more than reflected in a significant re-rating of the business. Management has a terrific track record in turning around and growing contracting businesses. However, RCR is trading at a significant premium to its peer group, so we have downgraded to a sell.

Virtus Health (VRT)

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

Virtus, which specialises in fertility care and related services, has passed its latest test as a listed entity – its fiscal year 2013 result comfortably delivered on the prospectus forecast earnings. Based on slowing IVF growth in the recent Medicare statistics, this, in our view, may dampen growth expectations for VRT. Recently trading on an aggressive price/earnings multiple of 20.1 times for fiscal year 2014 is also behind our sell recommendation.

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18 Share Tips – 8 October 2013: 18 Share Tips to BUY, SELL & HOLD from…

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