Peter Moran, Wilson HTM
BUY RECOMMENDATIONS
Oil Search (OSH)
Chart: Share price over the year versus ASX200 (XJO)
We have lowered our oil price assumptions, but still see the Papua New Guinea LNG project as offering an internal rate of return of 19 per cent. We expect the market will increasingly focus on the significant earnings and cash flow uplift to come from the project in coming years. Additionally, further drilling may provide near term upside. The shares are trading at a big discount to our $10 price target. The stock closed at $8.53 on November 12.
Boral (BLD)
Chart: Share price over the year versus ASX200 (XJO)
We believe construction materials and cement revenue is likely to be flat next year. But we see upside in the US business, which we expect to return to EBIT break-even before becoming profitable in 2016. We believe the improvement in the US amid falling costs will provide strong growth in Boral’s profitability.
HOLD RECOMMENDATIONS
Credit Corp Group (CCP)
Chart: Share price over the year versus ASX200 (XJO)
The share price jumped following a positive AGM update, where the company confirmed net profit after tax guidance of between $36 million and $38 million for fiscal year 2015. While the announcement is positive, it only confirms our previous forecasts. With the share price approaching our $10.61 price target, we have downgraded to a hold. The shares were trading at $10.29 on November 13.
Macquarie Group (MQG)
Chart: Share price over the year versus ASX200 (XJO)
Macquarie Group’s first half 2015 NPAT of $678 million was 5 per cent above our forecast and well above guidance of between $625 million and $650 million. This was partly due to the timing of bringing some transactions forward from the second half. Macquarie expects fiscal year 2015 NPAT to be up marginally on 2014. The share price is trading in line with our valuation.
SELL RECOMMENDATIONS
Challenger (CGF)
Chart: Share price over the year versus ASX200 (XJO)
Challenger’s sales slowed in the first quarter with retail annuity sales falling 3 per cent on the previous corresponding period. We have retained our forecasts of 13.2 per cent growth for the full year, with seasonally stronger sales expected in the second half. However, we’re now more cautious about fiscal year 2015 sales growth. Our main concern continues to be the sustainability of margins over the medium term.
Treasury Wine Estates (TWE)
Chart: Share price over the year versus ASX200 (XJO)
The US wine market has improved a little and the lower Australian dollar also helps. However, on a recent fiscal year 2015 price/earnings multiple of more than 22 times, we believe investors are expecting too much of a turnaround too quickly. In an industry that is still struggling, we retain a sell recommendation.
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Carey Smith, Alto Capital
BUY RECOMMENDATIONS
QBE Insurance (QBE)
Chart: Share price over the year versus ASX200 (XJO)
This big insurer offers good value for long term investors at current levels. The fall in the Australian dollar and previous asset writedowns are expected to increase profitability going forward. We are forecasting strong profit results for 2015 on the back of increasing interest rates in the US and the falling Aussie dollar.
Legend Corporation (LGD)
Chart: Share price over the year versus ASX200 (XJO)
This engineering solutions provider to the electrical, information technology, semiconductor and medical industries produces excess cash from its operations, enabling the company to pay large dividends. Recently trading on a price/earnings multiple below 8 times and a fully franked dividend yield above 8 per cent, we believe the company offers good value.
HOLD RECOMMENDATIONS
Metcash (MTS)
Chart: Share price over the year versus ASX200 (XJO)
The third force in Australian food retailing provides marketing and distribution services to 2500 independent grocery stores across Australia. The stocks suits conservative investors attracted to the defensive nature of the sector and a decent fully franked dividend yield of about 6 per cent.
Newcrest Mining (NCM)
Chart: Share price over the year versus ASX200 (XJO)
Australia’s premier gold miner has experienced a painful share price decline over the past three years. But recent completion of two major growth projects, Cadia East and the Lihir upgrade, should see substantial increases in gold production. We consider fair value is around $10 levels.
SELL RECOMMENDATIONS
Ramsay Health Care (RHC)
Chart: Share price over the year versus ASX200 (XJO)
The share price of Australia’s premier and largest private hospital operator has quadrupled since 2010, as investors switched into defensive and yield stocks. We believe the share price has significantly overshot fair value as it was recently trading on a price/earnings ratio above 25 times and a dividend yield below 2 per cent.
APA Group (APA)
Chart: Share price over the year versus ASX200 (XJO)
This energy transport infrastructure owner carries more than 50 per cent of Australia’s natural gas through its pipelines. About 90 per cent of the group’s revenue is generated from regulatory controlled assets or long term contracts, which reduces earnings volatility. But, in our view, the share price has significantly overshot fair value as investors continue to chase yield plays.
Peter Day, Macquarie Private Wealth
BUY RECOMMENDATIONS
Genworth Mortgage Insurance Australia (GMA)
Chart: Share price over the year versus ASX200 (XJO)
Third quarter underlying net profit of $70.2 million sees GMA raise its full year target to between $250 million to $270 million. The increased full year 2014 target was driven by a lower claims ratio of 21.4 per cent. The full year 2014 claims ratio target has been lowered from between 25 per cent to 30 per cent to between 20 per cent to 25 per cent. Supportive underlying operating conditions and capital in excess of targets support our outperform rating.
Karoon Gas (KAR)
Chart: Share price over the year versus ASX200 (XJO)
KAR has spudded the Kangaroo-2 appraisal well, the first of a two firm contingent well program in the Santos Basin, Brazil. We believe drilling will confirm the 135 million barrel resource estimate and help resolve lingering uncertainties surrounding the gas cap, reservoir quality and deliverability. We retain our outperform recommendation.
HOLD RECOMMENDATIONS
National Australia Bank (NAB)
Chart: Share price over the year versus ASX200 (XJO)
NAB’s strategy is clear and we believe it’s the right one. However, the sector is expected to experience the largest “capital call” in recent memory from the Murray Review, which will cast a cloud over the return on equity trajectory of the big four banks. We suspect this issue will lead to softness in NAB’s and the sector’s share prices. The only reprieve is likely to come from swift execution on its divestment enhancement plan, particularly in the UK.
News Corporation (NWS)
Chart: Share price over the year versus ASX200 (XJO)
We recently upgraded our recommendation to neutral from underperform to reflect improving value for shareholders after a fall in the share price. While the outlook remains challenging, operational trends should improve in fiscal year 2015.
SELL RECOMMENDATIONS
Westpac Bank (WBC)
Chart: Share price over the year versus ASX200 (XJO)
The full year 2014 result was solid although the second half showed several signs of softness. Looking forward, the bank appears to be increasing its capital intensity at a time when capital requirements are expected to go up. WBC appears to be the bank that may well be hit the hardest in terms of upcoming macro-prudential changes, spoiling its hard won mortgage growth momentum.
Wesfarmers (WES)
Chart: Share price over the year versus ASX200 (XJO)
Supply chain rationalisation is generating efficiency benefits, which are being ploughed back into retail discounting. But management is expecting the turnaround of the underperforming liquor division to take as long as five years.
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