18 Share Tips – 23 May 2016

Matthew Litchfield, PhillipCapital

BUY RECOMMENDATIONS
 
Tesserent (TNT)

This specialist managed cyber security firm recently announced the acquisition of Blue Reef, a provider of cyber security solutions. TNT says the acquisition will add new customers, is cash flow positive and earnings accretive, will strengthen the leadership team and increase its exposure through new partnerships. Given cyber security is becoming increasingly important in the corporate sector, I expect TNT to benefit.

JB Hi-Fi (JBH)

Chart: Share price over the year
On May 19, JBH confirmed it was holding preliminary discussions with retail chain The Good Guys in relation to a proposed sale of The Good Guys. JBH said it had made no decision, nor had it entered into any agreement to acquire The Good Guys. Nevertheless, JBH has been performing well. The 2016 Federal Budget included measures to support small to medium sized businesses, such as the $20,000 instant asset write off. Accordingly, we expect JBH to be a beneficiary. JBH has developed a solid network, offers a strong brand and enjoys customer loyalty.
 
 
HOLD RECOMMENDATIONS
 
APA Group (APA)

Given the low interest rate environment, APA is set to benefit due to a decent dividend and stable growth over time. Recently, APA acquired the Diamantina Power Station and is in the process of taking over the Ethane Pipeline Income Fund. This acquisition will increase its portfolio of gas and infrastructure assets, while enhancing its footprint.
 
CSL (CSL)

CSL’s scale and innovation success within an oligopolistic industry underpin growth for this biopharmaceutical company. We expect product innovation to drive high single digit top line growth. The ageing population in many countries and rising wealth levels will continue to drive demand for CSL’s blood plasma products.
 
 
SELL RECOMMENDATIONS
 
AMP (AMP)

AMP’s share price performance in the past five years has been flat. First quarter cash flow fell 38.9 per cent at its Australian wealth management unit and total assets under management decreased by 2 per cent. Better opportunities exist elsewhere.
 
Orica (ORI)

Profit was down in the first half and the dividend was also cut from 40 cents to 20.5 cents. Apart from a disappointing result, the outlook for this explosives and mining services company still looks cloudy given decreasing volumes and structural headwinds in the mining industry.

Michael Gable, Fairmont Equities

BUY RECOMMENDATIONS

Bellamy’s Australia (BAL)

Shares in this organic infant formula company traded below $9 a few weeks ago before bouncing back. We can see the downside momentum is slowing down. Interestingly, when it bounced from the lows a few weeks ago, it formed a hammer on a weekly candlestick chart, which is a reversal signal. With BAL well supported at $10, we believe the share price will head higher again. The first resistance level is between $13 and $14. 

Gateway Lifestyle Group (GTY)

Offers designer homes in a community environment. Price action is looking positive. It listed in June 2015 and began trending higher. The stock was tracking sideways in March and early April before breaking out about month ago. If GTY can hold above $2.70, then it should move up, possibly to a new high towards $3.10. The shares were trading at $2.755 on May 18. 

HOLD RECOMMENDATIONS

Austal (ASB)

It hit a low earlier this year on large volume before bouncing back to form a piercing pattern on the candlestick chart. This indicates an exhaustion of sellers and a reversal. We have also seen buy signals triggered on the relative strength index and the moving average convergence divergence. Since that low in January, ASB has been trending higher, making higher highs and higher lows. Current levels offer good support for ASB, and we believe it should head higher until it hits resistance near $1.80. Shares in the ship builder were trading at $1.42 on May 18.

Crown Resorts (CWN)

Price action looks interesting against a backdrop of CWN selling down its Macau stake and privatisation rumours. Since last year’s low, CWN has been making higher lows, but hasn’t been making higher highs. However, any strong close above mid $12 levels should be viewed as a positive. If that happened, we see a projected target towards $15. The shares were trading at $12.04 on May 18.

SELL RECOMMENDATIONS

Orora (ORA)

In January, we recommended ORA here as a hold when it was near $2.20. Now that it’s moved towards $2.80, the stock looks overbought on the chart and is now trading well above consensus targets. We are profit takers in this global packaging company and will look at it again on any weakness. The shares were trading at $2.71 on May 18. 

Cochlear (COH)

A breakout lifted the stock from below $90 in November 2015 to above $110 in early May 2016. The chart looks toppy and, in our view, the stock is getting expensive. We can see downside risk towards $100 again, so it may be time to lock in some profits. The hearing implants maker was trading at $118.52 on May 18.

Simon Herrmann, wise-owl.com

BUY RECOMMENDATIONS 

Heron Resources (HRR)

Heron offers speculative exposure to the zinc mining industry. We’re attracted to the company’s licensing and funding position, the high grade nature of the Woodlawn project and the ability to rapidly take the asset into production. While existing metal prices and project finance are the risks, major zinc mine closures are laying the foundations for a price recovery. A speculative buy. 

Pacific Smiles Group (PSQ)

Earnings for this dental care company have consistently increased since 2008 at a compound annual growth rate of 22 per cent. Focusing on organic growth, the company’s target is to open 10 additional dental centres a year. Management has a strong track record of strategically expanding the company portfolio, while maintaining a strong balance sheet.

HOLD RECOMMENDATIONS

MACA (MLD)

This mining and civil construction company is generating free operating cash flow and its order book of about 2 times revenue provides good financial visibility at the bottom of the industry cycle. A strong balance sheet enables counter cyclical acquisitions, while an increasing focus on gold projects positions the company to benefit from any cyclical recovery. It offers a favourable risk to reward ratio. 

OZ Minerals (OZL)

Offering diversified exposure to the copper and gold industry, OZL has a strong history of generating free operating cash flow at its Prominent Hill mine. The pre-feasibility study at the Carrapateena exploration project is progressing towards completion and construction has commenced. Continue holding, as the stock is tracking as expected. 

SELL RECOMMENDATIONS

Western Areas (WSA)

While most commodity prices have risen since the start of the year, nickel continues to underperform, resulting in a challenging environment for WSA. In the past 12 months, nickel prices on the London Metals Exchange have fallen by almost 40 per cent. There’s upside for WSA, but we would want to see evidence of a technical rebound. Better opportunities exist elsewhere. 

Thorn Group (TGA) 

We retain our sell recommendation. Competitors in the consumer leasing and finance space have underperformed as well. We remain bearish about the industry and Thorn Group’s latest profit downgrade reaffirms our view.

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