Jabin Hallihan, Morgans
BUY RECOMMENDATIONS
Oz Minerals (OZL)
We believe the counter cyclical growth strategy will be rewarded as the Carrapateena copper-gold project is gradually de-risked in the next one to two years and can justify valuations closer to $12.50 a share upon successful commissioning. We believe recent price weakness has been driven by macro economic uncertainties, which will fade in time. The shares were priced at $9.335 on August 30.
PWR Holdings (PWH)
Chart: Share price over the yearPWH is a world leader in automotive cooling that delivers technically advanced solutions to elite motorsport customers, such as Formula 1 and NASCAR. The company has mostly overcome currency headwinds and higher investment costs in fiscal year 2017, and the future looks much brighter. Key growth opportunities include gaining a greater share of customer spending, partnering with manufacturers on high performance/low production run vehicles and penetrating more of the US automotive aftermarket.
HOLD RECOMMENDATIONS
Westpac Bank (WBC)
Chart: Share price over the year
WBC has a relatively low risk profile in terms of loan book positioning and a low reliance on treasury and markets income. The bank stands to benefit from re-pricing of investor home loans. We expect WBC to comfortably meet APRA’s (Australian Prudential Regulation Authority) capital benchmark through no discount dividend reinvestment plans.
Atlas Arteria (ALX)
ALX offers valuation support and strong potential distribution growth over coming years. French toll road APRR is ALX’s key asset. Cash flows are driven by growing toll revenues, cost containment, a substantial decline in debt service, legislated corporate tax rate cuts and a potentially declining Australian dollar against the Euro. In the next year or two, restructuring initiatives related to the APRR and Dulles Greenway may deliver further valuation accretion for shareholders.
SELL RECOMMENDATIONS
Santos (STO)
Chart: Share price over the yearA mixed first half 2018 result in our view, with the energy giant posting underlying net profit after tax of $US217 million (versus Morgans of $US325 million) and EBITDAX of $US883 million (versus Morgans $US918 million). STO has agreed to acquire Quadrant Energy for $US2.15 billion plus contingent payments. We expect the acquisition to offer synergies, while decreasing the company’s sizeable earnings/valuation sensitivity to oil prices. The downside, in our view, is the strain the acquisition places on STO’s recovering capital resources. Funding the deal in cash and new debt increases STO’s risk profile in the short to medium term.
ASX Limited (ASX)
Chart: Share price over the yearFull year underlying net profit after tax of $465.3 million was up 7.2 per cent on the prior corresponding period and broadly in line with consensus. A key positive was an 8 per cent increase in revenue, while higher cost growth guidance into fiscal year 2019 was the negative. We leave our fiscal year 2019 earnings per share forecasts largely unchanged, but lower 2020 earnings per share forecasts by 6 per cent on expected higher costs.
Tony Locantro, Alto CapitalBUY RECOMMENDATIONS
Dimerix (DXB)
Chart: Share price over the yearDXB has strengthened its management team by appointing Dr Nina Webster as CEO/MD. Two parallel clinical trials for DMX-200 are expected later this year, with the drug an adjunct therapy for chronic diabetic kidney disease. Phase 2a trials were released in July 2017 and were most encouraging.
Proteomics International Laboratories (PIQ)
Chart: Share price over the yearPIQ is nearing cash flow positive status. Licence deals have been announced for the PromarkerD test for diabetic kidney disease in the US and Mexico. The PromarkerD pipeline is expected to grow, with new studies into chronic obstructive pulmonary disease and endometriosis, which is said to affect about 10 per cent of women at some stage. PIQ has a market capitalisation of about $20 million, which we consider modest relative to the company’s growth potential on multiple fronts.
HOLD RECOMMENDATIONS
Red Metal (RDM)
Chart: Share price over the yearOz Minerals is set to drill around 6000 metres on RDM’s tenements in South Australia in search of major copper-gold deposits. New conductors have been outlined at the Maronan project for potential extensions to the resource, and drilling of these targets could enhance project economics. The new zinc acquisition along strike from the Dugald River mine in Queensland is another exciting development.
Mako Gold (MKG)
Chart: Share price over the yearDrilling so far has been mixed, with high grade results in some projects offset by another area falling short of expectations. This West African gold explorer is backed by Resolute Mining. Expect aggressive drilling in search of gold deposits after the wet season. Share price weakness also provides an opportunity to accumulate.
SELL RECOMMENDATIONS
Afterpay Touch Group (APT)
Chart: Share price over the yearAPT has been an outstanding performer in response to the millennial age group embracing its buy now, pay later scheme. The company has grown substantially in Australia and is now building a presence in the US. Trading on a lofty price/earnings ratio, amid competition and regulation risk, it might be prudent to lock in some profits.
Westpac Bank (WBC)
Chart: Share price over the yearI have long been concerned about Westpac’s interest only loan exposure. Given rising interest rates, likely falls in property prices, tighter lending conditions and the fallout from the banking Royal Commission, I believe the risk/reward profile of the Australian banking sector is unattractive.
Tony Paterno, Ord MinnettBUY RECOMMENDATIONS
Sims Metal Management (SGM)
Chart: Share price over the year
We believe the sell-off following the full year result provides a buying opportunity in this metal recycler. Only a conservative amount of growth is required on fiscal year 2018 to achieve our fiscal year 2019 EBIT forecasts. That’s assuming Sims achieves the full $20 million uplift from internal initiatives in fiscal year 2019 and a 10 per cent post tax return on capital related to $100 million of acquisitions in late fiscal year 2018.
Boral (BLD)
Domestic earnings will largely be driven by the success of road infrastructure spending and price increases in heavy construction materials. Clear signs have emerged, particularly in the eastern states, that activity has picked up in the road infrastructure space. With respect to price increases, demand conditions appear to support stronger realisation compared to previous years. Offshore, BLD’s acquisition of US firm Headwaters will be a key driver of future growth.
HOLD RECOMMENDATIONS
Ansell (ANN)
We believe its portfolio of growth brands is performing well and driving sound top line growth. But cost pressures appear to be eroding benefits from the top line on earnings. In our view, Ansell offers modest mid-term earnings growth, but we believe this outlook is reflected at current prices. Shares in the rubber gloves maker closed at $25.10 on August 30.
Crown Resorts (CWN)
Australian VIP turnover is rapidly recovering. Asset sales enable Crown to focus on its core casino operations without balance sheet pressure. It has a net cash position. Capital investment in Sydney’s Barangaroo hotel resort, expected to open in 2021, is a long term growth driver.
SELL RECOMMENDATIONS
Link Administration Holdings (LNK)
Simplifies the administration of financial services through technology. We expect near term earnings growth to be driven primarily by cutting costs. On an underlying basis, through the cycle, we see this as a steady business with a largely recurring, but low growth earnings stream of about 3 per cent to 4 per cent. In the near term, however, there are earnings risks to our forecasts due to new measures in the Federal Budget, which we believe are likely to lead to significant account consolidation.
Monadelphous Group (MND)
We believe this engineering contactor is likely to experience significant headwinds in fiscal year 2019 as large LNG-related oil and gas contracts roll off. But it’s well positioned to benefit from recovering mining capital expenditure and the company has a strong net cash balance sheet. But the stock trades at a premium valuation and we see risks to consensus.
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