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Natural disasters do have a silver lining for investors. The recent floods and cyclone in Queensland is a case in point, where rebuilding stricken regions will provide a lot of work for ASX-listed companies. Chris Elliott, principal private client adviser for Shadforth Financial Group, says the estimated damage bill from the “summer of natural disasters” is expected to be more than $5.8 billion. “Any initial slow down will be more than offset by a recovery spend needed to get Queensland back on its feet,” he says. “I have looked at the industrials sector for companies that should benefit from assisting communities in rebuilding Queensland,” he says.

The industrials sector consists of about 200 companies in three categories – capital goods, commercial and professional services and transportation. Total market capitalisation for the sector in early April was about $115 billion. The sector for the 12 months to March 31, 2011 has been a disappointing performer, posting a negative annualised return of 4.95 per cent compared to an S&P/ ASX 200 negative annualised return of 0.77 per cent, according to Standard & Poor’s. However, as investing is about looking forward, Elliott’s selective stock picks, while not recommendations to buy, can be considered for potential long term value.        

CSR Limited (CSR)

Chart: Share price over the year to 08/04/2011 versus ASX200 (XJO)

Share price: $3.33
Market capitalisation: $1.69 billion
Forecast 2012 dividend yield: 6.7 per cent (fully franked)
Forecast 2012 price/earnings: 10.5 times

As fate would have it, offloading its sugar division turned out to be a blessing as the state’s far north sugar cane regions were ravaged by a cyclone. CSR now focuses on making and suppling building products in Australia and New Zealand and operates Australia’ s second largest, but one of the world’s lowest costs, aluminium smelters. Elliott says the company offers a strong balance sheet after selling its sugar division. “With the potential to participate in rebuilding Queensland via building products and Viridian glass operations, we are forecasting earnings per share growth of 144 per cent in 2012,” Elliott says. “CSR represents good buying for growth and yield.”

Leighton Holdings (LEI)

Chart: Share price over the year to 08/04/2011 versus ASX200 (XJO)

Share price: $28.94
Market capitalisation: $8.8 billion
Forecast 2012 dividend yield: 5 per cent (fully franked)
Forecast 2012 price/earnings: 14.7 times

Australia’s largest engineering services contractor has major infrastructure, contract mining and construction businesses locally, in the Persian Gulf and in Asia. “The extent of the damage to infrastructure and mining assets in Queensland gives Leighton, via its subsidiaries Thiess and John Holland, the opportunity to offset any potential slow down in the Middle East,” Elliott says. He says competitive advantages include construction and contract mining experience, a sound balance sheet and a dominant local market share. Elliott sees the only major risk to growth is delays in the tendering process at state and federal government levels.

United Group (UGL)

Chart: Share price over the year to 08/04/2011 versus ASX200 (XJO)

Share price: $16.26
Market capitalisation: $2.68 billion
Forecast 2012 dividend yield: 5.1 per cent (fully franked)
Forecast 2012 price/earnings 14.1 times

UGL is a diversified group providing specialised engineering and maintenance and facility management services in water, power, rail and other essential infrastructure. Elliott says the need to rebuild Queensland’s infrastructure paints a bright outlook. “I see benefits arising from its service divisions, with workshops in Brisbane, Gladstone and Mackay, and its partnership alliances within UGL Infrastructure, including QR National and Leighton’s Thiess,” Elliott says. Financial management is sound, with the company generating strong cash flow amid moderate gearing levels.

Skilled Group (SKE)

Chart: Share price over the year to 08/04/2011 versus ASX200 (XJO)

Share price: $2.15
Market capitalisation: $475 million
Forecast 2012 dividend yield: 3.4 per cent (fully franked)
Forecast 2012 price/earnings: 11.1 times

Skilled provides labour hire and staffing services to a broad range of industries, with operations in many Queensland-affected areas. While earnings are highly exposed to the economic cycle, the company will benefit via a growing business trend to outsource non-core activities and the need for skilled labour in Queensland. “As the economic outlook improves and demand for labour increases, I expect Skilled to experience a recovery in earnings,” Elliott says. “Exposure to resources, oil and gas offers growth opportunities.” Elliott says debt has been reduced following the recent equity raising.

GWA Group (GWA)

Chart: Share price over the year to 08/04/2011 versus ASX200 (XJO)

Share price: $3.29
Market capitalisation: $992 million
Forecast 2012 dividend yield: 5.8 per cent (fully franked)
Forecast 2012 price/earnings: 12.9 times

With its head office in Brisbane, Elliott says GWA Group is a leading manufacturer and distributor of building and household fittings. The company has strong brands in not overly competitive markets. “GWA is a reliable cash generator and offers healthy margins and limited capital expenditure requirements, though earnings are buffeted by residential and commercial building cycles,” Elliott says. “With the residential and commercial rebuild occurring throughout Queensland, GWA is well placed to benefit from its strong brands.”

*Share price close at April 6, 2011.  Market capitalisation, forecast 2012 dividend yield and forecast 2012 price/earnings at April 4, 2011.

 

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