Some fund managers look for “bargain priced” value stocks; others look for growth, speculating on expected increases in earnings. And some fund balance value and growth. The Invesco Smaller Companies Fund takes such a balanced approach. According to lead portfolio manager Cynthia Jenkins, “The team’s fundamental approach seeks to identify mispriced and often undiscovered companies that are expected to achieve a rate of earnings growth that is superior to the market over the longer term.” The fund was highly rated by Standard & Poor’s last year; however, S & P analyst Andrew Yap noted that “there is a partial disconnect between this manager’s short-term valuation approach and its longer-term investment focus. This may be mitigated should the manager take a longer-term view on forward earnings, to fully capture the key company drivers and stock-specific risks identified during the qualitative review process.”

Jenkins says that mining and exploration are not favoured sectors. She says that as value investors they want sustainable earnings, and given a large portion of the resources market is exploration, it doesn’t have a sustainable earnings and needs constant capital raising.

Yet the fund’s April report suggested that Jenkins and her team weren’t too terribly opposed to investing in resources. Metals and mining stocks made up 24.27% of the fund’s portfolio, the single largest sector and just 3.19% less than the benchmark S&P/ASX Small Ordinaries Accumulation Index for that sector. The fund is, however, noticeably underweight in energy stocks, with only 0.98% of portfolio in the energy sector, compared with 14.44% for the benchmark index.

Invesco Smaller Companies is overweight in a diverse pool of securities, led by mining services company Ausdrill Ltd (ASL). Other overweight positions include Ramsay Health Care, Adelaide Brighton (construction materials), Mermaid Marine Australia (MRM) (marine services) and Atlas Iron (mining).

Ausdrill (ASL)


Chart: Share price over the year to 10/06/2011 versus ASX200 (XJO)

On May 17, Invesco became a 5% shareholder of Ausdrill. This appears to have been a good move, as JP Morgan and RBS Australia both initiated coverage of Ausdrill last week with buy ratings. This brings the number of brokers in the FNArena database covering Ausdrill to four, all of whom rate the stock a buy. The company is heavily focused on the gold and iron ore mining industries. JP Morgan, which expects a recent equity raising to enable additional capital investment, targeted the company’s share price at $4.17. This brings the consensus target up to $3.99. RBS noted that 65% of the company’s revenues come from customers at the production stage, protecting ASL against price volatility.

‘Ausdrill’s business has experienced strong growth in recent years and, assuming continued strength in the resources sector, Ausdrill anticipates a high level of tender activity in the next 12 months,’ the company said in April in anticipation of the equity raising. RBS forecasts 13-16% revenue growth across FY12-FY12; JP Morgan expects earnings per share to grow 20% in FY12.

Graeme Carson, Senior Industrial Analyst for Patersons, said that Ausdrill “expected to report a solid interim earnings result later this month following renegotiation of some key contracts previously operated by Brandrill as well as an earlier recommencement of exploration drilling operations in the New Year due to high demand.” Carson added, “The company is well and truly emerging as a dominant force in Australian and African contract mining services and the growth outlook is underpinned by the gold and iron ore-dominated order book.”

Ramsay Health Care (RHC)


Chart: Share price over the year to 10/06/2011 versus ASX200 (XJO)

Ramsay Health Care, our “Bull of the Week” on May 15th, reported profits of $102.8 million for the six months to December 31, 2010, rising from $78.6 million in the previous corresponding period. Revenue rose 10.7 per cent to $1.9 billion for the latest six month period.

RHC reported that margin improvement was a result of organic growth and a continued focus on costs. Demand is expected to continue due to positive demographics (aging population) and a stable operating environment.  The private hospital sector is also an integral part of the Australian health care system given it treats more than 40% of all patients who go to hospital, and receives bipartisan political support for strong private sector that is expected to continue. Regulatory risk remains in Australia as the means testing the Private Health Insurance rebate issue continues.

For FY 2011 RHC reaffirmed its guidance for group core NPAT growth of 22%-24% which translates to core EPS growth of 18%-20%.

Michael Heffernan of Austock, who has a buy recommendation on Ramsay Health Care, following the 30.8 per cent increase in net profit after tax to $102.8 million for the six months to December 31, 2010 commented that RHC “should continue doing well in light of the immense pressure on the public hospital system and an ageing population. Its share market fundamentals are attractive.”

According to Reuters data there are currently 3 analysts with buy recommendations, 2 with outperform ratings, 11 hold ratings, 0 underperform and only 1 sell recommendation.  This is unchanged from 2 months ago.

Adelaide Brighton (ABC)


Chart: Share price over the year to 10/06/2011 versus ASX200 (XJO)

Cement and lime manufacturer Adelaide Brighton Ltd says it expects full year profit to be in line with 2010, despite a weaker first half.

The company says it’s confident there are good opportunities for long-term growth of shareholder returns, despite the mixed and uneven economic conditions.

‘At present we expect first half 2011 net profit after tax to be weaker than that in the first half of 2010,’ managing director Mark Chellew told the company’s annual general meeting in Sydney.

‘However, along with the price increases in our lime business and expected recovery in the concrete and cement markets in South Australia and Western Australia in the second half due to the timing of projects, we expect net profit after tax for 2011 to be similar to 2010,’ Chellew said.

‘In 2011, we expect the national demand for cement and concrete volumes across Australia will be similar to last year, although there are a number of risks to the business.’

Weakness in the concrete masonry market was expected to continue in 2011, due to difficult conditions in the commercial and the multi-residential segments and the end of a large federal government building program.

Following the earnings guidance, Patersons left its recommendation for Adelaide Brighton at ‘hold,’ the dominant sentiment among analysts. Patersons noted that “Adelaide Brighton is trading on a medium term PE Multiple of 11 – 12 times with forecast EPS growth of 5 – 10% pa which we view as appropriately priced. The share price is in-line with our valuation.”

Mermaid Marine Australia (MRM)


Chart: Share price over the year to 10/06/2011 versus ASX200 (XJO)

Mermaid Marine Australia is the country’s largest marine services provide to the offshore oil and gas industry. In May, Credit Suisse upgraded Mermaid Marine to ‘outperform’ from ‘neutral.’ The company announced this week that it had won two contracts worth $60 million to provide offshore marine services to Woodside Ltd.’s WA operations. Managing director Jeff Weber said the charter of the Mermaid Sound and Mermaid Strait vessels to Woodside was a strong endorsement of the company’s operating capability.

The contracts are both for a term of three years firm, with two options of one-year each. The Mermaid Sound will commence its new contract on 15 June 2011. The Mermaid Strait is currently under construction and is expected to be delivered in April 2012. The $60 million figure represents the combined contract value for the firm period, with further upside should the options be exercised.

Earlier this year, the company reported a small increase in profits for the six months to December 31, 2010. This followed a none-off capital expenditure tax benefit. At that time, Weber predicated a stronger second half performance, based partly on recent contract wins such as a December 2010 contract to provide supply base services to Chevron.

Atlas Iron (AGO)


Chart: Share price over the year to 10/06/2011 versus ASX200 (XJO)

Brokers gave Perth-based Atlas a thumbs up, recognizing its rapid but well-managed growth. ‘We believe Atlas Iron’s track record of ramp-up and further capital-light growth potential position it well,’ Macquarie analyst Martin Stulpner said in a client note.

‘Atlas Iron is differentiated (from its peers) by the simplicity of its production model, taking advantage of low strip ratio mines that are located close to the port. This results in relatively low cash cost, despite the relatively cumbersome transport model of hauling ore by truck on public roads.

In upgrading the miner to “outperform,’ Macquarie put a 12-month target of $4.10 on Atlas.

Paterson’s James Georges, who gave Atlas a ‘buy,’ said, “An excellent track record of resource growth and low capital expenditure requirements instils confidence.” However, Georges cautioned, “single commodity exposure dependent upon Chinese demand increases risk. The shares are only suitable for risk tolerant investors.”

Atlas Iron has signed an agreement to expand capacity at its Wodgina iron ore mine in the Pilbara by 75 per cent to 7 million tonnes per annum, the West Australian reported. That will take the company’s total capacity to 9mtpa as Atlas aims to grow total production to 12mtpa by December 2012.

Atlas said it had entered into a six-year infrastructure agreement with Global Advanced Metals, which owns infrastructure at the Wodgina tantalum mine site, giving the iron ore miner access to a range of infrastructure including the crushing and screening plant.

>>Back to the newsletter to view other articles – June 13th 2011

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