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Paladin (PDN)

 Closing price $2.56
 Weekly change +$0.14
 % change +5.8%

 

Citigroup – upgrade from HOLD to BUY

Raymond James – BUY

RBS Dominion Securities – BUY

Paladin Energy – a uranium exploration company with projects in Australia and Africa – has been hammered since the disaster in Japan, tumbling from $5.00 in March to a 12-month low of just $2.29 earlier this week. After a tough beginning to this week when it hit an 12-month lowe, it has since rebounded off this low, jumping 8.7% on Wednesday and a further 10.4% on Thursday after Citi upgraded the stock from a hold to a buy. Friday saw the stock retreat $0.10, or 3.8% on profit taking.

Although it’s obvious that the meltdown in Japan didn’t exactly help uranium stocks, it was the reported change in policy from the Namibian Government for the development of minerals that turned the share price slide into a rout. Paladin’s wholly owned Namibian subsidiary company, Langer Heinrich Uranium operates mines integral to PDN’s earnings in Namibia.

One thing’s for sure, the market didn’t listen to Paladin’s MD John Borshoff when he announced to the market on May 11, 2011 that ‘the proposed changes to Namibian Mineral Policy will not affect Paladin interests,’ with the share price tumbling a further 10% over the following three days.

‘The Company welcomes the media statement released by the Minister yesterday clarifying the proposed
changes to The Minerals Act. In his statement he advised: ‘The existing exploration and mining licenses will not be affected.’ Importantly Mr Katali also stated that the proposed changes should in no way be construed to indicate that the Government of Namibia intended to nationalise the mining industry,’ wrote Borshoff in an ASX release. “Paladin is a significant investor and employer in Namibia and the Company was pivotal in pioneering the renaissance of the Namibian uranium industry. Paladin continues to invest heavily in Namibia, with Stage 3 expansion of Langer Heinrich nearing completion and preliminary planning well advanced for Stage 4, which would double production of LHUPL by 2015. The removal of any doubt over sovereign risk in relation to Paladin’s interests in Namibia is very welcome and paves the way for continued significant investment,’ he said.

Although uranium stocks – and the arguments of nuclear power advocates in Australia – have taken a severe hit since the Japan nuclear disaster in March, analysts have counselled against hasty selling. Raymond James mining analyst Bart Jaworski is bullish on the sector and PDN specifically. “We have updated our outlook on uranium supply/demand fundamentals and, after revisiting our reactor model and making adjustments to our projected reactor build-out per region, our outlook beyond 2011, to our surprise, remains fairly bullish,” he says.

Jaworski’s top picks in the sector are Hathor Exploration (HAT) and Paladin Energy (PDN), predicting improved performance in uranium toward the end of the year. “We continue to believe that the uranium industry will again find its legs and that the public perception of nuclear power will shift positively,” Jaworski wrote in a recent report. Adam Schatzker, an analyst at RBC Dominion Securities, also rated Paladin as a top pick.

Based on Thomson Reuters data, 35% of analysts have a buy on PDN, 53% have a hold and 12% have a sell.

 

Chart: Share price over the year to 24/06/2011 versus ASX200 (XJO)

Stock code: PDN

Charts: Paladin Energy Limited

More news: Paladin Energy Limited

 

SMS Management & Technology (SMX)

 Closing price $6.22
 Weekly change +$0.17
 % change +2.8%

 

RBS – upgrade from HOLD to BUY

Lincoln Indicators – BUY

Morningstar – BUY

Patersons – BUY

SMS Management & Technology is an IT services company that provides consulting services to a diversified portfolio of government and private sector clients. The company specialises in improving operational performance and IT delivery, SMX’s expertise spans the financial services, ICT, government, defence, health,  utilities, mining,  gaming and infrastructure sectors – with the top 10 clients generating around 50 percent of revenue.

Based on projections by Patersons Securities, the IT services sector is expected to pay a very respectable average gross dividend yield of around 7 per cent in 2011. And with most stocks in the sector looking relatively cheap, investors could be rewarded for taking early positions with the hope of making gains over the long haul.

In this week’s SECTOR SCAN, James Samson of Lincoln Indicators highlights SMX as one of five tech stocks to watch. “What’s pleasing is the company’s high level of repeat business from existing clients in the financial and government sectors,” Samson says. “While we believe that IT consultancy represents more risk than a software or hardware provider, the importance of an efficiently run IT department is becoming increasingly vital to businesses. SMS offers investors with quality exposure to this segment.”

Peter Rae from Morningstar also has a buy on SMX, as you would have seen in 18 Share Tips earlier this month. ‘IT outsourcing is a growth industry, and SMX has experienced strong revenue and earnings growth in recent years. We expect this to continue. The balance sheet is strong with no debt. SMX is a well-run business with attractive exposure to a growth industry.’ 

Ben Kakoschke from Patersons highlighted SMX’s strengths in Mark Story’s article Ten Internet & IT Stocks to Watch in April. Kakoschke says SMX is well positioned to benefit from continuing strong demand from banks and resources, increasing federal government revenue, and any improvement in ICT demand. The company reported a 14.7 per cent increase in first half net profit, and declared a fully franked interim dividend of 13.5 cps – up 8 per cent on the previous period. Trading on a P/E of 12.9, Patersons is projecting EPS growth of 18.4 per cent and dividend growth of 14.5 per cent, gross dividend is 7.6 per cent. 

Based on Thomson Reuters data, 83% of analysts have a buy on SMX, 17% have a hold and 0% have a sell.

 

Chart: Share price over the year to 24/06/2011 versus ASX200 (XJO)

Stock code: SMX

Charts: SMS Management & Technology Limited

More news: SMS Management & Technology Limited

 

Telstra Corporation (TLS)

 Closing price $2.88
 Weekly change -$0.16
 % change -5.3%

 

Deutsche Bank – increased its price target for TLS

William Shaw Securities – BUY

RBS Morgans – HOLD

Alpha Broking – HOLD

Deutsche Bank has increased its 12-month target price on telco Telstra on the basis of continuing growth in its mobile phone business.

An argument for long-suffering Telstra shareholders to continue holding the stock is dividend yield. When priced at $3 a share, the stock is trading on a fully franked dividend yield of about 9.4 per cent. As the argument goes, that’s better than bank interest. But it’s also trading on a relatively cheap price/earnings ratio of 9.5 times. Perhaps blue sky is emerging for Telstra. Uldridge thinks so, believing Telstra may also enjoy some capital growth from here. “Telstra may prove to be the ultimate defensive stock in times of trouble,” he says. He says a growing number of consumers are prepared to pay a premium for “what is, ultimately, a better service than what its discount peers are able to offer.”

“In the 2011 third quarter alone, Telstra added 364,000 mobile and 206,000 wireless broadband customers,” Uldridge says. “This momentum will translate into earnings growth and a stronger share price in the long run.”

Les Szancer, Alpha Broking: Yes, Telstra is range-bound and it seems like it’s been forever trading between $2.60 and $3. Will we ever get any growth from this stock? Who knows. But it still offers a dividend yield of about 9 per cent, which is better than bank interest. The franking credits are also a bonus.

Nicholas Brooks, RBS: No nasty surprises are expected from the NBN (National Broadband Network) decision. Clarity should be a good catalyst for Telstra investors. It’s proving to be a solid defensive stock in a period of uncertainty. 

Not everyone wants a piece of the Telstra pie, however. Equities trader and Empire Investing partner Chris Becker, in his MacroBusiness blog, says “any sane, rational investor shouldn’t touch [Telstra] with a ten foot or even a telegraph pole.”

Becker explains, “The future risks facing TLS are immense: regulatory hurdles, the NBN structural separation, the post-NBN retail competition environment, new technology development, international competition. I think the only thing in Telstra’s favour is an irrational investor surge of interest because of the high dividend yield and the spin around the post-Future Fund selloff.”

Based on Thomson Reuters data, 59% of analysts have a buy on TLS, 29% have a hold and 12% have a sell.

 

Chart: Share price over the year to 24/06/2011 versus ASX200 (XJO)

Stock code: TLS

Charts: Telstra Corporation Limited

More news: Telstra Corporation Limited

 

Seek (SEK)

 Closing price $6.28
 Weekly change-$0.14
 % change -2.2%

 

Deutsche Bank – BUY

Lincoln Indicators – BUY

Shaw Stockbroking – BUY

SmallCo – BUY

Seek Limited’s operating divisions include online job classifieds, and training and learning. Seek Commercial enables browsers to search for businesses and franchises for sale, while Seek Learning assists jobseekers with career development.

In Anthony Black’s article last month on TheBull Premium ‘Best of the Smaller Companies Offering Value‘, Scott Marshall, Shaw Stockbroking analyst po that the Internet is now the first port of call for those wanting a job, car, house, flight, product or service. Marshall says Seek Limited is wasting no time taking advantage of a shift in search – from printed materials to the digital space. He says Seek is an aggressive company that’s established dominant positions in the online Australian job ads sector, with almost 70 per cent. And Seek is now expanding into Asian and South American economies, with more on the drawing board. “The group has also established an effective strategy in the Australian classroom and online education sectors,” he says. “It’s also specialising in career enhancement for Australian and foreign students. We expect Seek to benefit from growth in online job ads numbers amid the related shift away from printed ads.” Shaw Stockbroking is forecasting profit growth of 20 per cent in 2011 to a NPAT (net profit after tax) of $110 million.”

Rob Hopkins, Managing director of Smallco Investment Manager pointed out in Mark Story’s ‘Ten Internet & IT Stocks To Watch‘ that around 80 per cent of job ad volume is now via the Internet and job seekers seem to prefer the online space. But with its share of spend still only around 50 per cent, Hopkins says the opportunity for future upside is enormous. While international business accounts for only 15 per cent of SEK’s net profit, he says the long-term opportunity for it to eclipse the size of its domestic market shouldn’t be underestimated. As well as holding the number two job sites in China, SEK has the top two sites in both Brazil and Indonesia. Forecast earnings growth 27.6 per cent; dividend yield 2.6 per cent; and ROE 28.9 per cent.

And back in April in ‘Ride the Internet Boom‘ James Samson, of Lincoln Indicators said that the market reacted harshly when the company recently announced that its education division was experiencing difficult times, primarily due to the strong Australian dollar and regulatory changes for online student visas. He said online classifieds represents about 65 per cent of revenue, while weakened education accounts for 35 per cent. “Despite the adversities faced by the education segment, the company, on the back of a buoyant labour market, is expected to continue experiencing strong growth in its online employment business in the short-to-medium term,” Samson said. He says management expects second half net profit after tax (excluding JobsDB transaction costs and Swinburne joint venture start up costs) to improve on the first half of about $47 million. Samson described the company’s financial health as strong and investors may find some value after the share price was punished in response to its weaker education division. 

Based on Thomson Reuters data, 69% of analysts have a buy on SEK, 25% have a hold and 6% have a sell.

 

Chart: Share price over the year to 24/06/2011 versus ASX200 (XJO)

Stock code: SEK

Charts: Seek Limited

More news: Seek Limited

 

QBE Insurance (QBE)

 Closing price $16.82
 Weekly change +$0.11
 % change +0.65%

 

Macquarie – OUTPERFORM

Shadforths – BUY

RBS Morgans – BUY

QBE was highlighted in our Bull of the Week column on March 13th, with the share price initially rocketing before falling away on general sharemarket weakness and global concerns.

You can’t blame QBE shareholders for feeling that mother nature is against them. In February QBE warned that insurers in Australia and New Zealand will find it tougher to buy reinsurance, after a series of natural disasters pushed the company’s full-year profit down 17%. QBE Insurance chief executive Frank O’Halloran recently told analysts that some of the world’s biggest reinsurers had taken a financial ‘hammering’ from payouts linked to floods, hailstorms and now earthquakes.  

Despite the less than sanguine comments from O’Halloran, QBE Chairman Belinda Hutchinson said: “This was a very positive result given the difficult global economic conditions…Our outlook is positive, with expected net earned premium growth of 22 percent to 25 percent in 2011 from acquisitions already announced and an expectation that insurance profit will grow by at least a similar percentage.’   

Investors are still trying to figure out how much bad news is already priced into QBE shares. And is the recent price decline an opportunity to pick up QBE for a bargain?

Macquarie rates as Outperform – Large individual risks and catastrophies are dragging on earnings for the June half and the broker has adjusted forecasts in line with revised guidance.

Low interest rates, subdued equities markets, more natural disasters and a strong Australian dollar are making life difficult for insurers. QBE’s 2010 net profit after tax of $US1.28 billion was down 17 per cent on the previous year and Insurance Australia Group was down 51 per cent to $161 million.

Richard Batt, of Shadforth Financial Group: Batt says while IAG benefitted from a strong underlying performance in its Australian and New Zealand businesses, the UK operations hurt the result. “This is why we believe QBE is better positioned to benefit when conditions improve,” he says. “Rising interest rates in the medium term should improve QBE’s profitability. The strong management team and a robust balance sheet make QBE well positioned to pursue opportunities. Until IAG sort out its UK operations, we prefer QBE.” 

 Batt says the track record of QBE Insurance demonstrates management’s undeniable ability in underwriting risk at an effective and profitable price. “The company’s strategy of diversifying has been fundamental to its success,” he says. The company’s share price has retreated from a high of more than $22 a year ago to close at $18.54 on April 13, 2011. QBE booked a net profit after tax of US$1.28 billion for the 12 months to December 31, 2010, down 17 per cent on the previous year, which Batt says was mostly due to low interest rates, subdued equity markets, more catastrophes and a strong Australian dollar. But moving forward, Batt sees a brighter outlook as rising global interest rates over the medium term lift profitability. “The company has acquired several specialist underwriting agencies in Australia, the US and Europe to secure distribution channels and to further improve diversification, which should deliver well above average earnings growth and dividends,” he says. “It has a robust balance sheet to pursue more opportunities.”

Nicholas Brooks, RBS Morgans: QBE has recently updated the market, subduing fears about recent disasters and forecasting profits to grow by 30 per cent. It’s still paying a handsome dividend. Increasing insurance premiums tend to follow natural disasters sooner rather than later.

Based on Thomson Reuters data, 33% of analysts have a buy on QBE, 50% have a hold and 17% have a sell.

 

Chart: Share price over the year to 24/06/2011 versus ASX200 (XJO)

Stock code: QBE

Charts: QBE Insurance Limited

More news: QBE Insurance Limited

 

Incitec Pivot (IPL)

 Closing price $3.80
 Weekly change +$0.09
 % change +2.4%

Macquarie – OUTPERFORM

William Shaw – BUY

Morningstar – HOLD

Diversity and size makes the materials sector one of the most closely watched sub-indices of the ASX, according to Shawn Uldridge, of William Shaw Securities. He says macro factors, such as currency and commodity prices, have a significant impact on the performance of materials companies.

In last month’s ‘Stock Materials in Your Portfolio‘ Uldridge said that the world’s population is expected to reach 6.9 billion people this year, with the United Nations forecasting it to grow by another billion by 2020. “Fertiliser to assist in growing food will inevitably be required in much greater quantities,” he said.  Uldridge believes that Incitec Pivot isn’t expensive on a historical basis, and it tends to pay out a high ratio of earnings when it can. “Although 2009 was difficult, Incitec Pivot is recovering well from the global financial crisis and we expect the current upward trend to continue well into the next decade,” he said.

Peter Rae from Morningstar say that IPL is exposed to key agribusiness and resource inputs, which are currently benefiting from favourable conditions. ‘However, fertiliser and explosives prices are highly volatile and depend on soft and hard commodity end prices and cycles,’ says. ‘Cost efficiencies are contributing to earnings growth, and capacity expansion will boost earnings from mid-2012.’

However not all brokers are bullish on IPL, with WilsonHTM’s Peter Day placing a sell on the stock. ‘We have raised our full-year 2011 earnings forecast by 28 per cent to reflect higher global fertiliser prices…but we believe the risks to soft commodity and fertiliser prices are to the downside given increasing planting intentions, improving seasonal conditions and rising global interest rates.’

Based on Thomson Reuters data, 70% of analysts have a buy on IPL, 24% have a hold and 6% have a sell.  

 

Chart: Share price over the year to 24/06/2011 versus ASX200 (XJO)

Stock code: IPL

Charts: Incitec Pivot Limited

More news: Incitec Pivot Limited

 

 

REA Group Limited (REA)

 Closing price $11.80
 Weekly change -$0.70
 % change -5.6%

 

Deutsche Bank – BUY

Lincoln Indicators – BUY

SmallCo – BUY

Despite Deutsche Bank reiterating its buy on the stock this week, the stock has been hammered – falling 5.6% over the week in what was a flat market for the week.

REA Group, which owns and operates real estate and commercial development sites in Australia, has enjoyed strong organic growth from establishing a dominant position in Australia’s real estate advertising market. Monthly traffic to REA’s Australian website is a whopping 7.1 million visits and it is also expanding overseas and is enjoying solid growth via its Italian website casa.it.

James Samson of Lincoln Indicators has a buy on the online real estate company. Samson says the number of real estate agents paying for advertising on casa.it has risen from 2391 to 11,531 during the six months to December 31, 2010. “With the site becoming one of the dominant players in Italy’s online real estate market, it’s clear that European expansion is an opportunity for the company to explore in the future,” he says.

Rob Hopkins, Managing director of Smallco Investment Manager is also keen on the stock. ‘Encouraging within the online real estate advertising group’s 35 per cent EPS growth at half year were revelations that losses within its Italy-base operation had finally stabilised,’ he says. ‘The company is actively seeking new acquisitions and has been eyeballing French real estate site SeLoger.com. ROE 37.6 per cent and dividend yield 1.6 per cent.’

Based on Thomson Reuters data, 50% of analysts have a buy on REA, 29% have a hold and 21% have a sell.  

 

Chart: Share price over the year to 24/06/2011 versus ASX200 (XJO)

Stock code: REA

Charts: REA Group Limited

More news: REA Group Limited

 

>>Back to the newsletter to view other articles – June 25th 2011