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Paul Shepherd, RBS Morgans

BUY RECOMMENDATIONS

Rio Tinto (RIO)

 

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

This global miner is offering rare value, trading at a discount of more than 20 per cent to our valuation and target price. Rio is effectively ungeared with many divisions generating record cash flow. Additionally, it’s undertaking an aggressive organic expansion plan that should underpin significant production growth. We also see opportunities to increase capital management in the medium term, a key positive catalyst.

Stock code: RIO

Charts: Rio Tinto Limited

More news: Rio Tinto Limited

 

On The House Holdings (OTH)

 

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

I declare an interest in this company as RBS Morgans was joint underwriter of the initial public offering. OTH’s website provides free access to a comprehensive base of residential data, historical property sales and rental information. Acceptance of this platform should enable OTH to monetise traffic volumes and content via the fee-per-lead model and banner and associated advertising. OTH is developing a business model which has already been successfully proven by companies like carsales.com.

Stock code: OTH

Charts: On The House Limited

More news: On The House Limited

 

HOLD RECOMMENDATIONS

Cochlear (COH)

 

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

The hearing implants maker is a world leader. Its business spans the Americas, Europe and Asia Pacific, with a distribution and service network that covers more than 60 countries. But in an era of healthcare reform and a focus on cost-effectiveness, we expect slower growth.

Nufarm (NUF)

 

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

We have downgraded full-year 2011 underlying profit by 23 per cent to $70.2 million. We revised our forecasts to reflect concerns about the North American floods, the European drought and the strong Australian dollar. On a positive note, Nufarm, a crop protection company, is making progress on its strategy. However, we believe it will take two years to turn around the company. Given the short-term earnings risk, we retain a hold on the stock.

SELL RECOMMENDATIONS

Energy Resources of Australia (ERA)

 

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

First half 2011 NPAT (net profit after tax) guidance has been revised to a loss of between $20 million and $30 million for this uranium company. Previously, the loss was expected to range between $30 million and $50 million. While this is clearly a positive turn of events, high-grade ore at the bottom of the pit remains inaccessible due to flooding. We anticipate higher grades won’t be encountered until later this year.

Ten Network Holdings (TEN)

 

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

We reduce our earnings per share forecasts for full-year 2011 and 2012 by about 6 per cent to reflect current advertising weakness. Ten trades at a sizeable premium compared to its traditional media peers. We retain our sell recommendation.

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Andrew Inglis, Shadforth Financial Group

BUY RECOMMENDATIONS

Computershare (CPU)

 

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

CPU is the world’s largest share registry business and this provides a scale advantage over its competitors. With outdated share registration systems in several countries, there’s considerable scope for further industry efficiencies and consolidation.  CPU’s proposed takeover of Bank of New York Mellon’s substantial share registry business will be a major catalyst for CPU, providing it secures regulatory approval.

Stock code: CPU

Charts: Computershare Limited

More news: Computershare Limited

 

Woolworths (WOW)

 

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

In the event of a continuing downturn in the sharemarket, Woolworths appears reasonably priced with a dividend yield of 5 per cent and the possibility of further share buy backs.  Its mainly defensive business has already proven it can ride out a GFC.

Stock code: WOW

Charts: Woolworths Limited

More news: Woolworths Limited

 

HOLD RECOMMENDATIONS

Rio Tinto (RIO)

 

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

Rio’s been trading on a multiple of 8 times current year earnings and its strong balance sheet can fund expansion and further share buy backs. Strong businesses in iron ore, aluminum, copper and coking coal position it well to supply growing Asian demand.

Singapore Telecommunications (SGT)

 

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

Singtel’s share price has traded sideways for three years.  With its huge customer base across Asia, Africa and Australia, it operates in the world’s fastest growing markets. With a strong balance sheet, it’s well positioned to use this strategic advantage in future years despite intense competition in several markets.

SELL RECOMMENDATIONS

Cochlear (COH)

 

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

Cochlear, which makes hearing implants, has been an excellent long term investment.  However, with growth now slowing and the shares recently trading on a price/earnings ratio above 20 times, it’s time to take some profits and reduce this holding.

Monadelphous Group (MND)

 

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

This engineering group has also been an excellent investment, but it now appears to be an opportune time to take some profits, as it looks expensive in relation to its peers. There’s also a certain amount of risk with contractors due to the cyclical nature of its business, and problems with cost blowouts on fixed price contracts.

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Peter Day, Wilson HTM

BUY RECOMMENDATIONS

Newcrest Mining  (NCM)  

 

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

A high voltage switchgear failure at the Lihir power station in Papua New Guinea has interrupted production and reduced capacity. Repair work has started and a return to full operating capacity is expected over the next three weeks. The Wafi-Golpu exploration asset remains one of the most exciting new gold discoveries worldwide. While it’s taken NCM’s growth path to a new level, it isn’t reflected in the share price. NCM continues to offer excellent exposure to a rising gold price.

Stock code: NCM

Charts: Newcrest Mining Limited

More news: Newcrest Mining Limited

 

Woodside Petroleum  (WPL) 

 

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

Further delays and cost increases at Woodside’s Pluto-1 project underline the challenges in delivering multi-billion dollar projects on schedule and on budget. The delays have led to a $900 million increase in capital expenditure, and total cost increases are 24 per cent above the original budget. While the short term outlook is challenging, new chief executive Peter Coleman’s experience should help. We believe there’s little value imputed for growth projects at these levels and retain our buy rating.

Stock code: WPL

Charts: Woodside Petroleum Limited

More news: Woodside Petroleum Limited

 

HOLD RECOMMENDATIONS

Leighton Holdings  (LEI)   

 

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

Management believes the Airport Link project in Brisbane is tracking towards completion on June 30, 2012.  Management has indicated changes in the way it bids for future projects.  In our view, the net impact of these changes could be lower bid costs, higher margins, but a lower contract win rate for the group. We continue to remain on the sidelines with Leighton.

Iluka Resources  (ILU)

 

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

Iluka has negotiated big increases in zircon and titanium dioxide prices for the September quarter in an extremely tight market. We retain our hold recommendation, and again note that there’s further scope for further commodity price increases.

SELL RECOMMENDATIONS

Charter Hall Office REIT (CQO) 

 

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

This company has provided clarity surrounding possible capital gains tax implications regarding the potential sale of its Australian portfolio, which would crystalise a net capital gain of $556 million. Assuming corporate tax rates apply, this would translate to a tax payable range of between 17 cents and 34 cents a share on our estimates, depending on whether a capital gains discount is applicable. We retain our sell recommendation.

Tabcorp Holdings (TAH)  

 

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

Post the demerger of Echo Entertainment Group, we retain our sell rating, with the stock trading at a premium to our valuation of $2.85 a share. We believe the demerger leaves a smaller and more highly geared entity. Standard & Poor’s has downgraded its credit rating from BBB+ to BBB, and the dividend payout ratio will be reduced to 50 per cent in full year 2012. The stock was trading at $3.10 on June 23, 2011.

 

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