Bathurst Resources (BTU)
Credit Suisse – BUY
State One Stockbroking – BUY
Goldman Sachs Resources Fund – BUY
Phenomenal gains have been made on companies that specialise in the hottest commodities, such as coal explorer Bathurst Resources (BTU), whose shares have risen from just 14 cents to $1.02 – an incredible gain of 529 per cent over the past year.
Investors should always consider the company, sector and global outlook before buying shares. In the case of coal – thermal for generating electricity and metallurgical or coking for steelmaking – the outlook appears relatively bright.
According to the Australian Bureau of Agricultural and Resource Economics and Sciences, world thermal coal trade is projected to increase by 4 per cent a year to 962 million tonnes in 2016. Increasing thermal coal imports into developing economies – particularly India and China – will drive growth, and growing demand will be met by Australia, Indonesia and Columbia.
And in its 2011 March quarterly report on Australian commodities, ABARES says global metallurgical coal trade is forecast to increase at an annual average of 5 per cent to reach 341 million tonnes in 2016, with emerging Asian economies lifting imports. Coal companies may be a welcome addition to any balanced portfolio, and State One Stockbroking’s John Rawicki offers his value selections for investors to consider.
Rawicki’s list focuses on explorers and junior producers, as he believes they offer the most upside in percentage terms if all goes to plan. That’s the point – potentially bigger gains carry substantially higher risk, which investors should carefully weigh before buying stocks with promising objectives.
Bathurst Resources plans to start producing high quality coking coal from its Bulla project in New Zealand late this year. “The company’s coal is top quality as its low in ash and sulphur and high in carbon,” Rawicki says. “Another benefit is the coal is near the surface and occurs in thick seams.” He says Bathurst has a JORC Resource of 47.1 million tonnes and will spend most of 2011 trying to shore that up towards its planned exploration target of between 60 million and 90 million tonnes.
Goldman Sachs Resources Fund is overweight BTU.
Based on Thomson Reuters data, 100% of analysts have a buy on BTU (3 analysts).
Stock code: BTU
Charts: Bathurst Resources Limited
More news: Bathurst Resources Limited
AGL Energy (AGK)
Credit Suisse – upgrade to OUTPERFORM
State One Stockbroking – BUY
Macquarie Private Wealth – HOLD, price target $16.16
Subject to parliamentary approval, the Labour/Greens government’s proposed two-stage plan for a carbon price mechanism will commence 1 July 2012. The plan is for a flat price to apply for three to five years, before moving to a market traded price.
But not all stocks are casualties of a carbon tax, with energy companies Origin Energy (ORG) and AGL Energy (AGK) expected to see their EPS rise by 1 and 2 per cent respectively over the first three years. Both AGL and Origin stand to profit handsomely from the extra demand for gas-generated power.
State One Stockbroking’s John Rawicki put together a list of companies offering strong market positions that are less likely to be buffeted by short-term market movements, with AGL firmly on that list.
Rawicki says AGL supplies 3.2 million Australians with electricity, gas and dual fuel energy, making it the biggest retail energy supplier in the country. Strong growth is expected from within the retail and power generation businesses. The upstream gas portfolio should deliver above average shareholder returns over the medium term. “Complementing its traditional thermal generation, AGL has a significant investment in renewable energy assets, such as hydro, wind and coal seam gas, placing it in pole position for a carbon-conscious world,” Rawicki says. “Expect revenue growth to be about 8 per cent. Risks to revenue remain low given the inelastic nature of electricity demand.” Half-year revenue to December 31, 2010 was up 9 per cent to $3.488 billion, but underlying NPAT slipped 3.7 per cent to $226.2 million.
Sean Conlan, Macquarie Private Wealth believs that AGL remains attractive based on the pricing paid for the NSW power privatisation, however he thinks it will take time and clear evidence from AGL for investors to value the organic growth strategy. Ian Myles, also an analyst with Macquarie said that strong growth potential exists within the retail and power generation businesses and the upstream gas portfolio which should deliver above average shareholder returns over the medium term. ‘An estimated P/E ratio of under 13 times makes it look cheap given the strength of the core business,’ said Myles.
Based on Thomson Reuters data, 73% of analysts have a buy on AGK, 20% have a hold and 17% have a sell.
Stock code: AGK
Charts: AGL Limited
More news: AGL Limited
Atlas Iron (AGO)
Credit Suisse – OUTPERFORM
JP Morgan – OVERWEIGHT
Invesco Smaller Companies Fund – BUY
Patersons – BUY
Shadforth Financial Group – BUY
Atom Funds Management – BUY
Australia is among the world’s largest exporters of iron ore. The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) forecasts Australian iron ore exports to increase by 5.5 per cent to 425 million tonnes in 2011 as steel consumption in developing economies, particularly Asia, grows.
Based in the Pilbara region of Western Australia, Atlas Iron has several key projects strategically located within 150 kilometres of Port Hedland and is capable of taking advantage of the iron ore boom.
Brokers gave Perth-based Atlas a thumbs up, recognising 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.
Richard Batt of Shadforth Financial Group, who is confident about AGO’s prospects, says the company shipped 1.63 million tonnes of iron ore for the six months to December 31, 2010, and is targeting production of 12 million tonnes within the next two years. The company recently reported a maiden net profit of $30.1 million for the six months to December 31, 2010. Batt expects the company’s financial performance in the 2011 second half to be significantly stronger in response to increasing sales volumes, higher iron ore prices and reducing operating costs. ‘The company has also successfully acquired Giralia Resources NL (GIR), which is a strategic and financial fit, with both having complementary assets that significantly increase combined resource inventories, potentially providing for higher earnings,’ says Batt.
Batt prefers Atlas Iron to another pure iron ore play Fortescue Metals Group, because it’s coming off a lower base and offers more potential to surprise on the upside. Fortescue’s share price is down about 3.5 per cent this calendar year, whereas AGO is up 25%. He says Atlas Iron’s solid business generates strong cash flows, with operating cash flow of $120 million in the March quarter lifting net cash to about $300 million.
AGO has also 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, which will take the company’s total capacity to 9mtpa as Atlas aims to grow total production to 12mtpa by December 2012. In addition it has 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.
James Georges of Patersons Securities also has a buy on AGO, citing its operational mines producing 6 million tonnes of direct shipping iron ore a year with roduction of 12 million tonnes a year targeted by 2012. ‘An excellent track record of resource growth and low capital expenditure requirements instils confidence,’ says Georges. ‘However, single commodity exposure dependent upon Chinese demand increases risk…the shares are only suitable for risk tolerant investors.’
In recent news, investors would have learned that AGO is set to buy FerrAus to create a $3 billion company as the iron ore miners aim to get the most out of their combined operations in Western Australia’s Pilbara region. The miners say their deal is better than the takeover bid for FerrAus from Hong Kong investment company and major FerrAus shareholder Wah Nam.
FerrAus and Atlas have proposed a two-step deal in which Atlas would pay about $238 million and in the deal FerrAus will first combine Atlas’s south-east Pilbara iron ore assets with its own as Atlas pays $24.3 million for a 38 per cent stake in the smaller miner. Atlas would then take over FerrAus for a further $214 million in shares.
FerrAus chief executive Cliff Lawrenson said the consolidation of Atlas and FerrAus’s south-east Pilbara assets would create a larger, well-funded company. ‘Ultimately, however, we believe there are significant additional benefits for all stakeholders flowing from a combination of 100 per cent of both FerrAus and Atlas,’ he said.
It remains to be seen whether this proves to be the advantage that is being sold to investors.
Invesco Smaller Companies Fund is overweight in AGO. Based on Thomson Reuters data, 79% of analysts have a buy on AGO, 21% have a hold and 0% have a sell.
Stock code: AGO
Charts: Atlas Iron Limited
More news: Atlas Iron Limited
Newcrest Mining (NCM)
Goldman Sachs – BUY
WilsonHTM – BUY
Novus Capital – BUY
Patersons – BUY
Alto Capital – HOLD
Newcrest Mining Limited (NCM) is a quality, low-cost gold and copper producer with its main operations in Australia and Indonesia with other projects in Papua New Guinea and Fiji. NCM owns and operates seven mines – five located in Australia, one in Indonesia and one in Papua New Guinea. According to NCM, all mines are based on the conversion of exploration successes into low cost, long life mines.
Australia’s biggest listed gold producer downgraded full year production after a 16 per cent fall in the first quarter of calendar 2011. It now expects full year production to be 2.82 million ounces, plus or minus 35,000 ounces. Heavy rainfall on Australia’s east coast impacted production, while operations at Bonikro in Cote d’Ivoire were suspended during most of the March quarter due to civil unrest. However, Les Szancer of Alpha Broking views the production fall as a blip against the long-term outlook. Although gold production was lower, the company still produced more than 604,000 ounces for the quarter amid copper production increasing 13 per cent to 20,098 tonnes. Szancer says Newcrest offers long life operating mines and strong exploration prospects. “Newcrest, as an unhedged gold producer, will benefit as I am bullish about gold,” he says. “I view the share price retreat on news of lower production as a buying opportunity in a top gold producer.”
Peter Day, analyst with Wilson HTM is yet another broker that has a buy on NCM. He says that repair work has started on a high voltage switchgear failure at the Lihir power station in Papua New Guinea, which interrupted production and reduced capacity. Day says that a return to full operating capacity is expected over the next three weeks. Day is bullish on NCM’s prospects, pointing to the Wafi-Golpu exploration asset, which he describes as 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,’ Sayd Day. ‘NCM continues to offer excellent exposure to a rising gold price.’
Cleo Nanni from Novus Capital is also a fan of the gold and copper producer. ‘Despite the company downgrading full-year gold production, Newcrest offers ideal exposure to a rising bullion price that’s breached $US1530 an ounce,’ says Nanni. ‘Consider buying this company on any dips below $38 and continue to accumulate at each opportunity.’ James Georges from Patersons also recommends to buy on dips. ‘As a low cost quality gold producer, this stock has offered good returns amid a buoyant gold price,’ says Georges. He believes that at the right price, NCM is a cornerstone gold stock for any portfolio.
Gold aside, it escapes most investors’ attention that NCM is also a large copper producer. Hamza Habib, associate adviser at Patersons Securities, expects an improving global economy to drive copper demand beyond supply. “For 2011, the market is expecting a copper supply deficit above 444,000 tonnes,” he says. “This is subject to change depending on the speed of the global recovery.” Habib says in December 2010, Newcrest sold 37,000 tonnes of copper, generating $303 million in revenue. “Newcrest has almost doubled its capital expenditure on current projects and has also ramped up investment for further exploration,” Habib says. “Both, the company’s robust balance sheet and diversified operations across Australia, Indonesia, Papua New Guinea and Fiji present significant growth for years to come.”
Brett Schreuders from Alto Capital is slightly more circumspect, and has a hold on the gold and copper miner; although he admits that with global uncertainties persisting, the outlook for gold remains robust. ‘NCM remains Australia’s premier gold stock, with low cost production, good exploration upside and strong growth potential,’ says Schreuders. ‘The merger with Lihir Gold last year increases exposure to West Africa and Papua New Guinea, but with half its assets in Australia, the sovereign risk for NCM remains reasonably low for investors wanting exposure to gold.’
Based on Thomson Reuters data, 94% of analysts have a buy on NCM, 6% have a hold and 0% have a sell.
Stock code: NCM
Charts: Newcrest Mining Limited
More news: Newcrest Mining Limited
CSL Limited (CSL)
UBS – BUY, $44.00 price target
State One Stockbroking – BUY
Patersons Securities – BUY
Austock Securities – BUY
The biotechnology sector is high risk, but so are the rewards. Plans for a new drug can take years to develop and burn a lot of cash a long the way without any guarantee of success. However, new drugs are regularly coming to market, so investors will always be tempted to take a chance on a biotech with potential.
James Georges, of Patersons Securities, says the United States and Australian biotechnology sectors have experienced a slowdown in new listings compared to the heady days of the technology boom. Since then, many biotechs across the world have failed in the absence of capital. Companies that survived the “tech wreck” have demonstrated resilience and good management, and that gives investors more confidence to lift their risk appetites amid a possibly brighter economic outlook.
Australian biopharmaceutical products maker CSL operates in 27 countries, including the US, Switzerland and Germany. CSL develops, makes and markets biopharmaceutical products. Georges says the blood plasma industry has consolidated into a few fully integrated global suppliers. Scale of operations, control of supply and integration of services – from blood collection to product manufacture – gives CSL a competitive advantage that’s difficult to replicate. Industry consolidation led to favourable pricing and lifted returns. CSL’s human papillomavirus (HPV) vaccine offers another earnings stream, while it generates royalty revenue from Merck’s Gardasil and GlaxoSmithKline’s Cervarix. “A strong industry position makes it one of Australia’s best businesses and it should be a core portfolio stock at today’s price,” Georges says. He says the strong Australian dollar has been a headwind, so investors could find solid long-term value here, particularly if the currency falls.
State One Stockbroking’s John Rawicki says CSL’s human papillomavirus (HPV) vaccine adds another earnings stream to supplement its existing royalty revenue from Merck’s Gardasil and GlaxoSmithKline’s Cervarix. “With an exemplary and vertically integrated business model, CSL has conquered the high barriers to entry and resides in a strong competitive position,” he says. “CSL holds a suite of valuable patents that generate strong cash flows, further bolstering its balance sheet and placing it an enviable financial position.” Sales revenue of $2.1 billion for the half year to December 31, 2010, was up 7 per cent on an underlying basis compared to the previous corresponding period.
Michael Heffernan, from Austock also has a buy on the stock. Despite a fall of almost 19 per cent in NPAT to $500 million for the six months to January 31, 2010, Heffernan sees this global blood products maker and vaccines producer as offering a solid long-term opportunity. “The prospect of a stronger US dollar is likely to be positive for CSL’s profitability,” he says. CSL says the latest result included an unfavourable foreign exchange impact of $47 million. Heffernan says the company is expecting a better second half and has cash and cash equivalents totalling $719 million. “The future looks promising for CSL, as it always has its foot on the research and development accelerator,” he says.
Based on Thomson Reuters data, 47% of analysts have a buy on CSL, 35% have a hold and 18% have a sell.
Stock code: CSL
Charts: CSL Limited
More news: CSL Limited
Goodman Group (GMG)
RBS – BUY
Patersons Securities – BUY
Based largely on relative P/E rankings, earnings and sentiment indicators, one of the value stocks favoured by Patersons Securities Analyst Kien Trinh is investment manager Goodman Group (GMG).
GMG, based in Australia and with offices worldwide, invests in industrial property, funds management and property services – such as business parts, industrial estates and warehouses. It also offers a range of property funds, providing investors with access to its property assets.
Although Trinh may like GMG, not all brokers are bullish on the stock. On May 22nd Cameron Bell from Intersuisse had a Sell on GMG, say that it appeared to be fully priced. And with good reason – the stock has dropped 6.7% since then. ‘The market is expecting a recovery in development and funds under management growth,’ said Bell. ‘But with the weak economic environment in Europe, the targeted ramp of developments to $2 billion a year may be out of reach.’
Based on Thomson Reuters data, 67% of analysts have a buy on GMG, 25% have a hold and 8% have a sell.
Stock code: GMG
Charts: Goodman Group Limited
More news: Goodman Group Limited
Oroton Group (ORL)
RBS – BUY, target price $8.67
Shaw Stockbroking – BUY
WilsonHTM – HOLD
Oroton designs and makes luxury leather goods and accessories, which it has been successfully selling in the Australian market and now has plans to expand throughout Asia.
While the discretionary retail market remains immensely challenging, Scott Marshall of Shaw Stockbroking is confident that OrotonGroup will continue to perform. “Not only has Oroton weathered a poor retail environment in the past two years, but its demonstrated a solid track record of envious earnings per share growth, averaging about 35 per cent between 2007 and 2010,” Marshall says. “We are forecasting strong profit growth of more than 15 per cent to a NPAT of $27.8 million.” Marshall says Oroton also generates a very high return on invested capital – well above its peers. “The company is able to rigorously manage long-term brand development coupled with a stringent focus on profit growth and cost minimisation,” he says.
Peter Day, WilsonHTM has a hold on the accessories maker, although he does note that should the move into Asia prove successful sales growth has plenty of upside. ‘The domestic growth profile of about 10 per cent per annum over the next few years has the potential to grow exponentially if its foray into Asia is successful,’ he says.
Based on Thomson Reuters data, 57% of analysts have a buy on ORL, 43% have a hold and 0% have a sell.
Stock code: ORL
Charts: Oroton Group Limited
More news: Oroton Group Limited
APA Group (APA)
Credit Suisse – upgrade to OUTPERFORM
Patersons Securities – BUY
After hitting its highest level since 2006 this week, APA Group was the day’s biggest loser on Monday, tumbling 9.6% to $3.95.
APA is made up of the Australian Pipeline Trust and APT Investment Trust, which together own Australia’s largest natural gas distribution and storage infrastructure network.
APA seemed to have been in the news for all the right reasons last week, with its $171m purchase of the 80 megawatt Emu Downs wind farm in WA, and a $300m equity raising to fund the purchase and further capital expenditure until the end of next year.
However Monday’s 10% beating of the share price after it came out of a trading halt shows that investors were not impressed, with many running for the door.
APA Group’s natural gas pipelines extend across Australia, delivering more than 50 per cent of the nation’s usage. It has interests in 12,700 kilometres of natural gas pipelines and minority interests in gas distribution company Envestra and the Ethane Pipeline Income Fund.
Fears of systemic risk have the bears speculating about a global financial crisis mark II. It’s in this environment that James Georges, of Patersons Securities, has APA in his list of stocks he believes can withstand sharp volatility and present good value on signs of an improving global economic outlook.
Georges describes APA Group as a “classic defensive earnings story offering an attractive distribution stream”. In February 2011, it announced a 10.4 per cent increase in interim NPAT to $70 million and a 6.4 per cent increase in operating cash flow to $170 million. Distributions for the half-year were up 4.8 per cent to 16.5 cents. On June 20, 2011, it anticipated a final distribution of 17.9 cents. “Together with cash and committed undrawn facilities of $650 million, APA is well placed,” Georges says. “We see few downside risks to the company’s earnings forecasts.”
Major shareholder is Petronas Australia. P/E ratio is 19.4.
Based on Thomson Reuters data, 23% of analysts have a buy on APA, 62% have a hold, 15% have a sell, compared to three months ago when 33.3% had buys, 58.3% had holds and 8.3% had a sell.
Stock code: APA
Charts: APA Group Limited
More news: APA Group Limited
JP Morgan – OVERWEIGHT, price target $30.80
Shadforth Financial Group – BUY
Austock Securities – HOLD
Richard Batt of Shadforths has a buy on vitamin and supplement industry leader Blackmores, which is developing its business in Asia by launching new products and creating distribution channels. “Asia protects the business from the impact of any individual market challenge,” Batt says. “This strategy is proving a success, with Asian sales up 37 per cent this financial year and 61 per cent in the third quarter.”
Comparatively, Batt says same sector companies Australian Pharmaceutical Industries and Sigma Pharmaceuticals are finding current market conditions difficult. “Blackmores management has an established reputation, and the company’s well positioned to benefit from an ageing population and health-conscious consumers,” he says. “It provides growth potential and a solid fully franked dividend.”
In contrast Michael Heffernan of Austock has a hold on the vitamin supplier. ‘This maker of natural healthcare products has weathered economic difficulties particularly well in the past few years,’ says Heffernan. ‘The nature of its business means that it’s largely insulated from the worst effects of seasonal and economic adversity. With expectations of continuing steady earnings growth, BKL is attractive for investors with a medium term investment horizon.’
Based on Thomson Reuters data, 17% of analysts have a buy on BKL, 83% have a hold and 0% have a sell.
Stock code: BKL
Charts: Blackmores Limited
More news: Blackmores Limited
Charts: Share price over the year to 01/07/2011 versus ASX200 (XJO)