Peter Russell, Intersuisse
M2 Telecommunications Group (MTU)
This small and innovative telco wholesaler has shown sound management and strategy in consistently growing revenues, profits and dividends in the past six years. Its successful acquisition of People Telecom should further enhance M2’s growth prospects.
Transfield Services (TSE)
Transfield offers a reliable earnings stream from long term services contracts and low-risk infrastructure projects, many integrated with customer operations and considered “mission critical”. The share price slumped through a disappointing 2008 as debt in US dollars grew as the Australian dollar fell. After a capital raising and a new MD, the order book and earnings look cheap.
Data #3 (DTL)
This small but consistent performer is one of the favoured few, with cash on hand and profit growth expected to continue. It’s a national leader in providing public sector and corporate clients with software licensing and tailored information technology solutions. Current prices and franked dividend yields are attractive, with long-term upside.
SAI Global (SAI)
SAI helps organisations achieve compliance, manage risk and drive improvements through business publishing, training and assurance. Licensed to publish and distribute Australian Standards and many others internationally, it’s been growing strongly, is highly resilient and offers a useful dividend yield.
FKP Property Group (FKP)
A property stgeloper and one of Australia’s largest owner-operators of retirement villages, FKP shows all the symptoms of a listed property trust. With construction down amid impairments in property values, all segments contributed to a loss in the past half year. Negative cash flows and high debt to land values are not exclusive to FKP, but stretch the time to recovery.
Ten Network (TEN)
Although it shares AFL rights with Seven, its market share is relatively weak and the sector will come under further pressure. After a first half loss, Ten will probably remain under pressure through 2009 and 2010, possibly impacting on its business value.
Richard Batt, Shadforths
AMP offers one of the biggest financial planning networks in Australia and a leading market share in a range of products and platforms. The company is well positioned to take advantage of the ever-growing superannuation sector and any improvements in financial markets. AMP suits long-term growth portfolios.
Watpac Limited (WTP)
Watpac is a construction company and property stgeloper whose clients include government departments and private firms. The company is well placed to take advantage of the Rudd Government’s Building the Education Revolution (BER) program, having completed a number of school construction projects in Queensland and Victoria. In a sector that’s been out of favour, WTP provides an opportunity for investors to benefit from the stimulus package.
In the past month, the share price of this oil and gas producer has risen with the general market. Although movement has been swift, the company’s strong balance sheet, and the potential benefits from its LNG projects make STO a long term holding in a fully diversified portfolio.
Metcash Holdings (MTS)
A significant player in the Australian grocery market, with its IGA distribution business generating most company earnings. The IGA business is the biggest grocery wholesaler to independent supermarkets in Australia. In recent times, company performance has been enhanced by poor performing competitors, and we expect this to continue in the medium term. A fully franked dividend yield above 5 per cent is also attractive.
Insurance Australia Group (IAG)
IAG is Australia’s biggest general insurer, providing services through a range of well-known brand names. While IAG has strong market share, it has no particular competitive advantage and its margins continue to suffer. In terms of exposure to the insurance sector, better opportunities exist elsewhere.
Sigma Pharmaceuticals (SIP)
Makes pharmaceuticals, including generic products. Past company performance has impressed, but it faces the prospect of new players entering the generic market and providing strong competition. Also, if major retail chains are allowed to compete in the pharmacy industry, this could hamper Sigma’s growth prospects.
Grant Dwyer, Patersons Securities
The Reject Shop (TRS)
The discount variety segment of the retail industry has experienced dramatic consolidation in the past 10 years. The Reject Shop added 15 new stores to its growing chain in the past six months and now accounts for 16 per cent of the market. First half net profit after tax increased 10.1 per cent to $15.6 million on sales of $221.6 million, up 16.6 per cent compared with last year. This well run, defensive retailer has maintained its full-year profit guidance of $18.6 million to $18.8 million.
Mermaid Marine Australia (MRM)
Earnings per share rose 31 per cent on the previous corresponding period after a 26 per cent increase in revenue. Margins improved in the supply base and vessels divisions. Four vessels have been operating in Angola since September 2008, where lower labour costs have translated to greater profitability. Demand remains strong due to increasing drilling activity in the Browse Basin, and stgelopment of Woodside’s Pluto project due to start in the second half of 2009.
The ASX has a strong balance sheet and near monopoly position in the Australian equity and derivatives market. Despite the worst trading conditions for several years, normal profit after tax fell only 8.2 per cent to $171.9 million, highlighting the company’s strong franchise. Trading volumes were down and so were initial public offerings. This was partially offset by an increase in secondary raisings via placements, rights issues and share purchase plans. When market sentiment improves, trading volumes will recover.
Jabiru Metals (JML)
The Jaguar base metal project is now operating at full production. The company has closed out some of its hedge book and repaid all bank debt. Jabiru is better positioned than some, but margins are thin at current commodity prices. Upside exists if new reserves can be added.
Minara Resources (MRE)
Despite cost reduction initiatives, the company will struggle until the nickel price improves. After a recent rights issue, Glencore has emerged with a 70.6 per cent shareholding, and has a 40 per cent direct interest in the Murrin Murrin project. While Glencore will probably support the company through a low nickel price environment, it’s unlikely Minara will receive any corporate attention from outside parties.
Kagara has $50 million of debt maturing in June and another $100 million maturing in November. This zinc and copper company has already closed out its copper hedges, and had a small capital raising. A lower commodity price environment means thinner margins. Kagara may have to sell a project or two, such as Lounge Lizard or Admiral Bay, to reduce debt, but it’s unclear what these projects would fetch in the current climate.
More articles in this week’s newsletter
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