Top Gainer: Sundance Resources (SDL)
For the second day running Sundance Resources (SDL) was the day’s biggest gainer, jumping 8.3% on the back of yesterday’s 7.5% gain.
If you’re looking for take advantage of the recent price decline in commodities, Sundance Resources Limited (SDL) is an interesting pure play on iron ore. SDL shares have increased more than 180 per cent over the last year and are currently trading about 35 per cent below the 52 week high it made at the beginning of January. SDL was the day’s biggest gainer, beating a host of other miners to gain the top spot.
After hitting a multi-year high of 59.5 cents in the first week of this year, SDL has been on a steady slide down to its current level of 39 cents. Still, many investors have done well, as the junior miner is up 180% for the year to date and has climbed 28% in the past two weeks.
SDL is an interesting play for several reasons: firstly, it’s one of the few iron ore pure-plays with a large scale, low cost project. Global diversified miners such as Xstrata, Rio Tinto, Vale and BHP Billiton have recently shown interest in West Africa for iron ore developments, and steel companies are seeking projects to secure long-term supply.
Many investors are wondering if we have we seen the top in commodity prices for the time being, or if this is buying opportunity. As evidenced by SDL’s share price growth, share prices on commodity pure plays have enjoyed a tremendous run since September last year – as markets assumed that China economic growth would continue running at the same rapid pace as before the financial crisis hit.
And with expectations that China growth could well continue at the 8 per cent mark, its appetite for raw materials and energy will most likely continue. Bell Potter Securities senior client adviser Stuart Smith believes that commodity price falls on the back of China’s December GDP and inflation figures were overdone. “The market has been quite aware that the growth was over 10 per cent. All they’re (China) is trying to do is stifle speculation without denting the momentum that they’ve built up in the last 30 years.”
Argonaut Securities says that SDL shapes as a pivotal player in unlocking the iron ore potential of Central-West Africa. “Mbalam could ultimately become part of a ~100Mtpa regional development encompassing Core Mining’s Avima project, African Aura’s Nkout deposit and Equatorial Resources’ Badondo project,” notes Argonaut, saying that a significant milestone would be if SDL secured a strategic partnership or project financing with the big Russian and Chinese companies operating in the area. “Given the level of interest, SDL may seek multiple partners to maintain corporate appeal whilst still underpinning development of Mbalam,” says Argonaut. You can read the full report here.
Renaissance Capital has a buy on the iron ore miner, with a price target of 76 cents – more than double the current share price. It refers to SDL as a “high-quality, iron ore project” with funding as the key catalyst. “The company is likely to sell up half od its interest in the project in return for the required equity to fund the project.” it says. You can read the full report here.
According to Thomson Retuers broker consensus data those brokers covering the stock are bullish, 3 brokers hold Buys on SDL, with no Holds or Sells.
Chart: Share price over the year to 14/07/2011 versus ASX200 (XJO)
Stock code: SDL
Charts: Sundance Resources Limited
More news: Sundance Resources Limited
Investor Centre: Sundance Resources Limited
Biggest Loser: David Jones (DJS)
David Jones (DJS) came out with an announcement after the close of trade on Wednesday that an unprecedented dramatic and rapid deterioration in trading conditions has forced it to cut its sales and profit guidance. Investors panicked, dumping the upmarket retailer and sending its shares plummeting 18.2%. Other retailers suffered similar fates on the news, with Myer, JB Hi-Fi and Harvey Norman rounding out the top four losers in a sea of red for retailers – down 6.4%, 5.3% and 4.6% respectively.
DJS said that sales in the fourth quarter of its fiscal 2011 will fall by 11 per cent and that net profit for its second half will be down by between 15 per cent and 20 per cent compared with its first half. It said full year net profit will decline by between 0.5 per cent and two per cent, equating to a profit between $167.7 million and $169.7 million for the 12 months to its 30 July balance date.
“The dramatic and rapid deterioration in trading conditions in 4Q11 has been unprecedented,” managing director Paul Zahra said in a statement on Wednesday, issued after the close of share market trading. Mr Zahra said trading conditions deteriorated significantly in the all-important clearance period in June and early July. As a result, David Jones was taking a cautious approach to its 2012 fiscal first half. Mr Zahra said trading conditions were expected to remain challenging.
Expected negative sales as well as action to manage inventory levels would result in forecast net profit declining by 15 per cent to 20 per cent in the first half of its fiscal 2012, to between $84.5 million and $90 million compared with the previous first half. The company added that it was premature at this stage to provide a second half growth guidance for fiscal 2012.
As recently as May, David Jones had reaffirmed its profit guidance for five per cent growth for its fiscal year about to end, so this profit downgrade came as a nasty surprise to the market.
Chief executive Paul Zahra said it was the retailer’s largest known quarterly fall in sales. “As far back as our records will show, as far back as 20 years, we can’t see any significant reduction in sales like this,” he said.
Melbourne Business School academic Jody Evans says the profit warning is another sign consumer behaviour has fundamentally and permanently changed since the financial crisis. “Many retailers felt that the mid-year stocktake sale would be the big fix,” Evans said. “We said at the time of the GFC that it was dangerous to assume that customers will buy more if you drop the prices.”
Mike Bigwood, Patersons Securities had a sell on the stock back in April in 18 Share Tips, saying that increasing competition from domestic peers and on-line offerings has meant that margins have been declining. Even Bigwood would have been surprised by Wednesday’s profit downgrade, which prompted Thursday precipitous fall. “The company only just reached the bottom of guidance of between 5 and 10 per cent NPAT growth in its recently announced first half result,” said Bigwood in April. “Currently trading about 20 per cent above my calculated intrinsic value, I would be comfortable in looking for other opportunities to grow the portfolio.” And it seems Bigwood was right on the money with his valuation as shares dumped 18% in a day.
Another analyst from Patersons, Hamza Habib was also bearish on the stock a few months back, saying that retail sector sales and customer traffic across the board had been weak in the past few months. “A concern for David Jones is the high Australian dollar in terms of pricing and competition from other stores and online retailers,” said Habib.
Chart: Share price over the year to 14/07/2011 versus ASX200 (XJO)
Stock code: DJS
Charts: David Jones Limited
More news: David Jones Limited
Investor Centre: David Jones Limited
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