Peter Day, Wilson HTM
Woodside Petroleum (WPL)
Woodside has three liquefied natural gas projects on the drawing board, and we believe it offers solid growth. The share price fell through $30 late last year, but has recovered and stgeloped a medium-term uptrend. Expect this trend to continue as the stock market and crude oil price find a bottom.
A specialist pharmaceutical company involved in researching, stgeloping and commercialising therapeutic products for chronic respiratory and immune disorders. Its stgelopment pipeline of products includes Aridol for managing asthma and Bronchitol for treating cystic fibrosis and the progressive lung disease, bronchiectasis. Pharmaxis has just completed phase 3 trials for Bronchitol on 325 patients. We expect it to deliver positive results to the market.
Harvey Norman (HVN)
The retail giant’s performance in Australia has been reasonable in a challenging market. The company continues to take market share in key electrical categories, although discounting remains aggressive. But deteriorating retail margins in Ireland and New Zealand are having a negative impact on the group.
We have downgraded our rating from buy to hold. The chances of an equity raising of more than $1 billion to fund a possible acquisition of parts of Alcan Packaging have increased. While such an acquisition has strong strategic merit, our core assumptions imply that value and earnings per share will be neutral at best.
Qantas Airways (QAN)
Qantas announced a 60-to-80 per cent downgrade in 2008/09 profit. The international travel market has deteriorated significantly since the first half result. Yields are under severe pressure due to heavy discounting. The size of the downgrade is big, with the company signalling profit will now be in the range of $100 million to $200 million versus a previous outlook of $500 million. We also believe that Qantas still has potential to further cut its dividend.
The share price of this building materials group has bounced strongly in line with the sector. But the stock is hitting resistance at $4, and the price factors in a building recovery next year. We believe there is still downside risk to consensus 2010 earnings. While there’s signs of housing stability, a recovery may still be some time away.
Andrew Doherty, Morningstar
Perpetual Trustees (PPT)
This fund manager and financial services supplier has an excellent long term record of earnings and dividend growth. Earnings are being slashed by the bear market through fund outflows and reduced asset values, which result in lower management fees. But it remains a solid, long term prospect. Competitive advantages are its strong brand and reputation with planners and the investing public.
CAB has a dominant position in the taxi fare processing industry due to 30 years experience and scale efficiencies, which makes life difficult for potential competitors. Earnings growth will come from increasing card usage over cash and the conversion from paper to electronic transactions.
James Hardie Industries (JHX)
This building materials supplier has an excellent business model and a clear technology advantage over its competitors. This combination is driving above average earnings growth. US market share continues to grow despite the housing downturn. The company is increasing market share in interior products.
OneSteel was created via the spin out of BHP’s steel products business in 2000. It then merged with Smorgon Steel to become one of the leading manufacturers and distributors of steel and metal products in Australasia. Earnings are subject to a multitude of factors beyond management control, making it a very volatile stock and unsuitable for conservative investors.
Fleetwood Corporation (FWD)
This manufacturer of recreational vehicles and portable accommodation is leveraged to growth in the resources, retirement and recreation sectors. Management is experienced and conservative. Cash flow generation is strong, with minimal capital expenditure requirements. But the share price over-states the company’s earnings potential.
Boart Longyear (BLY)
One of the world’s biggest drilling services and product providers. Demand for drilling products and services is highly leveraged to mining and resource-related expenditure, which is rapidly declining after years of strong growth. Problems are compounded by the company’s high debt levels, which becomes more difficult to service as earnings fall.
Alex Beer, State One Stockbroking
Woodside Petroleum (WPL)
The oil and gas giant has issued US$1 billion in corporate bonds on the back of a gas discovery at Martell-1 in Western Australia. Furthermore, a verbal agreement between the WA Government and the Kimberley Land Council, in relation to establishing an LNG precinct at James Price Point, was reached on April 16. After Pluto, WPL has world class LNG project options in the pipeline, including Browse and Sunrise.
Specialty Fashion Group (SFH)
In February, it announced first half earnings before tax of $30.5 million, down 14.9 per cent on the previous corresponding period. While it’s clear the business has suffered due to declining women’s clothing sales since the start of the year, the stock price has been punished over debt refinancing concerns. But women’s clothing sales at David Jones and Myer are encouraging for the industry. We are cautiously confident of a continuing recovery for Specialty Fashion Group ahead of its September 2009 debt refinancing.
After a strong rally, it’s possible that significant capital expenditure may be required to turn around the Coles business. The January 2009 capital raising has eased financial concerns, but Wesfarmers is exposed to many external price and volume risks, such as weather (fertiliser impact), commodity prices (coal, LPG and chemicals) and discretionary spending.
Outside the recent copper rally, there is downside risk to mining volume growth in the medium term, particularly iron ore. Expect a reduction in mining capital expenditure in a cyclical downturn. While this presents downside risks to MND’s order-book, significant engineering and construction work is expected to flow from the oil and gas sector. Monadelphous is a quality exposure in engineering and construction.
It’s concerning that the supermarket giant appears to be running out of attractive high growth options. The arrival of ALDI and Costco, and the steady performance by Metcash means Australia’s grocery retail space is becoming very crowded. Woolworths is now looking overseas for expansion opportunities, which has been historically difficult for other Australian companies, such as Harvey Norman. It may be time to look elsewhere for growth.
David Jones (DJS)
While the first half result was pleasing for shareholders, David Jones is experiencing challenging conditions in all states. With poor macro economic conditions expected in the next half year, we would rather be invested in discount clothing and electrical retailers, which have business models focused on competitive pricing.
More articles in this week’s newsletter
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