Price target lowered

Nucoal Resources (NCR)


Chart: Share price over the year to versus ASX200 (XJO)


Share Price: $0.265

Broker Calls: RBS – price target downgraded, Investec – risk of shares falling to 10-15 cents

P/E: –

Market Cap: $117 million

NuCoal Resources (NCR) owns three coal exploration licences in the Hunter Valley of NSW, however a cloud is hanging over the company’s future given it has hit a few problems with the Government granting it a Mining Lease. The uncertainty has prompted brokers to decrease their price targets on the coal hopeful, although the very same brokers are still fairly confident of a positive outcome.

Tom Sartor, RBS Morgans has decreased his price target to 65 cents from 78 cents, but has retained a buy, with a moderate-high volatility. ‘Strong fundamental interest in NCR remains frustrated by the ongoing review,’ says Sartor in a recent research report. ‘We’re not lawyers, but think Doyles Creek can proceed as planned…NCR’s price implying only a 30% chance of a positive review looks like an opportunity to us.’ However there is a strong caveat from Sartor – should the lease not be granted he believes that NCR’s share price would most likely ‘fall significantly’ – even in the event of NCR contesting the finding. ‘We think NCR could halve into the 10-15c range,’ he says.

Colin McLelland from Investec has a slightly lower price target and rates the stock as a ‘speculative risk buy’, suitable only for investors with significant risk tolerance. In other words, those who can lose their money.

‘While findings of the Government’s audit very much diminish possible risks for the project, some uncertainty remains over the potential for a further “probity review” and unfortunately this may linger until a Mining Lease is granted,’ says McLelland. ‘We note that in difficult markets the company may find it challenging to secure funding for development capex and project timing, and hence value, may slip as a result.’

McLelland points out that there are several weaknesses for the stock – initial production is unlikely prior to FY’14 with the Longwall in FY’15, regulatory and environmental approvals are yet to be obtained and the equity market may be cautious in its rating of a single longwall operator. There’s also the issue of growing community concern regarding increased coal mining in the Hunter Valley, and the risk of political involvement in the Mining Lease approval & planning process.



Fairfax Media (FXJ)


Chart: Share price over the year versus ASX200 (XJO)


Share Price: $0.84

Broker Calls: RBS – Sell, Macquarie – Underperform

P/E: 7.42

Market Cap:  $1,976 million

Media giant Fairfax has been a victim of the digital revolution and the accompanying shift of advertising revenue from print to online. Now loyal shareholders are reeling from the news of the Fairfax family selling their remaining shares in the beleaguered company to institutional investors – at a severe discount to the current share price.

According to the Australian PwC Entertainment and Media Outlook 2011-2015, investors should expect further revenue declines in structurally challenged segments of the media, resulting in negative average growth rates over the next five years. ‘Affected segments have a clear imperative to secure new digital revenue streams to remain relevant in the industry,’ said David Wiadrowski, PwC head of communications.

A key challenge for organisations is convincing consumers to pay for content, something Fairfax isn’t doing with much success. With the digital explosion, the expectation that content can be accessed for free has become the norm. ‘The inexpensive nature of most apps combined with the success of the free-to-air digital television channels is reinforcing this expectation,’ Mr Wiadrowski says.

Goldman Sachs media sector analysts concur with PwC on the structural challenges facing media; the broker recently downgraded forecasts for Australian economic growth and forecasted sharp falls for Australian advertising in particular. Goldman Sachs predicts that ad revenue will contract over the next year, falling 1.1%; its previous forecast was for growth of 2%.

Clive Briggs from RBS Morgans has a firm sell on FXJ, as RBS continues to trim earnings estimates. ‘Although the stock is very cheap, trading conditions are weak,’ says Briggs, noting that advertising revenue in the past six months has been softer than usual. ‘Conditions will eventually improve…but at this point, we regard FXJ as a short term trading sell.’

Likewise Macquarie advises to steer clear of the stock. It has downgraded the company to ‘underperform’ and has also trimmed earnings estimates, saying that ongoing problems at Fairfax mean that it is unlikely to pull itself out of the quagmire it is currently in.



David Jones (DJS)


Chart: Share price over the year versus ASX200 (XJO)


Share Price: $2.88

Broker Calls: Ord Minnett – Sell, Calibre Investments – Sell

P/E: 9.41

Market Cap: $1,512 million

You don’t have to be an investment guru to figure out that discretionary retail spending will decline as consumers tighten their purse strings. It’s hardly surprising that retail stocks like Billabong, Myer and David Jones have suffered share price falls as analysts adjust target prices based on a more subdued growth outlook.

John Rawicki of Ord Minnett says that Ord Minnett is steering well clear of the entire retail sector right now. ‘The toughest retail trading conditions in decades resulted in the company reporting a significant 11.2 per cent decline in 2012 first quarter sales to $414.3 million,’ he says. ‘Although David Jones is well prepared for the Christmas trading period, retail spending is much weaker due to the negative wealth effects of a sagging equity market, a soft housing market and the likely contagion of the European debt crisis.’ 

Likewise Darren Jackson of Calibre Investments says that retail continues to be a challenging market to navigate. ‘However, the stock has been massively sold off and shorted on the back of negative news flow,’ he notes. ‘Any easing in monetary policy would also be a positive catalyst.’

In the past week a swathe of other brokers have placed sells or downgraded the the once high-flying retailer, including RBS, Citi, Merrill Lynch, JP Morgan, Deutsche and UBS. It seems the consensus view is to steer well clear for now. RBS Australia is one of the more bearish of the lot, saying that there is significant medium term earnings risk.


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