18 Share Tips – 9th December 2011

Richard Batt, Shadforth Financial Group

BUY RECOMMENDATIONS

Alumina (AWC)

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

AWC is involved in bauxite mining, alumina refining and aluminium smelting. Its primary asset is a 40 per cent interest in Alcoa Worldwide Alumina and Chemicals (AWAC). The company is a beneficiary of increasing demand for alumina, particularly from China. It’s a low-cost producer and long term investors should make gains in line with improving market conditions across the globe.

Atlas Iron (AGO)

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

AGO has two operational mines in the Pilbara region producing 6 million tonnes of ore annually. Production is expected to reach 12 million tonnes by 2013. The company also has port facilities at Port Headland, which can provide capacity for up to 15 million tonnes. AGO has also completed three mergers, resulting in a large tenement base. It has an excellent track record of resource growth and low capital expenditure requirements. It remains an ideal exposure to the iron ore sector, and portfolios should benefit over the long term.

HOLD RECOMMENDATIONS

Mesoblast (MSB)

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

MSB is commercialising technology, enabling adult stem cells to be extracted from a donor’s bone marrow and developed into quantities that can be administered to patients. The company recently reported highly encouraging results from its phase 2 trials of Revascor, a drug for treating patients with heart failure. It has five other products in trials, so investors should retain their exposure.

Metcash (MTS)

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

In times of economic uncertainty, Metcash recently announced a positive result, with a 1.7 per cent increase in first half revenue to $6 billion. Net profit after tax was up 1.4 per cent to $117 million for the half year ending October 31, 2011. A recent court decision allowing the acquisition of the Franklins supermarket chain should improve earnings. The acquisition increases the size of its buying group, enabling Metcash to compete more effectively on price against its major competitors.

SELL RECOMMENDATIONS

Symex Holdings (SYM)

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

Little World Beverages has a fine tasting product range and positive year-on-year earnings growth. But, in our view, the current valuation for this boutique brewer is exceedingly generous and a bit hard to digest. When trading around $3.30, the company has an enterprise value of $195 million and a trailing price/earnings ratio above 22 times. We believe this can only be substantiated with exceedingly strong future earnings growth. On December 1, the stock was priced at $3.30.

Virgin Blue Holdings (VBA)

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

VBA, like most airlines, is operating in a very difficult environment of low margins and ever increasing labour and fuel costs. Recent share price rises due to the grounding of the Qantas fleet appears to be an over-reaction in our view. We don’t expect Virgin to benefit long term from the Qantas upheaval. Expect upcoming earnings guidance to be positive, so sell into this strength.

Michael Heffernan, Austock

BUY RECOMMENDATIONS

Incitec Pivot (IPL)

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

This explosives and fertiliser company recently produced a most satisfactory result. The company stands to benefit significantly from ongoing growth in the resources sector, particularly as earnings from explosives will continue to increase as a proportion of its total. Also its balance sheet is strong, with a relatively low debt-to-equity ratio.

Domino’s Pizza (DMP)

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

A franchise pizza operation, which has been a tremendous success story since listing on the ASX in 2005. As it operates in an almost recession proof area of the economy, its future looks bright even if European debt problems persist and the US recovery is slow.

HOLD RECOMMENDATIONS

Campbell Brothers (CPB)

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

Involved in a range of business activities, from laboratory analytics to distribution of chemicals. Its sharemarket fundamentals are strong and its diversity in today’s volatile times leaves it in a strong position.

Bradken (BKN)

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

This company, which produces consumables for the mining sector, has been impressively resilient in the past few years after an almost near death experience during the global financial crisis. With production levels in the resources sector expected to grow, the future looks promising. Also, and comforting for investors, is the company pays a fully franked dividend yield of around 5.5 per cent.

SELL RECOMMENDATIONS

Goodman Fielder (GFF)

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

This iconic food maker is currently facing one of its toughest tests. Specifically, branded products are being squeezed for shelf space by the increasingly pervasive major supermarket home brands. Supermarkets are concentrating on their own labels in the face of higher costs and competitive pressures.

BlueScope Steel (BSL)

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

Steel companies have experienced particularly difficult times in recent years due to the high cost of iron ore inputs, a strong Australian dollar, import competition and the recently legislated carbon tax.  Although the latter does provide limited compensation for steel companies, this is unlikely to be a permanent feature of the domestic steel landscape.

Paul Clarke, State One Stockbroking

BUY RECOMMENDATIONS

Regional Express Holdings (REX)

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

Regional Express is Australia’s largest independent regional airline. It’s the sole provider of numerous services on routes deemed by the major airlines to be too small or profitable. REX is well positioned to grow profits driven by the large Air Ambulance Victoria contract (from July 2011), and charter and freight services operated through subsidiaries Pel-Air and Airlink.

Cabcharge Australia (CAB)

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

CAB operates a highly profitable taxi payment processing network via its own charge card and by processing third party cards. CAB terminals are installed in more than 18,000 taxis, representing 95 per cent of an industry made up of six companies in New South Wales and two in Victoria. Expect a recovery in corporate taxi travel and higher contributions from CAB’s CDC bus and UK joint ventures to boost earnings.

HOLD RECOMMENDATIONS

Extract Resources (EXT)

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

EXT holds uranium deposits mostly in Namibia. Extract’s Husab project is its main asset situated near Rio Tinto’s Rossing mine, which has been operating for more than 40 years and produces 8 per cent of the world’s uranium. Expect first production from the Husab project in 2014. Recently, as part of the feasibility study refinement process, an additional 37 per cent increase in resources to 320 million pounds was identified, extending the mine life beyond 20 years. 

Technology One (TNE)

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

Provides end-to-end software solutions to private businesses and government departments. Products offered include HR and payroll solutions and supply chain and business intelligence applications. TNE recently reported a strong full-year 2011 result, with net profit after tax increasing by 14 per cent to $20.3 million. TNE operates on healthy margins, is supported by a robust balance sheet and generates a high degree of repeat sales.

SELL RECOMMENDATIONS

Goodman Fielder (GFF)

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

The food maker is currently undertaking a strategic review of operations, with a view to cut $100 million in costs by full-year 2015. Although a positive move, it’s unclear as to where it will achieve these savings. In any case, we believe cost savings are likely to be offset by continuing weak revenue.

BlueScope Steel (BSL)

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

The steelmaker recently announced a capital raising. Its objective is to raise $600 million via issuing 1.5 billion new shares at 40 cents each. BSL carries more than $1.2 billion of debt on its balance sheet and the funds raised will reduce part of this debt. But will the capital raising be enough, and will it satisfy its lenders given the outlook for steel manufacturing in Australia is negative? Steel industry trading conditions remain challenging with domestic sales volumes declining.

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