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James Samson, Lincoln Indicators

BUY RECOMMENDATIONS

Ausdrill (ASL)

 

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

With a forecast increase in revenue of more than 20 per cent in financial year 2012, ASL looks set to take advantage of the booming global mining sector. ASL provides contract mining and drilling and blasting services to miners in Western Australia and Africa, and is in a position to post a record year. 

Iluka Resources (ILU)

 

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

This mineral sands explorer, project developer and producer is financially healthy, having negotiated higher than expected prices to supply rutile. However, with the company’s core focus on zircon, we believe that ILU is poised to generate further earnings growth, leading to a higher share price.

HOLD RECOMMENDATIONS

Monadelphous Group (MND)

 

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

Monadelphous still sets the benchmark in minerals related engineering. However, at this point, we believe the company is fully priced on a forward price/earnings ratio of about 16 times.

iiNet Limited (IIN)

 

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

The share price was driven up on speculation that TPG Telecom had substantially increased its stake in internet service provider iiNet. Investors may be factoring a takeover premium into the share price, but we believe a takeover is unlikely.  At current levels, we feel company value is fully reflected in the price. iiNet shares were priced at $2.84 on December 15.

SELL RECOMMENDATIONS

Woodside Petroleum (WPL)

 

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

With concerns over the viability, or the ability to deliver the Browse LNG project, we believe WPL may face tougher times. The outlook for the share price weakens further when recently disappointing production results are considered.

Bank of Queensland (BOQ)

 

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

The Bank of Queensland’s issuer credit rating was downgraded by Standard & Poor’s in early December. It’s become clear to us that Australia’s smaller banks are feeling the squeeze. This looks set to continue, as profit growth is pressured due to increasing funding costs and a decrease in the official cash rate. This is likely to cause net interest margins to decline.

 

James Georges, Patersons Securities

BUY RECOMMENDATIONS

Rio Tinto (RIO)

 

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

Recently, the stock has been trading near its lower range for the current financial year. It intends divesting its Gove bauxite mine and refinery and several smelters via a spinout called Pacific Aluminium. We view the company’s recent streamlining of its aluminium assets as positive. This stock may benefit from any near term resolution in Europe.

Atlas Iron (AGO)

 

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

AGO continues to progress its low capital expenditure expansion plans. Under its new Horizon program, the company aims to produce 46 million tonnes a year to fill all of its available port allocation. We continue to rate AGO’s growth options highly and note that management has delivered on its growth ambitions so far.

HOLD RECOMMENDATIONS

Australian Agricultural Company (AAC)

 

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

AAC is Australia’s largest cattle manager, with more than 600,000 head of cattle on about 20 properties. A key advantage is quality control, gaining premium pricing for its source-guaranteed and marbled beef. With a long history, the company has considerable experience in beef production. But earnings and cash flow are volatile.

Bank of Queensland (BOQ)

 

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

Global credit concerns make it tougher for smaller banks to achieve the growth they enjoyed prior to the global financial crisis. Competing with the major banks is a challenge. Natural disasters in Queensland amid tough economic conditions have been a drag on earnings. But hold for a brighter outlook over the longer term.

SELL RECOMMENDATIONS

BlueScope Steel (BSL)

 

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

BlueScope’s recent capital raising was dilutive. A strong Australian dollar heightens competition with steel imports and pressures domestic prices. The BlueScope business model remains troubled. Any strength in steel prices would help BlueScope, but this is one to sell on any share price strength.

OneSteel (OST)

 

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

The balance sheet is weak with about $2 billion of net debt. Exports of iron ore generate superior margins and earnings than steel. Earnings are subject to exchange rates and steel and commodity prices – all beyond management’s control. Sell on rallies.

 

John Rawicki, Ord Minnett

BUY RECOMMENDATIONS

Origin Energy (ORG)

 

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

Chinese oil company Sinopec has announced it will acquire an additional 10 per cent stake in Origin Energy’s Australia Pacific LNG project, boosting Sinopec’s offtake agreement by a massive 3.3 million tonnes a year for 20 years. In our view, the Origin share price isn’t implying much value for the APLNG project at these levels, so we retain a price target of $18.95. On December 15, Origin was trading at $14.

Wesfarmers (WES)

 

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

We recently attended a Wesfarmers site tour, which focused on its chemicals, energy and fertilisers divisions. The tour highlighted a positive outlook for chemicals via a potential expansion of its ammonium nitrate facility. We expect a continuing strong performance from the company’s Bunnings hardware chain. Together with the Coles turnaround, we expect a lift in earnings growth during the next few years.

HOLD RECOMMENDATIONS

Incitec Pivot (IPL)

 

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

Prices for nitrogen fertilisers have declined recently due to the end of seasonal demand in the northern hemisphere. Uncertainty surrounds the commissioning of IPL’s ammonium nitrate facility at Moranbah in Queensland. Given potentially weaker prices for phosphates and nitrogen, we have downgraded the stock from a buy to a hold. Our earnings per share forecasts for full-year 2012 have fallen by 11.3 per cent and we retain a $3.15 price target. The shares were trading at $3.04 on December 15.

Adelaide Brighton (ABC)

 

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

This building materials supplier has plenty of exposure to resource driven developments in Western Australia and South Australia, and a relatively defensive profile compared to its peers. While these attributes remain appealing to investors, we believe the company’s recent strong share price performance has largely captured these factors and upside is fairly limited at this price. The shares were trading at $2.98 on December 15.

SELL RECOMMENDATIONS

Billabong International (BBG)

 

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

This surf and sportswear producer is a victim of weaker global economic conditions, such as softer retail spending. Debt levels are forecast to remain high due to deferred payments. We suggest the risks remain significant, so we retain our lighten recommendation.

Downer EDI (DOW)

 

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

Selling the architectural and design business, CPG Asia, will improve Downer’s balance sheet and reduce concerns surrounding the company’s gearing level. However, due to reliability issues with the Waratah train project, we believe Downer is at risk from delays in awarding new work, shortages of skilled labour and rising production costs.

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