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Paul Clarke, State One Stockbroking

BUY RECOMMENDATIONS

AWE Limited (AWE)

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

An oil and gas explorer and producer, with interests in Australia, New Zealand, Indonesia, Yemen and the US.  AWE has six main producing assets across Australia and New Zealand as well as onshore shale gas in Texas. In December, AWE agreed to sell an interest in the Bass Basin project to Toyota Tsusho for $80.125 million, where $26 million will be paid out as a special dividend and the remainder will add to AWE’s strong cash pile. This strong cash pile combined with potential reserves growth paints a bright outlook.

Ainsworth Game Technology (AGI)

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

AGI specialise in making, supplying and maintaining electronic gaming machines in Australia, the US and Asia. AGI recently completed a successful trial period of its machines in Nevada under two casino monitoring systems. This is an important step, as it will enable AGI to increase sales in this massive gaming region in the 2012 second half.

HOLD RECOMMENDATIONS

Coca-Cola Amatil (CCL)

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

This soft drink bottler has recently ventured into making and distributing premium beers and spirits. CCL has provided guidance of a 4.5 per cent increase in net profit after tax for the 2011 second half – slightly below analyst expectations. CCL may come under pressure to sustain fat profit margins amid stiffer competition. But CCL is a quality company, paying solid fully franked dividends, and it may attract takeover appeal.

ALE Property Group (LEP)

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

Owns 90 hotels across Australia and leases them to ALH Group (a subsidiary of Woolworths), with an average lease life of 18 years. Due to debt refinancing at higher margins, distributions will fall to 16 cents a share in 2012. But there’s potential upside via the development of additional land and rent reviews in 2018.

SELL RECOMMENDATIONS

Sigma Pharmaceuticals (SIP)

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

Sigma is a pharmaceutical wholesaler, and also owns the Amcal, Guardian and Amcal Max brands. SIP sold its manufacturing and generics business in late 2010, which greatly reduced debt. But the major risk, in our view, is a potential change in regulations that enable supermarket chains to compete in the industry. 

Primary Health Care (PRY)

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

Has a network of medical and pathology centres across Australia. It acquired Symbion Healthcare in 2008, which changed the nature of its asset base and resulted in it becoming the largest domestic pathology provider. Recent pathology funding cuts (pathology makes up 40 per cent of earnings) coupled with collection centre deregulation can generate uncertainty in the industry.

 

Michael Heffernan, Austock

BUY RECOMMENDATIONS

Miclyn Express Offshore (MIO)

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

This vessel charter company operates across a range of activities, particularly off the coast of Western Australia. Its sharemarket fundamentals are robust and its future earnings growth appears strong given the huge capital investments in the resources sector.

NRW Holdings (NWH)

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

A mining services company, operating in civil construction, drilling and fabrication. It’s in the right sector at the right time. It has blue chip mining clients, including BHP Billiton, Rio Tinto and Fortescue Metals. In November, it was awarded a $99 million civil works contract on the Whetstone project and lifted its profit forecast for the December half year. Its growth prospects are sound.

HOLD RECOMMENDATIONS

Commonwealth Bank of Australia (CBA)

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

While the banking sector has suffered in recent times, a likely interest rate cut next month and an increase in economic activity should be positive. In the run up to the reporting season in February, expectations will build about its dividend, which is a major attraction for retail investors. In a difficult economic environment, it’s always nice to receive strong dividends twice a year.

Domino’s Pizza (DMP)

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

A franchise pizza business, which has met with tremendous success 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 problems persist and the US only gradually recovers.

SELL RECOMMENDATIONS

Aristocrat Leisure (ALL)

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

This still seems to be a perennial disappointer. As long as there’s anxiety and uncertainty about European economic developments, on top of sluggish economic activity in the United States and Australia, discretionary spending on gaming is a likely casualty.

Insurance Australia Group (IAG)

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

With a big number of natural disasters in the past few years, the profitability of insurance companies has suffered. Insurance companies tend to increase premiums in the wake of natural disasters, but in the current economic environment it may take some time before this is translated to a more robust bottom line.

 

John Rawicki, Ord Minnett

BUY RECOMMENDATIONS

Suncorp Group (SUN)

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

Compared to its peers, SUN has a strong capital position and earnings growth prospects. Despite a string of natural disasters and claims in recent months, we expect the sharp increases in insurance premiums to offset the negative impact, and enable the company to continue delivering respectable growth and dividends to shareholders this year.

Asciano Group (AIO)

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

Solid growth in container traffic through Sydney and Melbourne last year sets up a bright 2012 for this ports and rail operator. Further, Pacific National’s (Asciano’s subsidiary) coal haulage contract with Rio Tinto represents successful penetration of the lucrative Queensland coal market. This supports our view that Pacific National can achieve an impressive 30 per cent market share of coal haulage in Queensland by 2016.

HOLD RECOMMENDATIONS

Commonwealth Bank of Australia (CBA)

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

We believe passing on the December interest rate cut in full to borrowers will put further pressure on lending margins, particularly its mortgage book. Unlike ANZ, there was no move in policy to enable the headline rate to be adjusted on a monthly basis. In our view, the bank’s profit could be 2 per cent lower this year, and we have amended our June 2012 price target to $52.92. It was trading at $50.02 on January 12, 2012.

Transfield Services (TSE)

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

The company had a great 2011 by acquiring $900 million in new contracts. But we believe that upside from these large multi-year projects won’t flow through significantly until after full year 2012, limiting immediate upside. Downside risks remain from prolonged strength in the Australian dollar and a potential cooling off in the resources and infrastructure sectors.

SELL RECOMMENDATIONS

Bendigo and Adelaide Bank (BEN)

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

In December, the bank announced a $120 million placement and an upcoming $70 million share purchase plan to bolster its balance sheet and fund the Bank of Cyprus acquisition. We don’t believe the acquisition will be as value accretive as management indicates. Further, the bank’s recent $95 million writedown in goodwill due to a decline in its margin lending business will place further pressure on earnings.

PaperlinX (PPX)

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

In our view, there’s a structural downshift in global paper consumption, while competition is increasing. The company’s debt balance is more than three times its current market capitalisation. Its ability to repay debt in the future concerns us.

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