Mike Bigwood, Patersons Securities
Lihir Gold (LGL)
The gold miner has a strong balance sheet and provides exceptional leverage to the gold price, which should remain strong in this uncertain economic environment. Gold, seen as an inflation hedge, should also benefit with any spike in inflation flowing from an improving global economy. With its Bonikro mine ramping up to full production at Ivory Coast in West Africa and further exploration upside, LGL is my top pick in the sector.
Carnarvon Petroleum (CVN)
The company recently announced a new oil discovery in Thailand. Low cost production, a strong balance sheet, solid cash flow and upside from further exploration and appraisal efforts provides a good investment opportunity for those playing in the small-cap space.
With a fully-franked dividend yield of around 5.3 per cent, a strong balance sheet and a defensive earnings base, Metcash, a grocery wholesaler, is well positioned to post solid earnings figures as the domestic economy slows. As the unemployment rate continues to rise, consumers will spend more time at home, which will support supermarket sales.
Origin Energy (ORG)
Offers investors exposure to a defensive earnings stream via its vertically integrated electricity generation and retail business. With $4 billion in cash, the balance sheet is strong. The company also has access to another $2 billion in debt funding, and it will be a key player in the privatising of the NSW power generation assets.
Minara Resources (MRE)
Current nickel prices are about US$5.50 a pound. Our view is Minara is unprofitable when nickel prices are below US$7 a pound. A share price rally of almost 150 per cent in the past two months appears unjustified. Although the company’s financial position improved after the rights issue in December 2008, the cash position remains under pressure at current spot prices.
Brambles Limited (BXB)
Brambles will struggle to grow revenues due to increasing competition in its mature markets of the US and the UK. Already, the company has lost a contract with Pepsi in the US to a competitor using plastic pallets as opposed to Brambles’ wooden pallets. With retailers running down inventories during the economic slowdown, revenues will remain under pressure.
Steven Hing, Novus Capital
Coca-Cola Amatil (CCL)
I’m looking at Coca-Cola Amatil as a safe play for two months. The company looks well supported around current levels, and, on a price/earnings ratio of 16 times, it presents reasonable value as CCL reported net profit after tax of $404 million for full-year 2008. Earnings before interest and tax increased 8.6 per cent. The average target price from institutional forecasts is $9.06, but, technically, it could go higher. Given the defensive nature of the stock, it offers a good risk/reward play. A defensive stock like Coca-Cola Amatil should well be supported if the market has another shakeout.
This blood products company is widely regarded as a defensive stock and is well supported at $31 levels. CSL has the productive capacity to stgelop a Swine flu vaccine if needed. Back in 2006, Avian flu awareness was enough to markedly increase seasonal flu vaccines. The awareness of Swine flu could increase sales of regular flu vaccines this year.
SP AusNet (SPN)
This Victorian-based electricity transmission company recently announced a capital raising. SP AusNet is getting solid support, and should hold these levels in response to a stronger balance sheet.
Macquarie Infrastructure Group (MIG)
This infrastructure group appears fairly priced at today’s levels given the risks. It has sufficient time to administer asset sales, to de-leverage and improve valuations. There is also an impending deal with the French Government, involving economic stimulus, which would be positive.
Macquarie Group (MQG)
Macquarie enjoyed a tremendous run, which coincided with the market rising 27 per cent from its bottom. Macquarie was $15.75 a share in early March. It has undertaken an effective capital raising, but at a steep discount. Macquarie could come under pressure if US banks start having problems again, or if the market starts retreating.
Woodside Petroleum (WPL)
While the oil giant offers excellent long-term potential from stgeloping its LNG projects, an expensive price/earnings ratio factors in crude oil prices higher than $US70 a barrel. Oil could retreat below US$50 if demand falls. if the market pulls back, oil will more than likely follow, and Woodside’s share price could find its way back below $35.
Scott Marshall, Shaw Stockbroking
The chemical and explosives maker is well managed and offers sound financials and fundamentals. Strong mining services offset flat or weaker profits from consumer products. Gearing remains low around 30 per cent and interest cover is strong at 6.6 times. Orica remains particularly exposed (70 per cent of pre-tax profit) to the fortunes of the mining sector.
Toll Holdings (TOL)
Despite the global downturn, this transport and logistics group offers many favourable attributes. Gearing is only 20 per cent and interest cover is eight times – very strong. TOL has no need for an equity issue – apart for major acquisitions – and has a strong history of generating free cash flow. Recent acquisitions are yet to fully contribute to earnings. TOL is building a multi mode transport and logistics network in the Australian/Asian region. At this point, Toll is managing its growth strategies well.
BHP Billiton (BHP)
BHP’s share price has staged a solid recovery from its low in November last year to a recent high that exceeds our price target. The recent rise in base metal prices is not enough to offset an expected sharp fall in bulk commodity prices. The recovery in commodity sales volumes can be mostly attributed to re-stocking rather than underlying demand.
Brambles Limited (BXB)
Sales revenue fell by 7 per cent for the 10 months to May 2. CHEP sales declined by 7 per cent and Recall Sales fell by 8 per cent. The CHEP review in the US is continuing, and capital expenditure has been cut to mirror the downturn in business. CHEP has long-term opportunities in Europe from global dominant technology. Recall has solid global growth opportunities.
National Australia Bank (NAB)
The bank has a significantly impaired loan book in the UK. Ratings agency Moody’s has downgraded NAB’s UK Bank, Clydesdale, for the second time in three months. The downgrade reminds us of the continuing earnings drag for NAB – because of its UK operations – relative to Westpac and Commonwealth.
Skilled Group (SKE)
Skilled recently changed its profit guidance to an “underlying NPAT decline of around 20 per cent”. The outlook is for interest cover to fall below 3 times so financial risk is high. This is close to the debt covenant, so we don’t believe the group has much scope to manage a further deterioration of operating conditions. While company management says it has scope for cost reduction and capital management, we believe the share price does not reflect the financial and earnings risk outlook.
Other articles in this week’s newsletter
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