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Andrew Arvanitopoulos, Alpha Securities

BUY RECOMMENDATIONS

Sydney Airport (SYD)

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

International traffic was up 6 per cent in March, making for a 5 per cent up-trend in the past eight months. We see international numbers as the most important driver of earnings and dividend growth. Domestic traffic was up 2.3 per cent, also a strong result. We expect strong dividend growth in the next two-to-three years.

Trade Me (TME)

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

TME is the online market place and classified advertising platform in New Zealand, with auctions and fixed price sales for new and used goods. It reported a 3 per cent rise in half year net profit to $NZ37.4 million on an 18 per cent increase in revenue to $NZ80.4 million. TME offers much growth potential, as its outlook is bright.

HOLD RECOMMENDATIONS

Telstra (TLS)

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

Telstra has grown its 4G customer base from 1.5 million to 2.1 million in a relatively short time. The company appeals for its fully franked dividend of 28 cents a share. We expect the business to continue growing and this should provide an opportunity for higher dividends in future. 

Insurance Australia Group (IAG)

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

IAG has expanded internationally. It now owns insurers in Thailand and has minority holdings in Malaysia, India, China and Vietnam. It’s focus on improving Australian and New Zealand performance is gaining traction. In our view, IAG’s underlying margin of 12.2 per cent in the 2013 first half is likely to improve. The fully franked dividend yield is marginally below 4 per cent.

SELL RECOMMENDATIONS

Alumina (AWC)

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

Alumina is involved in the various stages of aluminium production, from bauxite mining to refining to smelting.

The company recently received a fully franked dividend of $US25 million from its AWAC joint venture. We expect price declines in alumina and aluminium, which, in our view, clouds the company’s outlook.

Fleetwood (FWD)

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

Margins in the manufactured accommodation division have declined. Earnings forecasts have been reduced by 9 per cent. We see continuing lower demand from the WA resources sector. This, in turn, will impact occupancy at the Searipple Village at Karratha.  We expect sales of accommodation units will remain under pressure.

 

Peter Arden, Russell Research

BUY RECOMMENDATIONS

Neon Energy (NEN)

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

Neon has now secured rigs for drilling each of the proposed wells in Vietnam Blocks 105 and 120 and is finalising upcoming programs on these highly prospective offshore oil and gas exploration permits. Drilling is planned for June and August 2013.  The cost of each well will be largely funded by Neon’s partner, Eni.

Orbis Gold (OBS)

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

Orbis has made three promising discoveries in the emerging gold production powerhouse of Burkina Faso in West Africa. The company’s two most advanced projects (Natougou and Nabanga) have combined multi-million ounce gold potential and are currently the subject of scoping studies into potential early production. A speculative buy. 

HOLD RECOMMENDATIONS

Evolution Mining (EVN)

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

With the Mt Carlton silver/gold mine now producing, EVN has five operating mines with a gold production base of about 370,000 ounces a year. Lower operating costs are forecast from better grades and specific actions. It has a large gold resource base already, but recent exploration success at Mt Rawdon and Pajingo should add to that. 

Incremental Oil and Gas (IOG)

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

Oil production from its Californian operations is generating cash flow to fund IOG’s activities in the Florence Oil Field in Colorado, where relatively shallow, naturally fractured zones are expected to yield modest oil output.  The deeper Niobrara formation at Florence may host significant oil, but its development requires assistance from bigger partners.

SELL RECOMMENDATIONS

Beach Energy (BPT)

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

In our view, relatively flat and modest production of oil and gas has generated uninspiring returns. So the company is pinning its hopes for substantial success on the recent farm-in by global oil major, Chevron, which is targeting higher risk unconventional hydrocarbons in BPT’s core areas in the Cooper/Eromanga basins. This could take some time to yield results.

Rio Tinto (RIO)

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

Recent quarterly production performance was weaker than expected with output of major products down 7 per cent to 16 per cent on the previous quarter. RIO also recently had a serious pit wall failure at its major Bingham Canyon mine in the US, which is likely to curtail output for a considerable time and repairs may be far more costly than expected.

 

Anson Rosewall, BBY Limited

BUY RECOMMENDATIONS

FlexiGroup (FXL)

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

FXL has announced the acquisition of credit card provider Once Credit for $45 million. This provider of retail financing solutions will be funding the acquisition through a $45 million underwritten placement at $3.99 a share. Once Credit is similar to FXL’s Lombard business and provides FXL with additional scale in the credit card market. FXL can also utilise access to funding to drive growth in the Once Credit business.

Atlas Iron (AGO)

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

Production is 10 million tonnes a year and it has net cash of $140 million. The company is generating $25 million a month in operational cash flow. On its current cost structure, AGO can generate cash down to an iron ore price of A$83 a tonne. The circumstances for negotiating access to Fortescue Metals Group’s, or an independent’s rail and port have improved materially in the past six months. We expect a positive outcome here to trigger a re-rating.

HOLD RECOMMENDATIONS

Telstra (TLS)

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

We retain our neutral stance. While we expect dividend yield to retain its appeal among investors, Telstra is starting to look more stretched above $5 a share despite the 7.9 per cent grossed up yield it still offers.  Nevertheless, on our earnings estimates, we don’t expect much capital appreciation in the next 12 months. The still hefty yield relative to domestic bonds and bank deposits makes TLS worth holding.

Insurance Australia Group (IAG)

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

It’s a good time to hold domestic insurance stocks, except QBE.  There’s been an absence of major catastrophes and investment incomes have been rising in line with an impressive performance on the S&P/ASX 200 since the lows of 2012. Combining these two factors, we expect IAG’s next report to produce positive results. 

SELL RECOMMENDATIONS

Ten Network Holdings (TEN)

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

Excluding $304 million in impairments and re-structuring costs, first half 2013 results saw an underlying EBITDA decline of 38.6 per cent on the prior corresponding period. This poor performance reflected a 15.8 per cent fall in revenue, which offset an 11.5 per cent reduction in operating costs. Apart from TV ads for the looming Federal election, current indicators suggest the second half won’t deliver any revenue gains. Guidance reaffirms continuing soft ad markets and management mostly focused on further cost reductions.

Challenger (CGF)

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

The problems Challenger face are low growth and declining margins. Normalised margins for the annuity business have fallen from 4.9 per cent in the 2012 second half to 4.5 per cent in the 2013 first half. While the company expects this decline to slow in the 2013 second half, a period of sustained margin decline may be ahead. Shareholders should be concerned at the prospect.

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