Fortune sometimes favours the brave. Recently in a story on TheBull, Carey Smith, of Alto Capital, suggested investors consider buying troubled surf wear company Billabong International. Smith argued the intrinsic value of the group’s brands was undervalued and he believed the share price would rise if a deal with private equity was reached. A deal was agreed and the share price had since doubled to trade at 38 cents on July 25.
Similarly, Brendan Fogarty, of PhillipCapital, saw value in gold producer Newcrest Mining. Trading at $10 levels several weeks ago, Fogarty said there came a point where the value of the company’s reserves, exceeding 40 years of mine life, presented enough value to simply buy and hold. The share price was trading at $12.32 on July 25.
Today, analysts identify more buying opportunities of beaten up stocks. Their recommendations are aimed at investors with an appetite for risk. They back their case as to why these stocks can be considered.
Transfield Services (TSE)
Smith says Transfield is one of Australia’s largest operations and maintenance service providers to the mining, energy and infrastructure sectors. Smith says share price has more than halved in the past six months and is about 85 per cent lower than its pre-GFC highs. Recent share price weakness is related to concerns over the slowdown in the mining sector. The shares were trading at 92 cents on July 25.
Smith says most companies providing services to the mining industry have experienced significant share price declines.
“The difference between TSE and most other service companies is TSE has little to do with project construction,” he says. “Rather, TSE provide services to projects that are already operating. The slowdown everyone is talking about in the resources sector is related to construction rather than production.
“Earnings per share estimates for 2013/14 range between 11 cents and 21 cents. Even on the lowest estimate, the company is trading on a price/earnings ratio of less than 10 times, and is forecast to pay a partially franked dividend of 5 cents.”
Troy Resources (TRY)
This gold company has two operating mines in South America – Casposo in Argentina and Andorinhas in Brazil. Smith says the share price is down about 70 per cent since October last year. Smith says recent falls have been magnified over concerns the company paid too much for the recent all scrip acquisition of Azimuth Resources.
“Troy has historically been one of Australia’s best gold miners, generally producing solid profits and paying dividends,” Smith says. “Troy has paid out 73 cents a share in dividends since 2000.
“This stock isn’t for the faint hearted as its market value partially depends on the gold price. Management has a proven track record, and we expect the share price to rebound strongly once market sentiment towards the gold sector improves.”
Atlas Iron (AGO)
Brendan Fogarty says iron ore prices have been volatile this year. The price was around $US155 a tonne in March and fell to $US110 in June. Recently it was trading at $US130 a tonne. Due to the weaker Australian dollar, Fogarty says the iron ore price in Australian dollars is close to its highs.
Fogarty says listed producers have been slow to react to this recovery, with most stocks only now starting to recover from significantly sold off positions. He says a strategy is to choose your preferred iron ore listed exposure and wait for a share price reaction if and when the producers beat the current downbeat earnings expectations.
“My preferred mid cap iron ore exposure is Atlas Iron,” he says. “With an estimated FOB (free on board) break even cost around $A80 a tonne amid near term production growth, I expect Atlas to be one of many mid cap iron ore producers re-rated in a more stable iron ore price environment.”
Maca Limited (MLD)
A mining services business largely engaged in construction and contract mining operations. James Samson, of Lincoln Indicators, says while the mining sector remains in the doldrums, MLD has grown its order book.
Samson says the company’s share price has suffered despite its strong financial health.
“For investors with a contrarian view seeking high risk opportunities, MLD offers a bright spark within a deeply troubled sector,” he says.
“The company’s contracted order book is stable, and earnings are expected to grow in full years 2013 and 2014, placing the business on a forward price/earnings ratio of six times full year 2014 earnings.”
Silver Lake Resources (SLR)
The share price has retreated from about $4 in October 2012 to trade at 86 cents on July 23, 2013. It paid $426 million for Integra Mining last year, which the market suggests was possibly too high. This was followed by a rapidly retreating gold price.
“For investors willing to take on gold price risk, SLR has generated significant production growth in recent times,” Samson says. “The company is likely to thrive on the back of higher gold prices and looks undervalued on a forward price/earnings ratio of about 4.5 times full year 2014 earnings.
OZ Minerals (OZL)
Peter Moran, of Wilson HTM, says the share price of this copper and gold company has fallen about 40 per cent this year and about 70 per cent since July 2011. He says OZ Minerals, like other miners, has been impacted by higher costs, weaker commodity prices and negative sentiment. It recently suspended development of its Carrapeteena project because of the difficult environment, and Moran says its sole producing mine Prominent Hill will struggle to make a profit this year.
However, Moran says OZL is sitting on $650 million in cash and has an 18 per cent stake in listed Sandfire Resources. He says OZL is interested in buying assets already in production.
“We believe as the environment begins to improve, we will see solid gains in the share price,” he says.
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