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Discretionary retailers and building product companies are poised to benefit from low interest rates, a lift in consumer confidence and an election result.

Australian retail sales of $21.8 billion in June were flat and consumer confidence remains in relatively short supply.  For those who believe the Australian economy will benefit from stimulus, now may be an appropriate time to add more calculated risk to portfolios.

And Christmas is once again in sight.

Senior private client adviser and economist Michael Heffernan, of Lonsec, says investors willing to diverge from the relative safety of appealing yield plays and take on additional risk should generate capital growth.

Heffernan expects the home building sector to improve in response to historically low interest rates and the possibility of yet another cut before the end of the year.

“I strongly believe the Reserve Bank stimulus will have a positive impact on home building activity,” Heffernan says.

In line with his thinking, Heffernan says building products maker Boral is worthy of consideration despite a first half loss of $25.3 million for the six months to December 31, 2012. The result was impacted by significant items of $77 million, such as suspension of clinker production at Waurn Ponds in Victoria and first half restructuring and redundancy costs.

Boral reports on August 21, so investors can carefully examine its performance. But Heffernan says he will be particularly interested in the outlook statement.

“The result on August 21 will tell you what’s gone before, but I want to know what’s ahead,” Heffernan says. “Boral is in a sector that I think will improve. But I want to know what Boral forecasts about the future. The outlook statement may be cautious, it may be upbeat or it could paint a challenging future.

“But, if nothing else, this stock is one to keep on the radar going forward.”

Adelaide Brighton will also report its interim result on August 21. Joshua Stega, of JAS Wealth, says while the bulk of the company’s earnings are still generated from its cement and lime operations, a series of acquisitions have led to greater vertical integration and ultimately a more balanced and stable business.

While Stega expects earnings to be broadly flat this year, he says there’s strong potential for growth going forward from rising product prices and volumes.

Among discretionary retailers, Stega’s preferred stocks for capital growth include Super Retail Group (SUL) and GUD Holdings. He says Super Retail Group’s diversity generates multiple revenue streams from its auto, leisure and sporting outlets. It offers good EBIT margins and return on capital.

“We would expect consumers to spend more at SUL outlets if confidence improves,” he says. “SUL caters for what consumers like – cars, boating, fishing and camping. If people feel more secure in their jobs and believe the economy is heading in the right direction, then lower interest rates will provide the impetus to spend more disposable income.”

Stega says organic growth for GUD Holdings in the past few years has been modest mostly as a result of weaker consumer spending. Stega says this consumer and industrial products company is well managed, offers a strong balance sheet with high interest cover and a relatively high dividend yield of about 7 per cent on August 14.

Stega expects GUD to look for acquisitions to support its existing portfolio of strong brands, which include Sunbeam, Oates and Dexion. He says the company has been recently trading on an undemanding price/earnings ratio of about 11.5 times.

“I believe there is value here as GUD has solid fundamentals and management knows how to grow the business,” Stega says.   

Retail investors who bought Myer shares in the IPO for $4.10 and still hold them have had little to smile about since the company listed in November 2009. The shares were trading at $2.61 on August 14. Its interim report for the half year to January 26, 2013, provided some hope for better times ahead. The company reported a 1.7 per cent increase in half year sales to $1.7325 billion and a 1.4 per cent rise in EBITDA to $185.4 million.

Peter Moran, of Wilson HTM, says Myer’s broad range removes product specific risk associated with many other retailers.

He says Myer is one of Wilson’s preferred discretionary retailers.  

“The company offers pretty good value at current levels,” Moran says. “On our forecasts, assuming the tough retail market remains, we see Myer trading on a price/earnings ratio of 11.2 times and a dividend yield of 7.3 per cent for financial year 2014.

“It’s well managed and inventory levels remain under control (unlike some retailers) thanks to a sound supply chain.”

James Samson, of Lincoln Indicators, says ARB Corporation has an enviable track record in the retail sector. “It’s been one of the few retailers posting buoyant growth in the past few years,” he says of a company that makes and distributes 4-wheel drive accessories.

“Sentiment has been impacted after the Rudd Government announced changes to the fringe benefits tax on novation car leasing despite a lack of any real impact to earnings.” 

He says the company’s new Thailand facility will enable it to produce and distribute products more efficiently. The company will also expand operations over the next few years.

Samson says ARB’s balance sheet remains solid and cash flows from operations are growing. It has no debt.

“Companies that do well in tough times tell you something about management and its operations,” Samson says. “So when the economy turns for the better, the good performers are at the forefront of investors’ minds. And the reason is strong growth potential.

“Nothing is guaranteed; it’s about taking calculated risk.”

Click on the links below to read other articles from this week’s newsletter

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