Ben Potter, ABN AMRO Morgans
IOOF Holdings (IFL)
IOOF is cheap relative to its peers. It’s also trading at a substantial discount to the wealth management sector. We see price upside from here as cost synergies are realised from its recent merger with Australian Wealth Management.
Oz Minerals (OZL)
This diversified miner remains our top pick in the sector. The company is well placed to pursue growth at Prominent Hill now the Minmetals deal has been approved by shareholders. The transaction brings Oz Minerals an additional US$180 million.
BHP Billiton (BHP)
The recently announced joint venture with Rio Tinto to pool its iron ore production in WA’s Pilbara region is seen as a positive, with estimated potential synergies of US$10 billion. While we believe BHP’s share price is fully valued, we recommend investors continue holding the stock.
The debt position of this industrial giant has been addressed after completing another successful capital raising. It can now focus on operational performance, including the turnaround of its Coles business. The Bunnings hardware business continues to perform well.
This building materials group is operating in difficult times. The recent sale of an 18 per cent stake in Adelaide Brighton, 15 per cent below the prior day’s close, underscores the state of the construction markets and is a signal of future earnings uncertainty.
The national carrier faces an unprecedented fall in travel demand, particularly premium travel, prompting us to significantly cut earnings forecasts. The share price has rallied about 60 per cent off its March low, and we see this as an opportunity to exit the stock.
Andrew Doherty, Morningstar
Coca-Cola Amatil (CCL)
This well-managed soft drink bottler offers a strong track record. Competitive advantages include the Coke brand power, scale benefits of the distribution network and continuing innovation. It offers efficiency gains via expansion into packaged fruit and snack food through the SPC Ardmona acquisition.
Cochlear is the innovative leader in growing markets for hearing implants. Growth stems from further penetration of existing markets and entry into unstgeloped markets, such as South America, Eastern Europe and China. Cochlear is a strong cash generator suitable for long-term growth portfolios.
Westfield Holdings (WDC)
Westfield is one of the world’s largest retail property groups, with a strong management team and successful business model. International property valuations and retail spending are likely to remain under pressure for some time, but we expect local operations to bolster short-term earnings, while the stgelopment pipeline offers longer-term growth.
Leighton Holdings (LEI)
Australia’s biggest engineering services contractor has major infrastructure, contract mining and construction businesses in Australia and Asia. Competitive advantages include construction and contract mining experience, a sound balance sheet, dominant local market share and Gulf networks. Prospects are currently factored into the share price.
This building materials group operates in a difficult industry, characterised by cyclical demand. A requirement to make high levels of investment in capacity and facility maintenance results in relatively low returns on capital. It’s able to handle these conditions reasonably well amid strong positions in not overly competitive markets. The shares appear fully priced at current levels.
Pacific Brands (PBG)
Manages some of Australia’s strongest consumer brands, but is under pressure due to the retail downturn. Most products have strong positions in competitive and moderate growth segments. We consider this stock above average risk due to uncertainties relating to outcomes from an aggressive restructuring program, and the low margin, low growth nature of this business.
Carey Smith, Alto Capital
Iluka Resources (ILU)
The $84 million received from selling its 51 per cent stake in Consolidated Rutile will provide some relief regarding the debt position of this major mineral sands miner and processor. Iluka’s share price is trading near decade lows due to high levels of capital expenditure on expanding existing operations and stgeloping new mines. Weak zircon and rutile sales in Asia is affecting the group’s profitability. Wind the clock forward a year or two, and we forecast a return to high profitability as a global economic recovery results in substantial share price gains.
This industry leader in healthcare protection is considered a defensive stock. Trading on a price/earnings ratio around 11 times, the company is valued at a significant discount to other defensive stocks. Expect the company to perform well over the next 12 months irrespective of which way the market moves.
CSL Limited (CSL)
After failing to acquire US company Talecris, CSL has announced a share buy-back of up to $1.6 billion, about 9 per cent of its shares, in the next 12 months. The buy- back is expected to improve the group’s earnings per share and return on equity. It will also return the group to a prudent level of gearing. Expect CSL to continue growing sales and earnings from its already impressive suite of products.
Foster’s Group (FGL)
Foster’s is a true defensive stock. It generates lots of free cash from its brewing assets, and appears to have stopped the bleeding in its wine division. Trading on a relatively cheap price/earnings ratio of about 13 times and yielding more than 5 per cent fully franked, it’s difficult to see how an investor can go wrong holding Foster’s over the long term.
Macquarie Communications Infrastructure Group (MCG)
The Canada Pension Plan Investment Board recently increased its takeover offer for MCG by 50c to $3, via the payment of $2.50 a share and a 50c special capital distribution. We believe this offer is fair and reasonable and recommend share holders sell on market rather than risk something going awry with the proposal during the next month.
Alumina Limited (AWC)
Its 40 per cent interest in Aloca World Alumina and Chemicals (AWAC) is the group’s only asset. AWAC is primarily involved in bauxite mining and alumina refining, representing about 25 per cent of the global alumina market. With alumina and aluminium trading at near decade lows, the profit outlook looks poor.
Other articles in this week’s newsletter
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