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A new government can produce sharemarket “winners and losers,’ depending on the government’s ability to implement its campaign policies. While post-election certainty is often good for the economy, the final composition of the Senate is the wild card.

With that in mind, here are five sectors likely impacted by a new government in the house.

Mining

The proposed repeal of the mining tax will benefit miners.  Here is a five day chart for Rio Tinto (RIO) and Fortescue Metals (FMG).

Although both iron ore miners outpaced the XJO post election, positive growth in Chinese export data released over the weekend may have contributed to the uptick.  The share price of BHP Billiton (BHP) also rallied.

Here are some performance and valuation indicators for the top three miners on the ASX:

Company (CODE)

Share Price

52 Wk % Change

Div Yld

1 Yr Total Share-holder Retrurn

2 Yr Earnings Growth Forecast

2 Yr Dividend Growth Forecast

P/E (Forward -2014)

P/B (MRQ)

BHP Billition (BHP)

$36.32

+10%

3.3%

13.8%

-4%

-2%

13.02

2.74

Rio Tinto (RIO)

$64.28

+16%

2.5%

24.1%

2.2%

1.6%

11.76

2.62

Fortescue Metals (FMG)

$4.65

+35%

2.4%

46.4%

13.9%

19.7%

8.32

5.55

 

All three miners note cash costs for producing iron ore between $40 and $50 per tonne, with Fortescue recently reporting cash costs for the June Quarter at $36 per tonne and $44 on the year.  Analysts claim the big miners can remain profitable at iron ore prices as low as $90 per tonne; Fortescue management claims they will remain profitable at $70 per tonne.

So far, the price of iron ore has remained steady; as of 11 September the spot price of iron ore was US$135 per tonne.  Expansion of production capacity at the big three was expected to lead to oversupply.  Morgan Stanley is forecasting 8.8 million metric tons of surplus in 2014 while UBS sees a 150 million metric tonne surplus for the same period.

A falling Aussie dollar is good news for big miners. Analyst firms like RIO especially, and are less hell bent on BHP and FMG.  The forward-looking numbers from our table suggests Fortescue and Rio have the most potential upside.

Another potential Coalition policy – that being the Exploration Development Incentive – could benefit struggling junior miners.  A 2012 JUMEX (Junior Mining and Exploration) study from consulting firm Grant Thornton showed 90% of ASX listed miners are juniors with market caps under $500 million.  Only 4% of those are actually producing.  The rest are still in the exploration stage.  There are many juniors with solid prospects who could benefit from this plan, which would allow exploration costs to be deducted from taxable income.  

What happens to miners with no taxable income?  The exploration costs are passed onto shareholders as a tax deduction.  This incentive would spur exploration from juniors in the early production stage as well as miners yet to generate revenue (the policy benefits private or JV capital with tax breaks).  Solid junior miners could find capital raising easier as the EDI allows companies with no taxable income to pass exploration costs to shareholders as a tax deduction.

In the bleak mining climate of the past year or so mineral exploration is down close to $1 billion.  The ABS (Australian Bureau of Statistics) recently released figures showing an $889.2 billion drop in exploration across Australia year over year.  Here are two junior miners worthy of note:

Company (CODE)

Mkt Cap

Share Price

52 Wk % Change

Total Cash (MRQ)

Total Debt (MRQ)

Gearing

P/E (Forward -2014)

P/B (MRQ)

Western Desert Resources (WDR)

$268.8m

$0.745

-10%

$39.12m

$14.29k

0.01

12.33

2.08

Gindalbie Metals (GLB)

$196.6

$0.14

-56%

$70.89

00.00

7.25

0.27

 

Western Desert Resources (WDR) has two things in its favor right now; the company’s Roper Bar project in the Northern Territory is about to commence production.  Infrastructure in the area will keep cash costs relatively low at the onset, about $60 per tonne with annual production target of three million tonnes.  Singapore based commodities trader Noble Group earlier provided a credit facility for the project and has an agreement to buy all the ore produced for up to five years.  

Noble is also considering a takeover offer.  Apparently Australian banks were lining up to provide the financing for final completion – with Macquarie Bank getting the deal.  WDR is definitely one to watch.  

Gindalbie Metals (GBG) began shipping ore from its Karara iron ore project, a joint venture with Chinese steel producer Ansteel, in 2011 – but the ramp-up since then has been slow with three capital raises and multiple debt facility agreements.  In June 2013, Ansteel stepped in with an $84 million capital infusion.  Gindalbie could benefit from investor interest stemming from the tax advantages offered by the Coalition’s proposed EDI.

Energy

Repealing the carbon tax is high on the list of priorities for the new government but its impact on specific companies is less clear. 

Origin Energy (ORG) might benefit from an environment of less regulation and more pro-business policies from the Coalition, but the actual impact of the carbon tax on the company’s profits is uncertain.  The same could be said for AGL Energy (AGK) as both are involved in a variety of energy-related operations but electricity generation from both companies comes not only from coal but also from natural gas and renewable sources.  Repealing the carbon tax helps coal-generated electricity but both companies stand to lose carbon credits from gas and renewables.

Analysts appear more bullish on ORG.  Here are some performance and valuation metrics for both companies:

Company (CODE)

Mkt Cap

Share Price

52 Wk % Change

Div Yld

1 Yr Total Shareholder Return

2 Yr Earning Growth Forecast

2 Yr Dividend Growth Forecast

P/B (Foreward 2015)

P/B (MRQ)

AGL Energy (AGK)

$8.45b

$15.25

+3%

4.1%

6%

-1.4%

5%

12.3

1.15

Origin Energy (ORG)

$15.5b

$14.09

+20%

3.6%

29.4%

11.4%

0.0%

16.58

1.17

 

AGL has a definite edge in dividends, fully franked as opposed to Origin’s with no franking.  However, other indicators make Origin look the safer investment long term.  

Renewables

Australia’s renewable energy stocks are likely to suffer from the repeal of the carbon tax.  Clearly it depends on whether other incentives to promote renewable energy are scrapped.  Most important for investors is the current RET (Renewable Energy Target);  some analysts claim lack of clarity on the RET has halted most large-scale renewable energy projects going into the election.  Here are two renewable energy stocks to consider:

Company (CODE)

Mkt Cap

Share Price

52 Wk % Change

1 Yr Total Shareholder Return

2 Yr Earning Growth Forecast

Total Cash (MRQ)

Total Debt (MRQ)

P/B (MRQ)

Infigen Energy (IFN)

$199m

$0.29

-5%

2%

-3.6%

$124.52m

$1.21b

0.41

 Geodynamics Ltd (GDY)

$41m

$0.10

-23.8%

-16.7%

39.8%

$41.39m

0.00

0.89

 

Infigen Energy Ltd (IFN) owns and operates 24 wind farms across Australia and in the US.  Infigen sells the electricity generated over the wholesale market but has not shown a profit over the last three years.  The shares are currently trading below book value.

Geodynamics Ltd (GDY) is a geothermal energy exploration and development that is yet to generate revenue.  The 2 year earnings growth forecast of 39.8% bears explanation.  The actual EPS for 2013 was a loss of $0.29 per share.  The lone analyst forecast for FY 2014 is for EPS of $0.00 dropping to -$0.01 in FY 2015.  

Here is a five year price chart comparing these two companies:

Infrastructure

Tony Abbott wants to be known as the “infrastructure prime minister” and there are already reports of fast-tracking certain roadway projects.  This has generated some speculation on stocks that could be “winners” here, such as Leighton Holdings (LEI), Downers EDI Ltd (DOW) and UGL Ltd (UGL).  

On the first trading day post election, UGL shares dropped while LEI and DOW went up. The following five day chart shows the movement for the two initial “winners”:

All three companies offer a wide variety of services to multiple industries.  So while spending on road building could benefit one operating segment, potential cutbacks in rail infrastructure could hurt another segment.  Here are some performance and valuation measures for Leighton and Downer EDI:

 

Company (CODE)

Mkt Cap

Share Price

52 Wk % Change

Div Yld

1 Yr Total Share-holder Retrurn

2 Yr Earnings Growth Forecast

2 Yr Dividend Growth Forecast

P/E (Forward -2014)

P/B (MRQ)

Leighton Holdings (LEI)

$6.7b

$19.75

+30%

4.5%

25.1%

15.2%

16.3%

11.9

2.13

Downer EDI (DOW)

$2.03b

$4.48

+34%

4.6%

36.5%

4.7%

6.3%

9.55

1.21

 

Healthcare

It is likely the new government will be more favorable to private health care providers.  Early speculation that the Coalition was looking to scrap the GP Super Clinics championed by the Labor Party led to a Coalition statement that no existing contracts would be canceled and existing Super Clinic funding would be reviewed.  In addition, the coalition has promised to review and not necessarily eliminate Medicare Locals.

Two ASX listed companies that could stand to benefit from a government favorable to private interests are Ramsey Health Care (RHC) and Primary Health Care (PRY).  Here are some performance and valuation measures for the two companies:

Company (CODE)

Mkt Cap

Share Price

52 Wk % Change

Div Yld

1 Yr Total Share-holder Retrurn

2 Yr Earnings Growth Forecast

2 Yr Dividend Growth Forecast

P/E (Forward -2014)

P/B (MRQ)

Ramsey Healthcare (RHC)

$7.32b

$36.35

+52%

1.9%

55.7%

-12.9%

13.5%

20.94

5.57

Primary Healthcare (PRY)

 $2.56b

$5.08

+35%

3.6%

45.3%

10.7%

15.1%

14.11

0.96

 

Ramsay Health Care operates private hospitals and same day surgery centers in Australia, with locations in the UK, France, and Indonesia as well.  Primary Health Care operates medical centres that provide services to independent physicians who run their practices at the centre.  Primary also operates a range of diagnostic testing centres.

Both companies have rewarded shareholders dating back ten years.  The average annual rate of total shareholder return for Ramsey over 10 years is 27.5%, and 8.5% for Primary.  Both companies offer fully franked dividends and despite the impressive past performance, the earnings and dividend growth forecasts suggest upside potential.  Here is a ten year performance chart for these two healthcare stars, showing Ramsey’s phenomenal 780% increase and Primary’s respectable 50% increase:

Telecommunications

The new government’s plan for the NBN is to replace the previous planned FTTP (fibre to the premises) network with a less costly FTTN (fibre to the node) network; Telstra and others will manage the connection from the node to individual homes and businesses along copper connections.  Critics complain this will result in slower connections, which it will, and additional costs in the future to upgrade the copper leg, which it might.  The Coalition response is that its plan will cost less and be completed more quickly.

The agreement between the NBN and Telstra to facilitate the FTTP will have to be renegotiated but Telstra has  stated it will accept nothing less than the originally agreed $11 billion.  In theory, Telstra has nothing to lose from the shift and could emerge a winner since part of its existing copper network will still be in play.  In addition, some analysts claim the copper to the premises arrangement could open the door for some of Telstra’s competitors.  Two stocks to benefit from this potential competition are M2 Telecommunications (MTU) and TPG Telecom (TPM).  Here are some valuation and performance indicators for these two companies:

Company (CODE)

Mkt Cap

Share Price

52 Wk % Change

Div Yld

1 Yr Total Share-holder Retrurn

2 Yr Earnings Growth Forecast

2 Yr Dividend Growth Forecast

P/E (Forward -2014)

P/B (MRQ)

TPG Telecom (TPM)

$2.8b

$3.51

+65%

1.8%

61.5%

-36%

26.4%

17.55

4.30

M2 Telecom (MTU)

 $1.03b

$5.77

+62%

4%

74.3%

43.9%

22%

11.10

3.48

 

Over the past five years these two stocks have shown astonishing capital appreciation with TPG Telecom’s share price up over 2000% and M2 Telecommunication’s up almost 1000%.  The growth forecasts for both companies suggest more room to run, regardless of the outcome of the NBN.  Here is the chart:

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