Mark Goulopoulos, Patersons Securities
Rio Tinto (RIO)
The share price fall amid the huge rights issue has created an excellent long-term buying opportunity. Raising $US15.2 billion through a combined rights issue and BHP Billiton paying $US5.8 billion, as part of the proposed iron ore joint venture, will considerably reduce debt and enable a re-rating for the company.
Equinox Minerals (EQN)
Equinox has a long life, low cost copper mine – it’s started producing and offers significant exploration upside. Potential exists to expand mine production. The company offers value based on forecast production and exposure to a recovering copper price.
Still Australia’s premier retailer, but the competition is narrowing the gap. This is likely to lead to higher capital expenditure on refurbishing stores and other measures in order to maintain strong market share and grow revenue. Today, the stock is fair value based on its impeccable record and defensive qualities.
Harvey Norman (HVN)
Slow sales growth and pressured margins are likely to result in a flat performance for the next six months. Although a clear leader in the consumer discretionary sector, Harvey Norman is also facing increasing competition in a weak economy.
Macarthur Coal (MCC)
Expect a loss in 2009 on the back of falling production volumes and significantly lower coal prices. Macarthur should post a profit in 2010, although insufficient to justify today’s share price, which is above our valuation.
Fortescue Metals Group (FMG)
The share price moved up very strongly in response to the proposed iron ore joint venture between BHP Billiton and Rio Tinto. Expect Chinese interest in Fortescue to help it expand production in future. But the stock is now overvalued for the short term.
Alex Beer, State One Stockbroking
New chief executive David Thodey takes control of a healthy company. Mobile ARPU (average revenue per user) is $53 in 2009; it was $43 in 2005. It appears Telstra is well placed to see out any downturn in the Australian economy. Furthermore, the cancellation of the National Broadband Network is positive for Telstra in the short-to-medium term.
QBE Insurance (QBE)
The global insurance outlook is uncertain, but QBE offers a diversified income stream by industry sector and country. Also, QBE has a strong record of delivering consistently high returns on equity. A dividend yield above 6 per cent is forecast in 2010.
United Group (UGL)
United Group continues to win work, including the Thiess Queensland Airport Alliance and the RailCorp contract. UGL Resources, a subsidiary of UGL, recently secured a $230 million construction services contract at Woodside Petroleum’s $12 billion Pluto project involving LNG. UGL is well placed to potentially gain more LNG work in the WA region in the next five years.
The US Navy has exercised contract options, funding Austal’s long lead-time equipment associated with constructing two 103-metre joint high-speed vessels. ASB has a net cash position of $136 million in anticipation of expanding its US operations.
While management is highly rated, the January capital raising is now a distant memory and a rising share price will now depend more on sales margins. This point appears contentious in this year’s second half, as sales turnover may drag on results after a stimulus-boosted first half result. The stock is now trading on a price/earnings ratio of 15 times, and a dividend yield of about 4 per cent is forecast in 2010.
PaperlinX is a leading international fine paper merchant and distributor. However, the company faces difficult trading conditions in the short term amid weaker volumes and demand. The company recently announced it had sold European properties for $57 million. It recently sold Australian Paper for $578 million, but a potential “earnout” of $100 million could be received in the next three years.
Peter Rudd, Balnave Capital
Operating in more than 40 countries, this leading Australian and international infrastructure services company offers a diverse spread of activities that reduces individual project and construction risk. Well positioned to benefit from Australian and US stimulus packages.
This expanding Queensland-based construction group is building Cochlear’s $80 million global headquarters in Sydney. A growing civil infrastructure division has gained almost $50 million in new business, including refurbishment projects at Frankston and Broadmeadows railway stations in Victoria.
Foster’s Group (FGL)
The beer division is a major profit driver combating static markets. The narrowing price between premium and mainstream beers has seen bulk margins slightly increase.
Serving 14,000 corporations and 100 million shareholders in 17 countries across five continents, the March acquisition of US Chapter 11 bankruptcy specialist Kurtzman Carson Consultants strengthens the group’s counter-cyclical businesses. This provides a good earnings backstop until stock market volumes improve and registry activity increases.
Fairfax Media (FXJ)
Company revenues are under pressure as free web-based alternatives to classified advertising, news and entertainment erode traditional newspaper circulation levels. Removing the stock from S&P/ASX 50, along with a Standard & Poor’s credit downgrade are further negatives.
Westfield Group (WDC)
Australia’s largest listed property trust and a top 20 ASX stock. But investment returns from large regional shopping centres in Australia, New Zealand, US and UK could remain under pressure due to a weak global economy. This is in the context of international commercial property values continuing to fall amid rising vacancy rates.
Other articles in this week’s newsletter
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