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Patrick Trindade, PhillipCapital

BUY RECOMMENDATIONS

Telstra (TLS)

Chart: Share price over the year to versus ASX200 (XJO)

The telecommunications giant lifted its first half profit almost 10 per cent to $1.7 billion. The dividend increased to 14.5 cents. We believe Telstra’s low earnings volatility and high dividend yield are particularly attractive in the context of likely further falls in local interest rates and a challenging earnings growth phase as the Australian economy transitions in the second half of 2014. The dividend yield is almost double the current cash rate (plus franking).

Rio Tinto (RIO)

Chart: Share price over the year to versus ASX200 (XJO)

Our key view is investors stay exposed to big, low cost and expanding iron ore producers. As such, we categorise RIO as our best pure iron ore play and continue to recommend it as a key holding in any investment portfolio. Our 12-month price target is $73.50 a share. The shares were trading at $68.49 on February 13.

HOLD RECOMMENDATIONS

Super Retail Group (SUL)

Chart: Share price over the year to versus ASX200 (XJO)

SUL is a well managed retailer. But we believe outperformance is unlikely until the market regains confidence that an anticipated improvement in profit margins in the leisure segment can be achieved.

ASG Group (ASZ)

Chart: Share price over the year to versus ASX200 (XJO)

This technology services provider has positioned itself to capture several growth opportunities offered by cloud computing and to meet its EBITDA guidance for the half. However, converting sales opportunities in cloud computing during the second half may not match the first half. A cautious approach to the stock is warranted on the back of our forecast single digit return on equity.

SELL RECOMMENDATIONS

Cochlear (COH)

Chart: Share price over the year to versus ASX200 (XJO)

Half year net profit after tax was down 73 per cent to $21 million. While the poor result can, in part, be attributed to regulatory delays for new products, the outlook for the rest of fiscal year 2014 still looks clouded and investors should be prepared for more share price volatility if they continue to hold.

Treasury Wine Estates (TWE)

Chart: Share price over the year to versus ASX200 (XJO)

After several profit downgrades, TWE’s share price has lost almost 20 per cent since the beginning of the year. A surplus of cheap wine in Australia may continue to pressure earnings. We retain our sell recommendation primarily on the basis of potential further earnings downgrades.

 

Charles Thomas, Bell Potter Securities

BUY RECOMMENDATIONS

Bank of Queensland (BOQ)

Chart: Share price over the year to versus ASX200 (XJO)

Our earnings revisions have factored in a year’s delay in achieving the 2015 lending target, leading to 2-to-3 per cent lower earnings across the forecast horizon. Our price target is also lowered to $12.40 (previously $13) to be consistent with the 11-to-12 per cent medium term return on equity outlook. The 10 per cent share price retreat in the past month appears excessive in light of our earnings revisions. We believe the underperformance also disregards the potential earnings contribution arising from the Virgin Money Australia transaction. The shares were trading at $11.74 on February 13.

Select Harvests (SHV)

Chart: Share price over the year to versus ASX200 (XJO)

We have raised our rating from hold to a buy, reflecting expectations that Australian dollar almond prices remain in an uptrend from the combination of a weakening Australian dollar and potential for lower yields in California for a third straight year.

HOLD RECOMMENDATIONS

Macquarie Group (MQG)

Chart: Share price over the year to versus ASX200 (XJO)

While our $56.50 price target is retained, we believe a hold rating (previously a buy) is now more appropriate for MQG. This follows the company’s recent share price outperformance and the absence of further catalysts for the time being to justify a price target increase.

Virgin Australia (VAH)

Chart: Share price over the year to versus ASX200 (XJO)

We expect the company to begin generating improving returns on capital from fiscal years 2016/17. By then, we believe VAH is likely to compete effectively with Qantas across all domestic segments – mainstream, discount, regional and fly in, fly out. Our price target has declined 19 per cent relative to our previous estimate due primarily to our earnings revisions.

SELL RECOMMENDATIONS

The Reject Shop (TRS)

Chart: Share price over the year to versus ASX200 (XJO)

Notwithstanding store rollout costs, the inability to grow earnings despite an expanding store footprint is concerning. Challenges include store cannibalisation risks in certain regions and gross margin risks in the face of stronger competitive conditions and a lower Australian dollar. Accordingly, while strong earnings growth may materialise in future years, we believe the embedded risks outweigh the benefits. We downgrade our rating from a buy to a sell with revised 12-month price target of $10.17 (previously $20).

Aurora Oil & Gas (AUT)

Chart: Share price over the year to versus ASX200 (XJO)

Baytex Energy has offered $4.10 cash a share for AUT. While a higher bid cannot be ruled out, the scheme has a “no talk, no shop” provision, and a break fee of $18.8 million. It’s understood that Aurora can engage with other bidders if approached. The scheme requires approval from the Foreign Investment Review Board (FIRB) and Australian court and shareholder approval. Shareholders will get to vote on the transaction in late April or early May, where a minimum of 75 per cent of shares on issue and 50 per cent of shareholders need to vote in favour of the scheme for it to be implemented. AUT shares were trading at $4.125 on February 13.

 

Carey Smith, Alto Capital

BUY RECOMMENDATIONS

Transfield Services (TSE)

Chart: Share price over the year to versus ASX200 (XJO)

One of Australia’s largest operations and maintenance service providers to the mining, energy and infrastructure sectors reports its half year results on February 27. While we believe the profit number won’t be pretty, we don’t expect it to be as bad as what the market is anticipating. This must be considered a speculative buy as the stock is down about 60 per cent in the past 12 months. 

Troy Resources (TRY)

Chart: Share price over the year to versus ASX200 (XJO)

TRY has historically been one of the better gold miners listed on the ASX, with projects in Argentina, Brazil and Guyana. The upswing in most gold producers since Christmas has seen Troy’s share price almost double. We believe there’s still plenty of upside in the stock considering it was trading at $5 only 18 months ago. The shares were trading at $1.44 on February 13.

HOLD RECOMMENDATIONS

ASX Limited (ASX)

Chart: Share price over the year to versus ASX200 (XJO)

The increase in algorithmic trading, rising merger and acquisition activity and the list of new IPO’s forecast over the next few months should help the company report a solid 2014 profit result. 

Oakton (OKN)

Chart: Share price over the year to versus ASX200 (XJO)

This provider of IT solutions to governments and businesses reports its half year results on February 20, with earnings and dividends expected to meet forecasts. With more than $16 million in excess franking credits, no debt and strong operating cash flows, we believe the stock provides a good degree of safety and may surprise to the upside on dividends in the next 18 months.

SELL RECOMMENDATIONS

Bradken (BKN)

Chart: Share price over the year to versus ASX200 (XJO)

This manufacturer and supplier of goods to the mining, construction, rail and transit sectors reported an 18 per cent decline in half year profit and lowered full year profit guidance. Most of the sectors the company operates in are experiencing a slowdown and we believe further downgrades to profits are likely going forward.

Domino’s Pizza Enterprises (DMP)

Chart: Share price over the year to versus ASX200 (XJO)

Performance in the past five years has been fantastic, with its shares increasing from $2.50 to almost $20. Even after a recent solid half year result, with earnings per share up 20 per cent, we believe the stock is overvalued. The stock was recently trading on a forward price/earnings ratio above 35 times and we suggest holders take some money off the table.

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

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2. Floats to watch this year: The Australian sharemarket’s weak start to 2014…

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Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.