Eastern Star Gas (ESG)
The coal seam gas sector experienced rapid consolidation last year. A number of transactions highlighted the increasing value of coal seam gas assets. Eastern Star Gas made significant progress in the December quarter, with a substantial upgrade in reserves and continuing success with its drilling program.
Australian Worldwide Exploration (AWE)
AWE is in a solid financial position with $383 million in cash, no debt and a broad portfolio of producing assets. In today’s market environment of limited funding and lower oil prices, AWE is a lower risk investment with sufficient cash flow to fund exploration and stgelopment. Also, it’s able to grow the business from internal cash flows. Potentially higher oil prices and upside from successful drilling are the key value drivers going forward.
First half-year sales were up 8.1 per cent – marginally below expectations. The supermarket business is experiencing slowing real growth and margins are being squeezed in the non-food divisions. While Aldi’s expansion is becoming more aggressive, Woolworths continues to win market share from Coles.
Macarthur Coal (MCC)
December quarter coal production was 36 per cent higher than the previous corresponding period. Latest MCC profit guidance between $75 million and $125 million is down on last November’s guidance of between $150 million and $160 million. We are concerned that MCC may be over-hedged in this year’s second half. Depending on the coal price, sales volumes and currency, MCC may need to raise capital if insufficient revenue is unable to meet currency hedges.
Kagara Limited (KZL)
Debt of $150 million, due to be re-financed in 2009, is hanging over the stock. We will revisit this recommendation with any recovery in metal prices or margin improvement once funding is clarified.
Alesco Corporation (ALS)
Longer term, Alesco represents good value at current levels. But it faces headwinds of weaker demand for its construction and building products, and high levels of debt on its balance sheet. Until signs of a recovery emerge in the construction and housing cycle, there is no need to be in this cyclical stock.
Ramsay Health Care (RHC)
This premier private hospital operator generates leading industry margins. Strong cash flow, from a portfolio of quality hospitals, is invested to enhance facilities. Annual revenue is more than $2 billion from more than 100 hospitals and day-care facilities. RHC has 20,000 staff and manages more than 8000 beds. Many of the hospitals present natural monopolies for their region because of location, scale and reputation.
United Group (UGL)
United Group is a diversified engineering and facilities management services group. It operates in the areas of water, power, rail and other essential infrastructure. Management has lowered the earnings risk profile through diversification, and by building long-term and recurring maintenance-type work. Financial management is sound, and the company offers strong cash flow and moderate gearing levels.
This building and construction materials supplier operates in a difficult industry characterised by cyclical demand. High levels of investment in capacity and facility maintenance result in relatively low returns on capital. The stock should recover in line with a housing recovery here and in the US, but it will require patience.
ResMed is a leader in treating sleep apnea. Expect strong long-term growth in response to increasing diagnoses of the disorder. By introducing new products, including airflow generators, masks and nasal pillows, it should remain an influential leader in this market for the longer term.
BlueScope Steel (BSL)
The Port Kembla steelworks is the dominant profit centre. The business is capital intensive and margins can be volatile. High debt levels present some concern. This stock is high-risk heading into a cyclical economic downturn and not for conservative investors.
Bank of Queensland (BOQ)
With a strong presence in the Queensland market, the bank is pursuing interstate expansion through an innovative, owner-managed branch model. Its balance sheet is heavily skewed towards residential mortgages, backed by strong retail deposit funds. But global credit concerns make it more difficult for this relatively small bank to achieve growth, particularly when competing with the majors.
This engineering services provider to the oil and gas sectors continues to produce sound results. The company’s share price has suffered as a result of turmoil in the financial markets and, in particular, the resources sector. However, recent share price weakness presents a buying opportunity.
Lion Nathan (LNN)
The brewer recently withdrew its take-over offer for Coca-Cola Amatil. Lion Nathan offers sound economic fundamentals in a defensive area of consumer spending and, therefore, is in a relatively good position to weather the economic slowdown. A good buying opportunity in subdued times.
The share price of this diversified industrial company has been punished due to big debt following the Coles acquisition. A slump in the coal price has just added to its woes. However, its share price fall appears to be over done, and its recent capital raising should shore up its balance sheet. Its latest report was satisfactory and in line with expectations.
Coca-Cola Amatil (CCL)
Although Coca-Cola Amatil rejected Lion Nathan’s takeover offer, the soft drink bottler recently produced a very sound result. This shows the company’s products are shielded in a slowing economy, and demand is most likely to improve on better news.
Its recent report confirmed the difficulties Boral faces in a sluggish building and construction industry in the US and Australia. The prospect of subdued economic activity doesn’t provide an opportunity for a reversal in Boral’s future profitability or share price.
This insurance and wealth management company has been a very poor sharemarket performer in the past few years. Global financial turmoil is hurting its wealth management business. Sell AMP in response to a slowing economy, higher unemployment and a marked reduction in sharemarket activity.