Russell Krause, NOVUS CAPITAL
Red Fork Energy (RFE)
Red Fork Energy is an emerging coal seam gas and oil producer, with assets in the US state of Oklahoma. It has an experienced US-based operating team, and cash in the bank. It just announced the underwriting of options due to be exercised at the end of April. This will provide another $3 million in cash. Coal seam gas producers are generating significant market interest. If one applies the same valuation model to Red Fork, as being used in the Pure Energy takeover, then we arrive at a value of $8 a share.
Deep Yellow (DYL)
Deep Yellow is a uranium explorer, with major assets located in Namibia, Africa, and the Mt Isa region in Queensland. DYL has $56 million in the bank, and Paladin Energy is its biggest shareholder with just over 19 per cent. An experienced management team is led by one of the world’s top uranium experts, Dr Leon Pretorius. A massive drilling campaign in Namibia last year yielded two significant resource targets. In the next few months, the company is likely to announce significant JORC (Joint Ore Reserves Committee) reserves of high-grade uranium within 15 miles of Paladin’s Langer Heinrich mine.
BHP Billiton (BHP)
Recent results reflected a downturn in commodity prices and weakening global economies. BHP Billiton has a conservative balance sheet, a portfolio of world-class assets and is best positioned, of the major mining houses, to deal with the global economic slowdown. While commodity prices are significantly off their highs, strong demand still exists for high-grade iron ore, coal, oil and gas.
Its recent rights issue will reduce debt and strengthen its overall position. Retail assets, such as Coles and Bunnings, generate massive cash flow, and are partially shielded from the economic downturn.
ANZ Bank (ANZ)
The ANZ has raised significant money through bond issues, but the market soon expects a big equity raising. We expect more write-downs, and ANZ may be involved in protracted litigation over its role in the Opes Prime disaster. A slowing economy is hurting small business and this could reduce ANZ’s profits. Dividends could be cut.
Suncorp is one of the biggest home insurers in Australia. Expect an increase in claims from floods in Queensland and the tragic bushfires in Victoria. Suncorp is also involved in financial services and motor vehicle leasing. Its portfolio of businesses is under pressure on every front and this is reflected today’s share price. There are simply better investment options elsewhere in the market.
Grant Dwyer, TOLHURST
Telstra Corporation (TLS)
The national telecommunications carrier is one of the most defensive stocks in the ASX100 and, consequently, has outperformed the market over the past year. It offers a solid position in the Australian market – a defensive earnings stream, a relatively high and secure fully-franked dividend and limited overseas earnings exposure. All have been a strength in this uncertain environment. Growth in iPhone hand sets and usage could lead to further earnings growth.
Westpac Bank (WBC)
The major Australian banks have been busy raising equity to bolster their capital adequacy ratios. With stronger capital positions, they can use the Federal Government guarantee to raise cheap debt on overseas capital markets. Also, with many foreign banks in disarray, opportunities exist for our banks to improve market share and margins in the Australian corporate debt market. Westpac’s recent merger with St. George may lead to synergy benefits, and Westpac appears to have less exposure to bad and doubtful debts than its competitors.
The retail giant continues to meet expectations. Again, solid sales results reveal the high quality and defensive nature of this business. The stock is currently trading on a price-to-earnings ratio of 17.1 times, but the resilience of its operating business justifies the premium rating. Further cost savings could be extracted in the logistics area from on-going project improvements. The stock should be held for growth.
Dominion Mining (DOM)
As expected, the US dollar gold price is getting stronger in response to an increase in the US money supply caused by low interest rates and other stimulus packages. Dominion Mining is a low-cost gold miner. It’s producing more than 100,000 ounces a year from the high-grade Challenger mine in South Australia’s Gawler Craton region. The company is debt free and does not hedge its exposure to the gold price.
Recently released first-half profit guidance that was down 45 per cent on last year’s actual first-half profit. Exposure to Queensland-based property stgelopers doesn’t sit well with high-risk general insurance exposure to natural disasters. The heavily discounted capital raising has hurt the share price. The strategy of building a bank/insurance group appears to have been flawed and the chief executive officer is leaving the company.
Ten Network (TEN)
CanWest may be forced to sell its 57 per cent stake in Ten if it can’t rapidly improve its debt covenant ratios. But the question is who would buy a free-to-air TV provider in this difficult advertising market? Then what would be the price? With a weak earnings outlook, it might pay to reduce exposure.
Brett Walker, STATE ONE STOCKBROKING
Telstra Corporation (TLS)
Telstra management is delivering the goods, with full-year 2008 sales up 4.2 per cent to $24.7 billion. EBITDA margins increased to 42.2 per cent in the same year – a strong result. Even without the National Broadband Network, Telstra has the size to deliver speeds of 100mb/s in Sydney and Melbourne via existing cable infrastructure. It’s planning to increase wireless broadband speeds up to 42mb/s for its entire Next-G network. Forecast revenue growth of 3-to-4 per cent in 2009 will be better than most ASX listed businesses. Expect a healthy $6 to $7 billion in free cash flow, or about 50c a share.
Harvey Norman (HVN)
Retail sales in December rose on the back of the Federal Government’s $10 billion stimulus package. Expect increasing sales if Australians receive $950 as part of the $42 billion stimulus package. Harvey Norman has a strong balance sheet and is well positioned to handle an economic downturn, unlike its smaller competitors. Return on equity is above 15 per cent.
West Australian Newspapers (WAN)
WA News reported first half 2009 operating profit of $58.5 million. Stronger cash flow at $102.4 million was up from $91.3 million in 2007. Net debt was reduced by $15 million to $317 million at December 31, 2008. The company says it’s comfortably complying with all banking covenants. With a near impregnable monopoly in Perth, WA News is a worthy hold given its ability to generate cash.
Westpac Bank (WBC)
Despite challenging economic and business conditions, WBC continues to experience strong credit demand from the commercial and institutional sectors. The bank’s Tier 1 capital ratio rose to about 8.5 per cent in response to a capital raising and retail share purchase plan. It reports half-year results in May.
ResMed’s core activity is designing, making and distributing medical equipment to treat breathing-related sleep disorders. First half 2009 revenue was up 14 per cent to $440 million and net profit was up 21 per cent to $61 million. But the stock trades on a lofty price/earnings ratio of 20 times and given its strong performance during the past 12 months, it may be prudent to take some profits in this bearish environment.
GUD Holdings (GUD)
First half net profit after tax of $19.5 million was down 3.6 per cent on last year’s corresponding period. Total sales declined by 3.1 per cent, mostly due to weaker water product sales. GUD, a marketer of small electrical appliances, did not provide guidance for full-year 2009, noting the result will depend on the level of demand and the value of the Australian dollar given 80 per cent of its products are imported. Sales have held up reasonably well. Imported stock costs will increase against a weaker Australian dollar. Gearing levels of 51.5 per cent will remain under pressure as working capital expands.