Broker Stock Recommendations
Simon Bond, ABN AMRO Morgans
Energy Resources of Australia (ERA)
ERA reported underlying earnings of $119 million, higher than our forecast of $95.7 million and above company consensus. Revenue was higher than expected and increasing sales are benefiting from a favourable exchange rate. A final dividend of 20c was declared versus our estimate of 15c. We have upgraded full-year 2009 earnings by 22 per cent.
Origin Energy (ORG)
Origin’s share price has taken a beating in 2009, which we believe has been in response to concerns about earnings downgrades and dilutive acquisitions. Fundamentally, we believe the story is still robust and reiterate our buy rating.
Gloucester Coal (GCL)
Second quarter coal production was broadly in line with our forecast. Gloucester’s ability to adjust its sales mix to match market demand, combined with $25 million in cash and no debt, means it’s well placed to weather the storm hitting the coal market.
Tabcorp Holdings (TAH)
This gambling company recently announced it would raise up to $450 million under a placement and share purchase plan. Expect earnings per share to fall 10 per cent due to dilution and lower wagering and casino earnings. Tabcorp is trading on a relatively undemanding price/earnings multiple (ex-gaming) of 10.3 times in full-year 2009, but we believe it¹s too early to buy.
Harvey Norman (HVN)
It’s no secret that discretionary retailers face immense challenges in a slowing Australian economy, and, in Harvey Norman’s case a global economy. Strong December sales appears short-lived and are considered artificial compared to January. Pressure on margins and costs are valid concerns and behind our sell recommendation.
This building materials company recently announced an expected 40 per cent downgrade in net profit after tax to $120 million for full-year 2009. This was announced just three months after $200 million guidance had been given at its AGM. Boral is trading on a full-year 2010 price/earnings ratio of about 36 times.
Peter Day, WILSON HTM
The healthcare sector has proven a safe haven in the past 12 months due to inelastic demand and stable earnings. CSL offers continuing strength in blood product pricing and volume growth. If the first half 2009 reporting season proves as weak as most expect, CSL is likely to outperform on a relative basis. CSL Behring has secured US Food and Drug Administration approval for RiaSTAP that treats bleeding in patients with a rare genetic defect. We also expect to see progress on the Talecris acquisition.
Toll Holdings (TOL)
Recent acquisitions in Asia will boost growth for this transport logistics company. It’s continuing to focus on moving freight, and transport is partially cushioned in a slowing global economy. This company is well managed, and has a history of successfully integrating acquisitions, which it will continue to pursue.
AXA Asia Pacific Holdings (AXA)
We have cut full-year 2008 earnings in line with guidance, and are forecasting a significant loss. We expect a modest 15 per cent cut in earnings per share for 2009/10 in response to more conservative operational assumptions in wealth management and financial insurance. While we see longer-term value in AXA, particularly its strong and growing presence in Asia, short-term cyclical pressures are likely to occupy the attention of most investors.
QBE Insurance Group (QBE)
QBE is a leading provider of general insurance and re-insurance services in Australia, Asia, the Americas and Europe. While January 2009 insurance renewals were good, they fell short of meeting overly optimistic expectations forecast in late 2008. Consensus margin expectations of 19.5 per cent for 2009 could disappoint. But this company is a proven performer and definitely one to hold for the long term.
Metcash has three businesses – IGA Distribution, Campbells Cash & Carry and Australian Liquor Marketers. The company is over valued, in our view. As household spending will remain under pressure, we expect consumers to trade convenience for best price offered by competitors. The company’s 30 per cent premium to the All Industrials index is excessive.
Harvey Norman (HVN)
Expect increasing pressure on margins in response to more franchisee support and absorbing higher costs. January trading has been soft. Higher priced imports next month are likely to see volumes and margins deteriorate. The company may absorb some costs to maintain volumes, but retailing faces immense challenges.
Keith Thompson, SHADFORTHS
Orica is the world’s biggest supplier of commercial explosives and related services. Mining Services accounts for 75 per cent of group earnings. Orica continues to expand mining services, using its leading global market share in explosives. Competitive advantages include its duopoly Australian explosives business and global distribution. Earnings in coal and energy tend to be more reliable than in other markets, such as steel.
Woodside Petroleum (WPL)
As Australia’s premier oil play, Woodside’s operations encompass LNG, natural gas, condensate, crude oil and LPG. LNG interests in the North West Shelf joint venture in offshore Western Australia are the mainstay. Future production is forecast to grow strongly. The company delivers a reliable dividend stream and Shell’s 34.3 per cent stake adds spice. Well managed with a strong balance sheet, WPL is suitable for conservative investors seeking oil and gas exposure and stand-out long term growth. It represents a cornerstone energy exposure in a balanced portfolio. With oil trading at US$40 levels, WPL is now poised to move up.
Newcrest Mining (NCM)
Newcrest is a quality, low cost gold producer offering growth and strong exploration upside. The company has under-taken a $500 million share placement to reduce debt and fund growth opportunities. The institutional placement, at $27 a share, was then upsized to $750 million due to strong demand. The stock initially fell following reaction to the placement, but it’s well positioned to move forward in 2009.
Westpac Bank (WBC)
Operates a sound banking franchise in Australia and New Zealand, with balanced exposure to the retail, corporate and institutional sectors. Aggressive expansion via acquisition in wealth management has complemented banking activities by transforming WBC into a solid financial services house. Management is sound, with a strong focus on existing businesses and capital management. WBC has been a strong performer within its peer group in the past decade, with the most conservative but improving payout ratio.
Fairfax Media (FXJ)
The media giant is leveraged to slowing Australian and New Zealand economies. Also, rural and regional Australia are doing it extremely tough and this may have a negative impact on its Rural Press assets. The Rudd Government is trying to resurrect a faltering economy, but with the business dollar tight, it’s difficult to see how Fairfax will extract any growth in such an environment during the next year. Money will simply flow away from Fairfax – best sell until the cycle improves for Fairfax.
Ten Network Holdings (TEN)
We are negative on traditional media stocks at this stage of the economic cycle. It’s all about growth and Ten is unlikely to access that growth in advertising revenue. The economy is slowing and this will put increasing pressure on revenue and budgets. The bottom line is expect TEN to struggle. If you want to invest in small screen stocks, the Seven Network offers the best prospects.