Carey Smith, ALTO CAPITAL
Flight Centre (FLT)
Is Australia’s biggest travel agent with operations throughout Australia, New Zealand, South Africa, Hong Kong, Canada, the US and the UK. It’s already reported that earnings for the six months to December are suffering from the global slowdown. However, we believe the share price fall from $32 to $6.17 in trading on January 30 is excessive. If earnings per share halve from $1.58 in 2007/8 to 80¢ for 2008/9, the group is trading on an appealing price/earnings ratio of less than eight times.
Austereo Group (AEO)
Austereo is Australia’s largest commercial radio broadcaster, with radio stations in all capital cities generally operating under the Today and Triple M Network brands. While earnings are likely to fall due to the slowing economy, Austreo’s dominate position should provide it with a substantial buffer. We forecast sustainable earnings per share of 10.5¢ and a fully-franked dividend of 7.5¢, equating to an attractive price/earnings ratio of less than 10 times.
Now that the diversified conglomerate owns Coles, Bunnings, Kmart, Target, various coal mines and chemical businesses and, has completed its much-anticipated capital raising, the market is likely to refocus on the group’s underlying value. While turning around the Coles business is expected to take several years, a price of about $16 a share is probably fair value compared to $40 in 2007.
Spotless Group (SPT)
Spotless is one of Australia’s biggest providers of outsourcing and labour-based services, with operations in Australia, New Zealand and the US. The market has sold the group down on fears a recession is likely to hurt the group’s earnings. But the company’s share price has been cut in half and this has reduced a lot of the downside risk. Worth holding for a rebound over the longer term.
Super Cheap Auto Group (SUL)
Owns 247 auto outlets and 47 boating, camping and fishing stores. The group is right in the middle of a slowing retail environment. Super Cheap Auto has a high level of debt compared to its peers, with a debt-to-equity level greater than 80 per cent. This may cause concern going forward. While the group looks cheap from a price/earnings perspective, we expect the earnings part of the ratio to fall substantially during the next 24 months.
This Queensland copper explorer has been promising an updated resource on its Rocklands deposit since mid 2006. But some reason always seems to delay its release. The 65 per cent fall in the copper price in the past six months is making life hard for most copper producers. And, we believe, the $255 million value attributed to Cudeco is excessive. Until a resource is released, we recommend investors avoid the stock, and existing share holders should sell.
Steven Hing, NOVUS CAPITAL
Paladin Energy (PDN)
A uranium miner that appears to be consolidating in a price band between $2.80 and $3.20. A break to the upside should give the stock significant momentum towards the $3.80 to $4 level. Fundamentally, I believe demand for uranium will increase, with the world looking for “cleaner” energy and moving away from coal fired power generation. Although solar and wind energy are perhaps a more environmentally acceptable alternative, I suspect it will be faster to bring nuclear plants online. Paladin looks well placed in terms of stock price and potential.
Rio Tinto (RIO)
The global miner is continuing to sell assets in an attempt to reduce its debt base. As it should achieve reasonable profit results, there is much potential left. The stock has been heavily sold since BHP Billiton walked away from proposed merger plans. Perhaps the sharp discount is overdone. Resource stocks appear to be improving again as commodity stockpiles fall.
This blood products company continues to defy the market gloom and is among the strongest healthcare groups in the world. While revenues remain strong, stock price upside appears limited, as its price/earnings multiple of 28 is around double the average market P/E. Although the company has been able to sustain similar P/Es over the long term, it’s likely to stock will only market perform rather than out perform.
Coca-Cola Amatil (CCL)
In November, brewer Lion Nathan announced a merger proposal based around $10.80 a share. CCL’s board promptly rejected the proposal, saying it significantly undervalued the company. I am sure that something will occur in the future – if not Lion Nathan – then someone else. Perhaps San Miguel, which previously had some part of CCL’s business. Our short-term price target is $10.
Another stock that’s traditionally traded at a premium price/earnings ratio to the market, and is often regarded as a portfolio defensive. But the retail sector is expected to remain under pressure as job losses slow spending and potentially erode Woolworths’ profit base Our short term price target is $22.
Billabong International (BBG)
I suspect earnings pressure will remain at this retail-based company. David Jones, Harvey Norman and JB Hi-Fi say they are expecting difficult retail conditions. Billabong is a premium clothing brand sold from a lot of stores amid stiff competition in the sector. If discretionary spending falls, expect the stock to go lower and then re-test recent lows. Even so, there appears to be little short-term upside.
Peter Rudd, ARMYTAGE PRIVATE CAPITAL
A global manufacturer and distributor of farm chemicals. This Melbourne-based company is experiencing growing demand for its products on the back of world population growth, and higher living standards leading to greater protein consumption. A break in the continuing drought will stimulate demand.
Western Areas NL (WSA)
One of Australia’s biggest nickel producers, with some of the lowest operating costs in the country. The group’s high-grade, underground mines in Western Australia received a recent boost amid excellent exploration results at its Spotted Quoll deposit.
Energy Resources of Australia (ERA)
The biggest pure uranium producer listed on the ASX. Mine life at Ranger, in the Kakadu region of Northern Territory, could be extended as new discoveries beneath the open-pit are further evaluated. Expect earnings to improve as low-priced, long-term sales contracts are rolled into higher priced ones that more closely reflect stronger spot uranium prices. A possible sale of Rio Tinto’s 68 per cent holding in the group may provide corporate activity.
ING Industrial Fund (IIF)
CSR is involved in building products, sugar and aluminium. About 40 per cent of company earnings are linked to a slowing residential housing sector in Australia that is showing no sings of a short-term recovery. Lower aluminium prices will also pressure profitability.
Foster’s Group (FGL)
Warning signs are emerging in the wine industry after leading US wine producer, Constellation Brands, reported lower third quarter earnings due to a market slowdown. A flow-on effect could hurt Foster’s Group margins and profitability, aided by competitive independent boutique brewers eroding market share of high-margin premium beer sales.