Brendan Fogarty, Alto Capital
Meridian Minerals (MII)
The speculative sector is seeing a gradual return in volumes in recent months, with overall risk in the macro-environment reduced to a more tolerant level. Some shrewd juniors have taken the opportunity to acquire reasonable small-to-mid sized resource assets at heavily discounted prices, post the exuberance of the bull market. Meridian Minerals is a good example, having recently acquired the Pilbara-based Lennard Shelf zinc-lead project for what I consider a cheap price. Meridian’s share price is improving, and should continue as the project stgelops. Aggressive investors should consider Meridian as a leveraged exposure to the commodities cycle.
Conservative investors looking for low-risk income exposures, then Metcash is ideal. This marketing and distribution company comprises IGA Food Distribution, Campbells Wholesale and Australian Liquor Marketers. Metcash offers investors a stable cash flow and a solid fully-franked dividend yield forecast at 5.5 per cent this financial year. Defensive and value-oriented stocks are likely to outperform growth companies during this stabilising stage of the bear market.
Transfield Services (TSE)
While company infrastructure projects and services contracts should be reliable over the long term, its US entities, generating about 30 per cent of total revenues, will take time to improve. Take a longer-term portfolio approach on Transfield, with a possible upgrade to accumulate when the earnings outlook shows greater visibility.
This international grain trader recently released a solid profit result, with free cash flow of $61 million for the first half of 2009. The outlook remains steady. Graincorp’s share price may weaken as short-term investors quickly sell stock bought in the recent share purchase plan. But any share price weakness should be short lived given the stability of Graincorp’s outlook.
Woodside Petroleum (WPL)
While Woodside is an ideal long-term exposure to energy, the sector and company have experienced a bounce that’s likely to run out of momentum in the short term. This is based on OPEC’s sobering release, indicating oil stockpiles are at their highest level in history at 4.3 billion barrels. This includes an all-time reserve high in the US. Global consumption is forecast to fall by 1.6 million barrels a day. Sell and return to energy stocks when the outlook improves.
Mount Gibson Iron (MGX)
This iron ore mid-cap has rebounded about 300 per cent from its lows late last year. However, with recent reports from China indicating there are at least 90 capsize bulk carriers (12 per cent of the total capsize fleet) full of iron ore waiting to unload, Chinese iron ore capacity appears full to the brink. Given Mount Gibson’s outlook relies heavily on this scenario, sell and look for better value later in the financial year.
Steven Hing, Novus Capital
Rio Tinto (RIO)
Completing a $15.7 billion rights issue enables the company to restructure its balance sheet and retire much of the gearing impairment that saw its price drop dramatically in the past 12 months. Having touched a recent high of $78 (pre-rights), the ex-rights sell-off appears well overdone when the stock is trading below its adjusted price of $57.75. As I believe the gearing levels should be a positive, the stock looks to be in oversold territory due to selling associated to the rights issue.
Asciano Group (AIO)
Another company to take advantage of market conditions and raise capital to finance debt. This ports operator is still trading below net asset backing. While it perhaps inherited the worst of the assets and debt from its split with Toll/Patrick, the earnings from the business remain and the cash injection should allow the company to expand. This stock looks cheap.
Red Fork Energy (RFE)
Red Fork Energy is engaged in oil and gas exploration and production in the US state of Oklahoma. Red Fork is targeting unconventional coal bed methane and shale gas and conventional oil and gas formations. The primary objective is to commercialise coal bed methane, shale gas and oil deposits. The stock has rallied from 22 cents in March to $1.15 in early morning trade on July 10. However, the information flow has been strong, suggesting that there is still some more upside.
Speculation hangs over company direction following the recent appointment of Patrick Snowball as new CEO. Some market watches believe SUN will try and sell its banking division and concentrate on insurance and funds management. If the company manages to restructure, it may be able to expand, or perhaps become a target itself.
David Jones (DJS)
The stock recently enjoyed a sharp jump on increasing sales results. However, I believe the retail sales outlook remains poor, and doubt the good result can be maintained. Government hand-outs of $900 appear to be spent as intended, and David Jones and JB Hi-Fi seem to be the beneficiaries. However, this boost to sales is a one-off, and I wouldn’t be surprised to see the stock retreat below $4.
Karoon Gas (KAR)
Widely pushed last year as a “baby Woodside”, this gas producer has enjoyed a stunning run in recent times, almost quadrupling in price. The company recently traded above $9 and announced a share purchase plan at $6.70. The stock looks set to fall from these lofty heights, possibly back to $6. Despite making a large discovery, the company is still continuing exploration and will need to do feasibility studies before producing any gas.
Scott Marshall, Shaw Stockbroking
As expected, the supermarket giant has largely missed the market rally, creating a valuation discount and an upgrade to buy. Myer and David Jones have provided positive trading updates, reflecting a relatively stronger consumer market. But expect an increasing unemployment rate to have a negative impact on consumer spending in the next six months. Woolworths remains a very strong cash flow generator, which, combined with gearing below 30 per cent, demonstrates the financial strength and low risk of the group. WOW has the potential to return significant under-utilised cash to shareholders.
Expect Peplin to complete clinical testing by the end of the year on its topical actinic keratosis (AK) drug for treating skin lesions. A competitor’s product was poorly tolerated when applied to the skin, but PLI’s treatment for the same condition results in significant improvements after only two applications. We believe PLI has a superior product to what is currently available, with shorter treatment duration and less irritation.
US competitor iGPS has aggressively targeted BXB’s CHEP pallet customers, including PepsiCo, Borders Melon and Okray Family Farms. iGPS has a different business model to BXB; the iGPS model is based on high cost / low maintenance plastic pallets. It’s uncertain if this is a more sustainable model than BXB’s CHEP model. While some speculate BXB may buy iGPS, the company believes it’s more efficient to tackle iGPS in the market place. At a recent market update, BXB said group sales (in $US) fell by 7 per cent for the 10 months to May 2. CHEP sales declined by 7 per cent and Recall Sales fell by 8 per cent.
Decisions regarding the national broadband network and company separation will have a major impact on valuation. Market concerns remain about the sustainability of the promised $6-to-$7 billion in free cash flow in 2010. We have little doubt this is achievable, as the transformation program has brought forward capital expenditure, artificially inflating free cash flow for several years. Telstra needs to engage the government in future, not disenfranchise it.
Boart Longyear (BLY)
The share price fall partly reflects disappointing earnings after several significant profit downgrades. Management has expressed confidence that short-term earnings are improving, encouraged by a stronger tendering environment, a lift in commodity prices (notably gold) and the stabilisation of underground drilling activity. Market speculation exists about a large capital raising, and this may create a better buying opportunity.
Its fully-franked dividend yield of about 6 per cent is in line with the major banks. But there are difficulties and time delays in turning this group of businesses around and restructuring the business composition. We retain a reduce rating as there is also a lack of clarity regarding a sustainable earnings base.
Other articles in this week’s newsletter
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