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Peter Moran, Wilson HTM

BUY RECOMMENDATIONS

Iress (IRE)

Chart: Share price over the year versus ASX200 (XJO)

Iress, a supplier of sharemarket and wealth management systems, is a well-managed company. It offers solid earnings growth prospects, largely in the Australian and UK wealth management divisions. IRE was recently trading at 22 times calendar year 2015 earnings, which we believe is warranted considering the strong earnings growth, recurring cash flows and high returns on capital.

Rio Tinto (RIO)

Chart: Share price over the year versus ASX200 (XJO)

The miner’s share price has been negatively impacted by lower commodity prices, particularly for iron ore, which provides more than 70 per cent of EBITDA. However, RIO’s projects are typically low cost, so margins are likely to remain strong even with lower prices. Additionally, RIO continues to cut costs and even its disappointing aluminium division appears to be improving. At current levels, RIO was recently trading at a 40 per cent discount to our fundamental valuation. The shares closed at $61.40 on May 28.

HOLD RECOMMENDATIONS

Domino’s Pizza Enterprises (DMP)

Chart: Share price over the year versus ASX200 (XJO)

Domino’s offers investors an outlook for sustained earnings growth, led by international expansion, new stores, increasing digital penetration and new menu items. Domino’s long-term store count targets imply significant growth potential.

Nufarm (NUF)

Chart: Share price over the year versus ASX200 (XJO)

This crop protection and specialist seeds company has potential to generate significant earnings above current levels, led by structural growth in international markets and the seeds business.  However, our hold recommendation is based on high gearing levels combined with near-term risk caused by uncertainty over the timing of a cyclical recovery and the impact of recent contract losses in Australia.

SELL RECOMMENDATIONS

Challenger (CGF)

Chart: Share price over the year versus ASX200 (XJO)

Challenger’s share price has risen strongly over the past year, partly due to strong growth in its lifetime annuity book (now 20 per cent of sales). After examining Challenger’s lifetime products, we believe there’s a risk the structure may lead some customers to withdraw early, thereby increasing Challenger’s funding costs. Following the recent strong run, we believe there’s better value elsewhere.

DuluxGroup (DLX)

Chart: Share price over the year versus ASX200 (XJO)

While this paint company has strong market positions and is well managed, we believe the market may be over estimating the firm’s leverage to improving new housing activity, which represents just 16 per cent of group sales revenue. Also behind our recommendation is a company recently trading on a 2015 price/earnings multiple of more than 18 times.

 

Roger Allan, PhillipCapital

BUY RECOMMENDATIONS

Credit Corp Group (CCP) 

Chart: Share price over the year versus ASX200 (XJO)

The primary growth driver for CCP in the medium term is the performance of consumer lending operations. CCP should generate significant cash in fiscal year 2015 with PDL (purchased debt ledger) collections likely to exceed purchases by a wider than usual margin. Management appears focused on continuing to deliver double digit earnings per share growth over the next few years driven largely by consumer lending. At current levels, the stock still looks attractively priced. The shares finished at $9.29 on May 28.

Cooper Energy (COE)

Chart: Share price over the year versus ASX200 (XJO)

In the past three years, COE has transitioned from a multi-country and diverse play type explorer towards an Australian and Indonesian focused oil and gas explorer and producer. Core assets show upside and management experience is now lining up several promising gas opportunities in the Gippsland Basin.

HOLD RECOMMENDATIONS

Super Retail Group (SUL) 

Chart: Share price over the year versus ASX200 (XJO)

After a series of downgrades to consensus expectations, SUL no longer deserves the premium rating it’s historically enjoyed. Consistent growth and a relatively high of degree of earnings certainty were characteristics of the stock, which we now believe are in question.

Oil Search (OSH)

Chart: Share price over the year versus ASX200 (XJO)

While we see a chance that OSH’s suite of growth projects could attract a corporate bidder, OSH is an attractive hold for its organic growth alone. Our valuation expands in 2015 to $11.15 a share. The shares finished at $9.40 on May 28.

SELL RECOMMENDATIONS

SMS Management & Technology (SMX)    

Chart: Share price over the year versus ASX200 (XJO)

While cognisant of an earnings lift in the 2014 second half relative to the first half, we believe weak demand and pricing pressure is likely to continue. We have downgraded earnings by 20 per cent. In our view, the stock was recently expensive at 16.6 times fiscal year 2015 earnings, especially considering the negative earnings momentum in the past 18 months.

Oakton (OKN) 

Chart: Share price over the year versus ASX200 (XJO)

This consulting and technology firm posted a gross profit increase of 2.5 per cent, or $400,000 for the first half to $16.7 million. After we examined this on a gross profit per average full time employee perspective, this metric declined 6.4 per cent on the previous corresponding period. While the rate of decline is slowing, the negative trend remains a concern for us.

 

Simon Bond, Morgans CIMB

BUY RECOMMENDATIONS

Telstra (TLS)

Chart: Share price over the year versus ASX200 (XJO)

Telstra’s good operating cash flow in 2014 is underwritten by its solid and reliable performance in mobiles. While we forecast a 14.5 cents final dividend per share for full year 2014, the strong mobile driven cash flow allows room for a further cent fully franked. Payment of this depends on the board’s comfort that dividends can be sustained at the higher level.

National Australia Bank (NAB)

Chart: Share price over the year versus ASX200 (XJO)

NAB’s UK business is still at risk of higher redress costs for mis-selling interest rate hedging products, but existing provisions for payment protection insurance appear adequate. Our NAB forecasts include a further A$150 million for UK conduct provisions. Our earnings forecasts remain unchanged and we retain our add recommendation.

HOLD RECOMMENDATIONS

CSR (CSR)

Chart: Share price over the year versus ASX200 (XJO)

Going forward, improving housing activity should provide a boost for volumes and earnings, and management indicated that volume growth accelerated throughout fiscal year 2014. Our only concern remains valuation and the pace of recovery that’s factored into expectations. For these reasons we remain cautious, although we upgrade our recommendation to hold.

Bradken (BKN)

Chart: Share price over the year versus ASX200 (XJO)

Recently updated the market. The scope of the downgrade was relatively modest, in our view, and related to softness in the US engineered products business and a slower-than-expected recovery in various other production driven businesses. However, more significantly, BKN has announced several major restructuring initiatives around local manufacturing, costing $51 million. The restructuring is necessary to help BKN compete in an environment dictated by lower pricing points relative to previous cycles.

SELL RECOMMENDATIONS

SAI Global (SAI)

Chart: Share price over the year versus ASX200 (XJO)

The Pacific Equity Partners offer of $1.1 billion implies significant premiums to SAI’s trading history versus both offshore comparables and the small industrials index. However, the bid still carries risk – currently non-binding, conditional and subject to due diligence. In the absence of such a bid, substantial downside risk exists in our view. Medium term earnings risk remains on several fronts, such as compliance platform, electronic conveyance and the renewal of the standards agreement. We downgrade our rating to reduce.

Echo Entertainment Group (EGP)

Chart: Share price over the year versus ASX200 (XJO)

Revenue growth remains weak and, as the cost-out program draws to a close, net profit growth looks likely to turn negative in the short term. Also, we have entered an information vacuum in relation to the Brisbane redevelopment, which is likely to last throughout 2014. On revised capital expenditure guidance, we lower our recommendation to reduce.

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.

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