Sean Conlan, Macquarie Private Wealth
OZ Minerals (OZL)
A copper stock with a strong balance sheet and solid performing operations in Australia. OZ Minerals is best positioned in our copper universe to provide relatively low-risk upside in the resources cycle.
ASX Limited (ASX)
The ASX offers broad exposure to improving market conditions. It continues to exercise pricing power across a breadth of monopolies, as shown by recent price increases. The stock is currently trading at a discount to our target price of $40.05. The shares were trading at $37.30 after the opening on July 31.
Macarthur Coal (MCC)
Macarthur Coal offers the greatest pricing leverage of the Australian coal pure plays. That said, based on our coal pricing and currency assumptions, MCC appears stretched on value grounds, so we retain our neutral rating.
National Australia Bank (NAB)
We don’t expect a strong share price performance after the recent placement. Considering our forecasts suggest a sufficient pre-deal level of Tier 1 (8.3 per cent) capital, it appears the only short-term implication of the capital raising is dilution of return on equity and earnings per share.
We retain an underperform rating and a price target of 40 cents. The underlying deterioration in earnings puts further pressure on key financial metrics in 2010 despite a debt reduction post the sale of Australian Paper. While earnings are at the bottom of the cycle, this would require the company’s debt holders to look through another potentially challenging year in 2010, which should lead to continuing uncertainty.
Aristocrat Leisure (ALL)
We have difficulty with Aristocrat’s numbers suggesting a rebound in the second half. Given there’s likely to be some joy from the Japanese market, we believe the company may be able to hold its earnings per share decline to less than 15 per cent. However, the stock is nevertheless expensive, so we retain our underperform rating, and flag that our valuation of $3.31 is likely to come under further pressure.
Simon Bond, ABN AMRO Morgans
Melbourne IT (MLB)
Our review found that Melbourne IT has a solid competitive position despite current margin pressure. We believe MLB is more than capable of positioning itself in attractive segments. An example of the company’s ability to diversify is that in full year 2004, more than 90 per cent of revenue came from domain registration; we estimate domain registration will account for less than 40 per cent of revenue in 2009. We believe MLB looks cheap on all valuation metrics.
News Corp. (NWS)
News Corp is our key pick in the sector due to an undemanding valuation. We expect a return to strong earnings growth driven by its cable division. Also, there’s potential for an advertising recovery in the US before it happens in Australia.
SEEK job ads fell in June, according to the SEEK Employment Index. But some early signs suggest the rate of decline may have stabilised. We forecast volumes to be down in the 20 per cent range in full year 2009. We also forecast a 50 per cent decline from peak to trough (in line with the average decline in newspaper job ads in the past three employment downturns).
We view Woolworths as Australia’s pre-eminent retailer. Strong sales growth reflects a good performance across all divisions. However, performance is captured by today’s share price. A continuing replication of mid-to-high teen earnings per share growth will require more than organic growth. Our share price target is $28.70.
PaperlinX has started full year 2010 with paper volumes at very low levels in Europe and the US. We remain concerned that pressure on next year’s earnings from weak demand may be exacerbated by falling selling prices, which are now starting to become more evident in the European fine paper markets. Earnings risks still remain high and this, in our view, could result in an under performing share price.
Ten Network (TEN)
The longer-term outlook for Ten has improved significantly following recent ratings gains. But the potential for a covenant breach remains our major concern in the absence of improving advertising rates and a higher share price. An equity raising is a distinct possibility.
Peter Russell, Intersuisse
The biggest game in town is energy. Santos is Australia’s second biggest oil and gas explorer and producer, both in production and reserves in every major producing basin. Its focus is to monetise its extensive gas reserves via its Papua New Guinea LNG project and its joint venture with Petronas in the Gladstone coal seam gas to LNG project. Expect long-term growth.
Mermaid Marine Australia (MRM)
Continuing the energy theme, Mermaid has a unique niche as the biggest marine services provider to the oil and gas industry, with supply bases key to north west shelf stgelopments. Its vessel fleet provides tug and barge operations, offshore maintenance and dive, survey and supply support. The Gorgon gas facility and other fields will keep the market outlook buoyant for years.
Toll Holdings (TOL)
The global financial crisis will accentuate trends for outsourcing and consolidation of logistics and transport. Toll is not only a clear leader in Australia and New Zealand, but already the Asian region’s leading provider of integrated logistics services. With its strong finances and track record, we expect substantial growth. Keep adding to positions.
Service Stream (SSM)
An example of a company heavily under priced due to the market downturn, some particular one-off problems and a hiatus in its market growth. It’s a leading provider of outsourced field force and asset management services to telcos and utilities, with long term contracts with Telstra, Optus, power and water utilities. Expect significant upside as the National Broadband Network/Telstra logjams clear.
Aristocrat Leisure (ALL)
A new executive team has been appointed and $240 million in capital has been raised. Yet the market for gaming equipment is likely to remain weak for a long time and a recovery will be slow. The shares have fallen from $16 in 2006/07. The recent rally offers a chance to move to stocks with more obvious upside.
Flight Centre (FLT)
With 2000 oulets in 10 countries and over half its business offshore, its US and global footprints play against the strengths of an Australian recovery. While debt is not an issue, it’s up against the changing trends in bookings. Many other companies and sectors have rosier prospects.
Other articles in this week’s newsletter
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