Grant Dwyer, Patersons Securities
Jabiru Metals (JML)
Low cost zinc producer Jabiru Metals has made a discovery at the Bentley project within easy trucking distance of its Jaguar operation. In time, Jabiru may be able to prove up a resource of 1 million tonnes at about 10 per cent zinc and 3 per cent copper. Jabiru is one of the few remaining ASX listed zinc producers without Chinese links. Despite some copper hedging, it’s still highly leveraged to the zinc and copper price.
Tox Free Solutions (TOX)
Tox Free Solutions recently opened a hazardous waste facility at Karratha. This company is highly leveraged to forecast growth in iron ore and LNG production in the north west region of WA. We forecast Tox to deliver net profit after tax of $8.1 million in full-year 2009 before rising to $19.1 million by 2011.
Nexus Energy (NXS)
Nexus received a $30 million deposit for the conditional sale of 50 per cent of the Longtom gas project, but the balance of $125 million, subject to debt financing, is not payable until the project is commissioned. With more debt than cash, a sale is eagerly awaited.
Gloucester Coal (GCL)
Gloucester has locked in thermal coal export contracts for 2011 and 2012 at a price the company says is fixed at a historically high Australian dollar level. Gloucester has reiterated previous net profit after tax guidance of between $88 million and $95 million for full-year 2009. The shares are fair value.
ING Real Estate Entertainment Fund (IEF)
The fund faces increasing refinancing risks with 73 per cent of its debt coming up for renewal in February 2010. Any deterioration in commercial property values may pressure loan-to-valuation ratio banking covenants. The fund has already cut distributions, but we believe it needs to raise capital or sell properties to help solve its problems.
James Hardie Industries N.V. (JHX)
The short-term outlook for the US housing market remains downbeat with very low levels of housing starts and historically high inventories of vacant homes for sale. It still has on-going asbestos issues. The recent strong share price rise of this building products maker offers a good opportunity to exit.
Alex Beer, State One Stockbroking
AWB Limited (AWB)
AWB recently updated the market, forecasting a full-year 2009 net profit before tax of between $90 million and $100 million. However, AWB Brazil will record a pre-tax operating loss in full-year 2009 of between $55 million and $65 million. This is a result of continuing credit issues amid deteriorating market conditions in Brazil, reduced trading margins, deferred foreign exchange losses, interest and overhead costs. With most of the bad news out, AWB can refocus on its profitable Australian operations in full year 2010.
QBE Insurance will acquire 100 per cent of the Elders Insurance underwriting arm. QBE will also acquire 75 per cent of a general insurance agency that will own the long-term distribution of products sold through the Elders Rural Services Network. QBE is paying a total of about $270 million for the businesses. QBE will also buy 112.5 million Elders shares. The net result is positive for Elders as it repairs its balance sheet.
Rio Tinto (RIO)
The June quarter production report was generally positive after announcing a rights issue (21 for 40) in June 2009. Iron ore production was a key positive while coal and copper production were only marginally negative. Given the strong copper price in the past month, RIO looks set for a positive start in full-year 2010.
News Corporation (NWS)
News Corporation focused on cutting costs in 2009 amid weaker economic conditions in the past 12 months. A fourth quarter net loss of US$203 million was recently reported by News compared with net income of US$1.1 billion in last year’s fourth quarter. While cable network programming (FOX News) and magazines and Inserts delivered higher contributions for the quarter, the decline in adjusted operating income reflects reduced contributions from the company’s other business segments.
We expect most of its retail businesses to report flat-to-modest growth, year-on-year into full-year 2010. This is based on tighter economic conditions and rising unemployment. The dividend yield is not as attractive as March 2009. Trading on a forecast full-year 2010 yield of 2.9 per cent, it may be time to pocket some profits.
Harvey Norman (HVN)
Fourth quarter retail sales grew 4.5 per cent to $1.49 billion. The retail giant has a strong track record of delivering results, but its international operations could drag on group performance in the next 12 months. It may be time to lock in some profits.
Andrew Doherty, Morningstar
Alesco Corporation (ALS)
This industrial brands distribution business was heavily sold on market concerns about its balance sheet and an over-exposure to a weak housing market. Gearing has been reduced after selling a business. Management has been busy stripping costs in preparation for an upturn that should start at the end of this year. This stock remains undervalued, and a prospective dividend yield above 5 per cent is decent.
Coca-Cola Amatil (CCL)
This well-managed soft drink bottler offers an extensive distribution network that’s difficult for competitors to match. Other competitive advantages include the Coke brand power and an ability to innovate processes and services. The balance sheet is solid and a yield of almost 5 per cent is reasonable. A good long-term portfolio stock.
Provides funds management and other financial services. It will benefit from favourable demographics and government policy that enables the wealth management industry to grow faster than the economy. PPT tracks the equity market because rising markets lead to higher management fee income and greater net inflows to managed funds. Perpetual’s competitive advantages include its strong brand and reputation with planners and the investing public – although these depend on sustained investment performance.
Crane Group (CRG)
Makes and distributes building and pipeline products in Australia and New Zealand. After several acquisitions, the pipeline division is the dominant earnings generator. Its plumbing supplies chain, Tradelink, also provides meaningful earnings. Most of Crane’s businesses have leading market positions, with strong branding and cost advantages derived from scale.
A building materials company operating in a difficult industry characterised by cyclical demand. What it does offer is strong positions in not overly competitive markets. Recent price rises have helped offset volume declines. Expect modest earnings growth over the longer term. Earnings ebb and flow with cyclical forces.
Flight Centre (FLT)
Flight Centre is Australia’s biggest high street travel agent. Discount airlines intensify price competition, driving down the cost of air travel and lowering commissions to travel agents. The travel industry adapts by charging customers a fee for service. Online travel agents, with their lower operating costs, add another burden to the competitive environment.
Other articles in this week’s newsletter
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