18 Share Tips – 9 March 2015

Jonathon Feil, Morgans Financial

BUY RECOMMENDATIONS

Ensogo (E88)

The largest e-commerce player in South East Asia, E88 has been through a process of integrating operations and reducing costs. VIP Shop (NYSE:VIPS), a $14 billion peer (versus E88’s $65 million market cap) just made a $6.3 million strategic investment in the firm, validating the business model. With this strategic partnership, expect profitability and growth to be fast tracked.

iiNet (IIN)

Weaker than expected first half results saw the shares sold off from a recent high of $8.36 to be trading at $6.51 on March 5. This was despite a 25,000 increase in subscribers as they edge on market share of Telstra and Optus. Overall, with a register decorated by names such as TPG, the shares look attractive as a takeover.

HOLD RECOMMENDATIONS

QBE Insurance (QBE)

Reported a net profit of $US742 million for fiscal year 2014. Performance was largely as expected, although marginally weaker at the top line versus guidance. The final dividend of 22 cents is above expectations of 20 cents.

IPH (IPH)

This intellectual property company reported numbers that beat consensus forecasts. The stock has enjoyed a stellar run to be trading at $4.79 on March 5. The IPO in November 2014 was $2.10. Asian growth prospects continue to look attractive, but on a recent price/earnings ratio of 27 times, the stock is trading at a very healthy multiple.

SELL RECOMMENDATIONS

Liquefied Natural Gas (LNG)

After a massive run up from US fund buying, culminating in its inclusion in the S&P/ASX300 Index, the reality is starting to set in that $1.7 billion is a lofty market cap for a pre-production story. On the back of a soft oil and gas market, the stock looks overvalued.

Toll Holdings (TOL)

Japan Post’s $A9.04 a share takeover offer overshadowed the 2015 first half result. The price/earnings multiple of 21 times offered for TOL is lofty. Given the challenges the first half result continues to show, this is a good opportunity to cash in.

Matthew Litchfield, PhillipCapital

BUY RECOMMENDATIONS

Rewardle Holdings (RXH)

Rewardle offers small to medium sized merchants and enterprise clients a digital form loyalty card similar to the ‘buy 9 get 1 free’ punch card. The membership points and loyalty system empowers local SME’s to use email and social and mobile marketing as a means of engaging more closely with customers. Rewardle is in an initial growth phase, utilising a first mover advantage and the network effect to attract merchants. Merchant growth is around 80 per cent and member growth at 103 per cent for the half year. A speculative buy with quality management and large growth prospects ahead.

Oil Search (OSH)

The full year 2014 recent result was impressive and met expectations with core profit rising 135 per cent to $US482.8 million. In response to starting up the Papua New Guinea project, its cash position grew and OSH was able to pay a bigger dividend on last year. Any brownfield expansion of PNG LNG or Greenfield development should benefit the stock.

HOLD RECOMMENDATIONS

ANZ Bank (ANZ)

Despite a weaker than expected first quarter in fiscal 2015 and softer margins, we remain positive on ANZ. The dividend is expected to grow and we also believe the bank’s expansion into “savings rich” Asia will pay off. Its Asian strategy is a point of difference with the other banks.

BHP Billiton (BHP)

A tough road for BHP, given a softer commodities market. However, according to its latest report, management has reduced capital costs and stayed true to its progressive dividend policy. The profit result broadly beat market expectations. We view it as a leverage play to the global economy.

SELL RECOMMENDATIONS

Atlas Iron (AGO)

Reported a net loss of $1 billion for the half year, which missed expectations and was a long way away from its $74 million profit last year. Mining costs are high compared to other low cost producers, making it tough for smaller operators such as AGO, particularly when BHP, RIO and Fortescue Metals continue to increase production.

Woolworths (WOW)

The supermarket giant is struggling to maintain its competitive edge amid stiffer competition from Coles, ALDI and Costco. The Masters home improvement division is also struggling, reporting a $103 million loss for the first half. Woolies is a quality name, but I believe there’s better performers elsewhere.

Peter Moran, Wilson HTM

BUY RECOMMENDATIONS

Estia Health (EHE)

Following Estia’s profit results, we have upgraded our price target to $6.37 driven by an increase in net accommodation bond inflows ($30.7 million versus prospectus of $18.1 million) along with cost reductions and revenue that were better than forecast in the prospectus. We expect investors will now focus on the growth prospects of the aged care industry. The shares were trading at $5.70 on March 5.

Ridley Corporation (RIC)

Ridley lifted earnings before interest and tax by 33 per cent in the 2015 first half. The result demonstrates further evidence of underlying volume growth in key AgriProducts segments. New feed mill projects under development (of which north east of Geelong is the most advanced) offer additional earnings growth potential.

HOLD RECOMMENDATIONS

Seven Group Holdings (SVW)

Produced a respectable result given the difficult operating environment faced by its industrial services business, particularly WesTrac. SVW announced it intended to buy back an additional 17.7 million shares on market. The forecast yield of 5.5 per cent is attractive, but the shares are trading around our valuation and in an environment that continues to be difficult for mining service providers.

Independence Group NL (IGO)

We continue to like IGO for its high quality gold and nickel operations. Its most recent results were in line with expectations and it also increased production guidance at all three operations. Following its recent strong run, the share price is now in line with our valuation, so we have downgraded to a hold.

SELL RECOMMENDATIONS

Virtus Health (VRT)

Underlying net profit after tax of $16.7 million was inline with expectations. But we are becoming more pessimistic about the near term outlook for the Australian IVF industry. The soft economy appears to be impacting demand, and we’re also concerned that lower cost providers appear to be increasing market share, leading to reduced margins. Despite these headwinds, VRT still trades on a price/earnings multiple of 16.5 times for 2016, causing us to move to a sell recommendation.

Metcash (MTS)

The supermarket environment is becoming more competitive. The largest player Woolworths may have to sacrifice margins to retain market share. While this is great news for shoppers, it’s bad news for the likes of a struggling Metcash. We retain our sell recommendation.

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