Matthew Felsman, Shaw Stockbroking
Sectors that ran strongly on rate cut thinking may ease. My view is the yield play has run its course and now is the time to look for high quality growth stocks. Apart from the recent turnaround story and the technical uptrend, we expect Elders to benefit from a lower Australian dollar, as it’s an exporter. A growing agribusiness sector in general should also help.
Amcom Telecommunications (AMM)
A situational trade. Amcom had been trading around $2.80 or 23 times valuation pricing on the Vocus merger. The share price fell on news that TPG Telecom may block these plans. It’s increasingly likely that Amcom will be taken over by another company in response to industry consolidation. TPG now owns 18.6 per cent of AMM and VOC owns 10 per cent. Rumours are circulating that Vocus will sell 10 per cent of the company it doesn’t have voting rights on to a party that will vote in favour of the deal to increase the chances of it going through.
Macquarie Group (MQG)
In an earnings upgrade cycle, Macquarie is a portfolio stock that fits in with some key medium term catalysts – yield, secular growth and exposure mergers, acquisitions, corporate activity and a lower Australian dollar. It recently announced a strong fiscal year 2015 result, posting a 27 per cent increase in full year net profit to $1.604 billion.
Bank of Queensland (BOQ)
We believe BOQ is in a multi year operational turnaround. It has a 1.5 per cent share of the Australian lending market, offers a fully franked yield of 5.7 per cent and trades on a 2016 price/earnings multiple of 12.8 times. Money is moving from the majors into regional banks.
The shares are more than $1 higher since we recommended it as a buy to thebull readers on April 13. On May 14, the shares closed at $9.84. On April 13, we anticipated another bid for iiNet after TPG Telecom had already offered $8.60 a share plus a 35 cents franking credit. In late April, M2 Group entered the fray with a higher $1.6 billion counter bid. Now, we believe it’s time to take the profit and invest elsewhere. Plan your trade and trade your plan.
Fortescue Metals Group (FMG)
We recommended this iron ore company as a trade buy to thebull readers on March 30 when the price was $1.92. We anticipated a short squeeze as the price of iron ore rallied. As firms closed out massive positions by buying back borrowed stock, traders who bought Fortescue have made a nice gain. I’m not an investor in iron ore stocks, only a trader. A good time to lock in a profit.
Peter Moran, Wilson HTM
This recently listed company operates a software platform that facilitates transactions to more than 600 electronic products, including mobile phone recharge vouchers, iTunes cards and gaming cards. We expect strong growth in Touchcorp’s earnings will be supported by the scale of its platform. Touchcorp is profitable, offers positive operating cash flow and a solid balance sheet – all unusual for a technology company in the early stages of the business life cycle. We commence coverage with a buy.
Suncorp’s third quarter 2015 bank update revealed strong loan growth, driven by an increase in housing of 4.7 per cent compared with 1.7 per cent for broader banking system growth. Recent weakness in the price means we forecast SUN is now on a fiscal year 2016 price/earnings ratio of 14.5 times and a dividend yield of 7.7 per cent. We upgraded to a buy.
Macquarie Group (MQG)
Fiscal year 2015 was another strong one for Macquarie, with full year earnings growing 27 per cent to $1.6 billion – well above guidance. While we see little to slow earnings momentum, we believe a significant share price increase since the start of the year means the good news is factored in. With a 12 month target of $79, we have a hold recommendation. The shares were trading at $81.25 on May 14.
The industrial conglomerate reported a strong result in most businesses other than liquor and Target. We expect Kmart, Bunnings and Officeworks to continue performing strongly, but see momentum slowing at Coles as Woolworths make efforts to improve its business. On a fiscal year 2016 price/earnings ratio of 18 times and dividend yield of 5 per cent, we see Wesfarmers as fairly valued.
Shopping Centres Australasia Property Group (SCP)
SCP is one of our least preferred real estate investment trusts as we see limited opportunities to grow earnings in a competitive supermarket environment. The share price has performed well since it was spun out of Woolworths in 2012, largely due to falling bond yields in Australia and around the world. Some signs suggest we have seen the lows for bond yields, so there’s an increasing risk of a sell off in SCP.
Boom Logistics (BOL)
Earnings continue to deteriorate, with trading conditions in March and April below the company’s expectations. The company reports it maintains healthy communications with its financiers. But, in our view, gearing levels for this crane logistics company are too high, so we recommend investors sell.
Jonathon Howe, Red Leaf Equities
Provides support services to buildings and occupants around the globe. Via the cloud it monitors energy usage and general building maintenance. Subscription based revenue fees are about $600 a building and $2 an occupant per month. Recently, countries in the EU have been mandated to comply with EU energy and environment legislation, which will impact UK companies occupying around 200,000 buildings. This, in itself, is a large potential customer base. The group is already on track for $10 million in revenue in fiscal year 2015. It has the potential to grow these revenues exponentially over the next few years if it gets it right.
Ainsworth Game Technology (AGI)
AGI’s last update anticipated domestic earnings revenue would increase in the second half of fiscal year 2015. We have been accumulating AGI at these levels given it’s on a yield of 3.5 per cent and a price/earnings multiple of about 16 times, compared to closest peer Aristocrat Leisure’s recent P/E of about 24 times. We believe AGI has some catching up to do in terms of valuation and could possibly do this by using current funds (23 cents a share) to make an acquisition to boost earnings.
Donaco International (DNA)
Operates leisure and entertainment businesses across the Asia Pacific. DNA is on track to acquire the Star Vegas Resort in Cambodia. Upon completion, the combined entity should generate more than $90 million EBITDA. We expect a substantial increase in revenue, with Star Vegas contributing about 80 per cent to the group. We expect the acquisition to be highly earnings per share accretive. The company expects to complete the acquisition by July.
The company has an array of blue chip mining clients keen to reduce their onsite expenses while creating efficiencies. RUL’s key products are already integrated into SAP and existing mining software. RUL’s products allow anyone from the CEO to the geologist access to any site in the world in real time. Users can develop mining plans, extend it to processing and to the end client. This has potential to be a game changer.
The Australian supermarket landscape is changing in response to stronger competition. ALDI will be a tough competitor during the next few years. The risk for Woolworths is checkout margins falling heavily as it cuts product prices to attract shoppers. Broking houses are already cutting material earnings forecasts for WOW. The dividend yield may look extremely attractive right now. But be warned, the market is telling you an earnings and dividend downgrade is likely.
Commonwealth Bank (CBA)
Recently, the big banks said growth in Australia looked bleak at best. With rates continuing to fall, margin pressure will be felt by the big four. We’re looking at selling CBA at these levels and waiting for the price to stabilise before buying again.
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.