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PREVIOUS ARTICLE 18 Share Tips - 24 August 2015 NEXT ARTICLE 18 Share Tips - 7 September 2015

Mathan Somasundaram, Baillieu Holst

BUY RECOMMENDATIONS

SpeedCast International (SDA)

 

Chart: Share price over the year

We retain our buy recommendation with an updated valuation in response to a good half year result. This satellite internet and communications service provider delivered good revenue growth and we expect this to continue into the 2015 second half and financial year 2016. SDA will also reduce costs as it undertakes a company restructure, and in response to legacy contracts from acquired companies rolling off. SDA was recently trading on a fiscal year 2016 price/earnings ratio of 15.1 times compared to the small industrials price/earnings ratio of 16.8 times and a telco services P/E ratio of 17.2 times. Our analyst Luke Macnab has lifted his target price to $4.48. The shares were trading at $3.75 on August 27.

Vita Group (VTG)

Chart: Share price over the year

We upgrade on growing confidence in our fiscal year 2016 outlook for this communications, computing and electronics provider. VTG acquisitions and continuing momentum in its retail network optimisation program are behind our upgrade. Valuation improves as we reduce our discounted risk weighting to outer year estimates given our increasing confidence in VTG’s Telstra contract renewal. The stock is trading on an undemanding multiple, solid growth and a dividend yield outlook above 5 per cent. Our analyst Josh Kannourakis has a price target of $2.10. The shares were trading at $1.87 on August 27.

HOLD RECOMMENDATIONS

Amalgamated Holdings (AHD)

Chart: Share price over the year

An entertainment, hospitality and leisure company. It’s a quality defensive stock with an attractive yield. There appears to be significant growth ahead from the roll out of hotel properties and cinema sites. The outlook for films remains strong. Our analyst Nick Caley has a price target of $14.10. The shares were trading at $12.80 on August 27.

Domino’s Pizza Enterprises (DMP)

Chart: Share price over the year

Expect more stores and improving margins going foward. While we believe it’s too expensive, risks are to the upside in light of the stock’s previous track record of highly accretive acquisitions and current operating momentum in Australia, New Zealand and Europe.

SELL RECOMMENDATIONS

Metcash (MTS)

Chart: Share price over the year

We retain a negative view in an environment of strong competition, lower currency, rising unemployment, rising cost of living pressures, declining real wages and falling consumer sentiment. Faces more margin pressure as Wesfarmers, Woolworths, Aldi and Costco retain their race to the bottom on prices.

Myer Holdings (MYR)

Chart: Share price over the year

Competition in the discretionary retail sector is fierce. It faces similar economic headwinds mentioned in the Metcash commentary. While delivering full service retail is challenging, its online model is up against much more targeted global and local competitors.

 

Boe Campion, Ord Minnett

BUY RECOMMENDATIONS

ANZ Bank (ANZ)

Chart: Share price over the year

ANZ produced few surprises in its trading update for the third quarter of fiscal year 2015, given the cash earnings result of $5.4 billion was recently released in conjunction with the $2.5 billion institutional placement. A softer domestic economy sees provisioning increase modestly from cyclical lows. However, a stabilising margin, strong underlying growth in the domestic franchise and an ongoing commitment to efficiency leave ANZ relatively well positioned. We resume coverage with an accumulate recommendation and a target price of $33.23. The shares were trading at $28.72 on August 27.

ResMed (RMD)

Chart: Share price over the year

The medical device maker posted a June quarter fiscal year 2015 result of $US87.5 million. After adjusting for one-off items, this can be restated as $US94.8 million, or below Ord Minnett’s forecast of $US99 million. Despite the miss on our earnings, due to currency effects at the gross margin line, top line momentum is clearly building with net revenue beating our forecasts by 2 per cent. Masks surprised by returning to growth while removing ongoing fears of further market share deterioration and discounting. Flow generators went from strength to strength, delivering 53 per cent growth in the US. With a strong top line and a gross margin that will correct, we raise our target price to $8.96 from $8.70. The shares finished at $7.20 on August 26.

HOLD RECOMMENDATIONS

Challenger (CGF)

Chart: Share price over the year

Delivered a fiscal year 2015 result broadly in line with our forecasts. A positive for this investment management company is trying to boost margins through annuity pricing, so the end of product margin declines appears in sight. In the near term, sentiment on annuities should support the stock.

Commonwealth Bank (CBA)

Chart: Share price over the year

CBA has consistently traded at a price/earnings multiple premium to its peers, mostly due to a superior return on tangible equity (ROTE) profile. But we expect regulatory-led degearing to disproportionately weigh on those returns, which has been fast forwarded via the rights issue. Accordingly, we’re now forecasting a ROTE of about 20 per cent in financial year 2016. We retain our hold recommendation, but cut our target price from $79.57 to $77.79.

SELL RECOMMENDATIONS

Monadelphous Group (MND)

Chart: Share price over the year

Reported a normalised net profit of $105.8 million for full year 2015, versus guidance of $114 million. Engineering and construction volumes continued to contract over the period, reflecting ongoing weakness across key commodity markets. EBIT margins contracted 0.6 percentage points, driven in part by a mix shift towards maintenance and industrial services. We retain a lighten recommendation.

Woolworths (WOW)

Chart: Share price over the year

CEO Grant O’Brien’s retirement adds uncertainty to the strategy presented at the May investor day. This uncertainty has left us more cautious regarding the food, liquor and petrol earnings outlook, while adding downside risk to earnings across the industry. Given downside risk to consensus estimates, a lack of valuation support and new CEO uncertainty, we retain our lighten recommendation.

 

Gavin Wendt, MineLife

BUY RECOMMENDATIONS

West African Resources (WAF)

Chart: Share price over the year

A most prospective emerging African gold production play. Its share price performance in recent years reflects the unfortunate loss of faith by investors in West African gold plays. Despite this, the company has maintained operational momentum by taking significant steps towards production status and is on track to achieve first commercial gold production during 2016.

Kibaran Resources  (KNL)

Chart: Share price over the year

The bankable feasibility study for its Epanko graphite project in Tanzania was delivered on schedule and within budget, highlighting a robust production opportunity. It’s also just finalised a 50 per cent off take agreement with ThyssenKrupp. KNL appeals as its graphite is of the highest quality. This opens up a lot more potential doors for commerciality than many of its peers. One of our favourite graphite exposures.

HOLD RECOMMENDATIONS

Talisman Mining (TLM)

Chart: Share price over the year

The share price surged in recent months following the release of outstanding drilling results on its Sandfire Resources joint venture acreage in WA. Diamond drilling has intersected massive sulphides containing high grade copper mineralisation from its Monty prospect, which is similar in nature to the massive sulphides previously identified at Sandfire’s nearby, high grade DeGrussa mine.

Orinoco Gold (OGX)

Chart: Share price over the year

Its Cascavel gold project is set for commissioning in early 2016. This emerging Brazilian gold producer offers outstanding project fundamentals. After the initial development of a relatively small scale, low cost start up mining operation, plans include increasing the resource base and mine life through cash flow funded exploration. Recently, the Brazilian Real gold price was performing even better than the Australian dollar gold price.

SELL RECOMMENDATIONS

OceanaGold (OGC)

Chart: Share price over the year

Has been a strong performer due to low cost production from its Didipio operation in the Philippines. The difficulty now lies with its growth strategy, which will see the acquisition of Romarco Minerals and its Haile gold project. While improving the company’s production profile from 2017, I have issues with the size of the premium being paid, as it doesn’t leave much upside for OGC shareholders. Time to think about cashing out.

Newcrest Mining (NCM)

Chart: Share price over the year

In my view, NCM is suffering mostly from its exposure to the problematic Lihir Island operation, acquired via its takeover of Lihir Gold a few years ago. I believe question marks remain over the asset’s value. This is because modeling is constrained by limited information surrounding the operation’s overall mine life. Low copper prices compound the situation, which are pressuring earnings from other operations.

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