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Boe Campion, Ord Minnett

BUY RECOMMENDATIONS

Vitaco Holdings (VIT)

 

Chart: Share price over the year

Makes and markets vitamins, supplements, sports nutrition and health foods in Australia and New Zealand. In addition to strong and continuing momentum in Australia and New Zealand, the company is well positioned via a portfolio of leading brands to penetrate high growth Asian markets. We initiate coverage with a buy recommendation and June 2016 price target of $3 based on our blended discounted cash flow and comparative companies based valuation.

SurfStitch Group (SRF)

Chart: Share price over the year

There are some concerns about the worsening trade environment in North America and the implications for SurfStitch, but Ord Minnett believes the online apparel retailer is able to respond to changes in action sports trends faster than its bricks and mortar peers. Moreover, SurfStitch has low market penetration that should improve as more curated traffic comes through from its content acquisitions. We retain our buy recommendation and $2.40 price target. We think SurfStitch will continue to grow both top and bottom line as it increases market penetration. The shares finished at $1.505 on October 7.

HOLD RECOMMENDATIONS

Telstra (TLS)

Chart: Share price over the year

Yield support may continue to see the stock trade around current levels, but over the medium term we expect the stock to drift closer to our valuation. We have a hold on Telstra with a price target of $5.63. The shares finished at $5.66 on October 7.

Rio Tinto (RIO)

Chart: Share price over the year

The global miner has sold its 40 per cent interest in the Bengalla thermal coal mine in NSW for $US606 million ($A865 million), which we see as a strong outcome. Overall, Rio Tinto has once again executed a sale that provides a meaningful cash injection, but with negligible impact on cash flow. Rio Tinto remains our preferred diversified miner and we reiterate our positive recommendation on the stock.

SELL RECOMMENDATIONS

Adelaide Brighton (ABC)

Chart: Share price over the year

We see little prospect of meaningful earnings growth over coming years, a challenge exacerbated by the sliding Australian dollar. While it’s one of the sector’s best managed companies, this building materials stock is trading in excess of our valuation.

Slater & Gordon (SGH)

Chart: Share price over the year

We have decided to remove the stock. Recent news that a UK contract was lost is unsettling following difficulties with the Professional Services Division acquisition from UK based Quindell. While there’s valuation potential, we prefer to wait for the UK acquisition to be bedded down before recommitting.

 

Ravi Chauhan, Fat Prophets

BUY RECOMMENDATIONS

Elders (ELD)

Chart: Share price over the year

After a near death experience, Elders, in our opinion, has turned the corner. We expect management’s back-to-basics approach to turn the business around will provide a positive outcome for investors. We also expect it to benefit from a lower Australian dollar and Asia’s growing appetite for Australian produce. The balance sheet looks a lot healthier with net debt reduced. We think it’s a buy around these levels. The stock finished at $3.92 on October 7.

Incitec Pivot (IPL)

Chart: Share price over the year

The cycle is turning for this fertiliser and explosives producer. Key to the investment case, in our view, is the Louisiana ammonia plant is on track from a budget and schedule perspective, providing diversification benefits and an attractive medium term growth kicker. On completion, the cash flow should improve and support a forecast dividend yield of about 3.5 per cent. With the commodities cycle showing signs of bottoming, its explosives division, Dyno Nobel, should contribute more positively to earnings.

HOLD RECOMMENDATIONS

Silver Chef (SIV)

Chart: Share price over the year

Provides funding solutions to business for hospitality equipment. The unique business model has worked well. The company has built a strong competitive advantage in its dealer relationships and has increased earnings every year for the past five years. Growth is now likely to come from expanding into the New Zealand and Canadian markets.

MyNetFone (MNF)

Chart: Share price over the year

An Australian based provider of voice-over-internet-protocol data and video services on top of enhanced service applications to residential and business customers. MyNetFone played the role of predator in fiscal 2015 via acquisitions, continuing a strategy that’s worked well for the company. We believe MNF may also be a target as merger and acquisition activity steps up further in the sector.

SELL RECOMMENDATIONS

TPG Telecom (TPM)

Chart: Share price over the year

The market is seemingly impressed by the iiNet acquisition and the solid financial result in fiscal year 2015. The company’s share price has been increasing since the start of September. However, we believe the company’s shares are over-extended given a recent price/earnings multiple of 33.7 times next year’s forecast earnings and a dividend yield of only 1.1 per cent. Further, the merger announced between Vocus Communications and M2 Group means TPG will soon be up against a bigger rival.

Carsales.com (CAR)

Chart: Share price over the year

Delivered a reasonable fiscal year 2015 result predicated on modest improvements in the second half. Management has noted a solid start to fiscal year 2016. But we believe the balance between risks and rewards is now looking less favourable. The jury remains out on whether recent growth initiatives will have a materially positive impact on group earnings in the near term.

 

Darren Jackson, Sanlam Private Wealth

BUY RECOMMENDATIONS

Vitaco Holdings (VIT)

Chart: Share price over the year

Blackmores (BKL) and Bellamy’s Australia (BAL) are among the strongest performers this year and we continue to look for similar opportunities. This recent IPO is a nutrition products maker. While trading on a high trailing earnings perspective, it offers considerable relative value to BKL and BAL. Potentially, significant upside exists should it make inroads into China with its Musashi supplements.  

SeaLink Travel Group (SLK)

Chart: Share price over the year

SeaLink Travel is highly exposed to domestic tourism and should benefit from a falling Australian dollar. The company recently announced it acquired Transit Systems Marine, an earnings per share accretive (EPS) business. The market has general rated EPS accretive acquisitions highly in a low growth, low interest rate environment. Offers high quality earnings and annuity style income from operating some monopoly routes.   

HOLD RECOMMENDATIONS

Netcomm Wireless (NTC)

Chart: Share price over the year

It’s taken considerable time for Netcomm to be re-rated by the market from when we first identified the company’s upside potential in July 2014. The company continues to generate new contract wins with global top tier companies – the latest being Hitachi. Connectivity between stgices still remains an important global theme. 

Ooh! Media (OML)

Chart: Share price over the year

This market leading outdoor advertising company recently reported strongly, with first half EBITDA of $20.2 million, up 51 per cent on the previous corresponding period. Key to future performance hinges on the continuing roll out of its digital infrastructure as digital continues to displace traditional print advertising.

SELL RECOMMENDATIONS

Thorn Group (TGA)

Chart: Share price over the year

We believe possible Federal Government legislative changes pose a significant risk to Thorn Group’s business model. Thorn generates considerable revenue from Centrepay, a payment facility operated by Centrelink. Lease companies may be excluded from Centrepay.

Santos (STO)

Chart: Share price over the year

This highly leveraged energy producer has balance sheet deficiencies. Assuming the oil price remains constant, STO offers potential upside should the company make an asset sale at a good price. Arguably, the company is trading well below a sum-of-the-parts valuation. Alternatively, STO is exposed to further downside should the company undertake a dilutive capital raising. Both scenarios are realistic near term outcomes, so we’re avoiding it.

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