Simon Bond, RBS Morgans
Nufarm sentiment has been unsettled after agricultural company Monsanto’s cautious tone on returns in its glyphosate operation. While market (supply/demand balance) and earnings risks remain material, it’s worth remembering the assumptions behind Monsanto’s forecasts are not fresh news and should have been broadly captured by NUF in the inventory write down it announced. Crop protection company Nufarm has the ability to manage its margins to a far greater extent than the more fully integrated Monsanto.
Eastern Star Gas (ESG)
We expect Eastern Star to focus on its aggressive exploration and appraisal campaign, increasing power generation capacity at Wilga Park Power Station and improving gas flows from the production pilots. Commercialisation of its resource is the next step. The large potential resource in PEL (Petroleum Exploration Licence) 238 is capable of supplying the domestic gas market, power generation, LNG, or all three.
Primary Health Care (PRY)
Primary Health Care has signed a debt refinancing mandate letter and term sheet with the National Australia Bank. The new facilities will be used to refinance PRY’s existing bank debt maturing on February 13, 2010. The $1.2 billion facility includes an NAB commitment of $500 million. The syndication process will commence immediately.
Sigma Pharmaceuticals (SIP)
This healthcare business recorded a pleasing 6.9 per cent increase in revenue to $1.215 billion and a 9.5 per cent increase in earnings before interest and tax to $29.9 million. EBIT margins rose to 2.5 per cent (first half 2009: 2.4 per cent). This is a sound result driven by sales growth, market share gains and improving pharmacy compliance.
This commercial explosives and chemical company appears to be successfully managing its way around many of its trading challenges. However, there is a real risk, in our view. In a market where volume growth is easing back and where the supply/demand balance may come under pressure, average realised prices may not rise as much as expected. This could mean the group’s profit cycle lags other cyclical companies. Its multiple is not overly demanding but, in our view, does not leave much room for error after a strong share price run.
Bendigo and Adelaide Bank (BEN)
The recent result leads to a small increase in our target price to $7.25. On the positive side, BEN, like the other regionals, is positively predisposed to margin improvement, with the majors needing to re-price mortgages in the next six-to-12 months. Counteracting this is the bank’s exposure to Great Southern and rising bad debts. While we do realise the recent capital raising provides a buffer to deal with these issues, we still prefer a lower entry point.
Les Szancer, Kinetic Securities
Prima Biomed (PRR)
This Australian health care company announced on July 30 that it had lodged its investigational new drug application with the US Food and Drug Administration to evaluate the company’s core product, the CVac ovarian cancer therapy vaccine. This is a major milestone in the commercialisation process and a critical requirement of a product’s stgelopment cycle. Prima Biomed has received approval from the US FDA to commence phase 2b testing. The company recently secured $25.5 million in funding for stgeloping and commercialising the vaccine.
Phase 3 trial results for Axiron, a male testosterone replacement lotion, are due next week. Acrux plans to submit a new drug application by the end of this year, and there is already strong interest from potential marketing partners. If approved by the FDA, expect Axiron to enter the testosterone therapy market in early 2011.
Lihir Gold (LGL)
Disappointing of late, but could be ready for a rally. Lihir significantly increased its resource estimates recently for Côte d’Ivoire and Lihir Island, demonstrating the quality of the company’s assets in each country. LGL will ride the wave up on gold’s back, which appears to be heading higher as we watch the value of the greenback erode.
Oil Search (OSH)
Oil search is in an excellent position to deliver sustained growth, with a strong balance sheet. It has about US$411 million cash and an undrawn facility of US$391 million. Then there’s the likely sale proceeds from oil and LNG interests. Oil search is well positioned to take advantage of any price hike.
The Federal Government can force a company break-up to generate more competition and consumer benefits. Telstra can voluntarily submit an enforceable undertaking to structurally separate. If it chooses not to, the Government can impose a strong functional separation framework on Telstra, preventing it from acquiring additional spectrum for advanced wireless broadband. The company remains vulnerable to any negative news.
AXA Asia Pacific Holdings (AXA)
As a trading stock, AXA has disappointed on many occasions. Yet again, the stock is struggling while the wider market has pushed ahead. Sell AXA on technicals – many black candles on the daily charts lately, below the 21-day moving average, negative momentum and down trending RSI (relative strength index) leaves room for more selling. Maybe the stock will pick up, but I’d rather be short than long until it shows some strength.
Brett Schreuders, Alto Capital
AGL Energy (AGK)
Purely a defensive play given the ASX200 has rallied about 45 per cent from its March lows. AGK controls Australia’s largest natural gas, electricity and dual fuels customer base, providing strong and reliable cash flow. Selling $3.2 billion of non-core assets recently has reduced debt and strengthened its balance sheet, making AGK a top defensive stock should the markets correct.
Ansell is an industry leader in the international healthcare sector. With low gearing, robust sales and a share buy back in progress, it offers investors some protection in a market that’s rallied hard and could be running out of steam. Free cash flow has increased 52 per cent on the previous year, further strengthening the balance sheet and enabling management to increase a modest dividend during challenging times.
CSL is a major player in the pharmaceutical and biotechnology industries. The last annual report shows a 63 per cent increase in net profit after tax, underlining sound management in a very competitive market. Currently undergoing clinical trials on the H1N1 (swine flu) vaccine, the Australian Government has ordered 21 million doses ($180 million) and, with the northern hemisphere winter approaching, we believe there is further upside. An on-market share buy back offers downside protection.
Tabcorp Holdings (TAH)
Tabcorp offers a wide range of gambling and entertainment products. The balance sheet is stronger after raising $387 million in equity and $434 million of five-year debt, underlining a healthy bottom line that looks set to continue. Tabcorp provides investors with a good yield and it’s currently priced at 1998 levels, so we see good value in holding this stock.
JB Hi-Fi (JBH)
Management’s aggressive expansion plans have paid off handsomely to date. A tremendous growth story that’s almost defied belief in the current economic climate. But we think it’s time to lock in some profits. Consider maintaining a core holding, but it’s prudent to take some money off the table.
Leighton Holdings (LEI)
Leighton has benefited from government stimulus around the globe. However, credit is still very tight for consumers and small businesses. We’re not convinced that all is well in the financial markets. Having bounced 130 per cent from lows earlier this year, we believe it’s time to pocket some profits.
Other articles in this week’s newsletter
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