Jonathon Howe, Read Leaf Securities
Transaction Solutions International (TSN)
The company is close to owning 100 per cent of Indian financial services subsidiary TSi, with an exclusive options agreement to acquire 75 per cent from its joint shareholder for $47.7 million. The deal includes significant uptake from TSi management and TSN directors, who will end up owning about 20 per cent of the fully diluted entity. We believe the macro theme is heating up, with India becoming a new bright spot. TSi provides ATM services, card products, e-surveillance, point of sale terminals, smart phone technology and financial switching and processing among other services. I owned shares in TSN on November 8.
TPG Telecom (TPM)
The company has been hit hard recently by the scale of the potential NBN margin squeeze. TPM is one of the better telco and internet providers, but a sharp price pull back of almost 50 per cent from its recent highs is certainly overdone, in our view. We are accumulating the stock for clients at these levels. I owned shares in TPM on November 8. HOLD RECOMMENDATIONS
Speculation about low growth and the NBN’s uncertain impact on future Telstra performance have resulted in a weaker share price. The dividends are robust. We like owning Telstra to provide a good portion of yield in our portfolio. Vita Life Sciences (VSC)
This smaller vitamins and supplements player supplies several Asian countries. The Teoh family is a major shareholder. David Teoh is executive chairman of TPG Telecom. Shane Teoh recently joined the VSC board as a non executive director. The company posted earnings before interest and tax of $3 million for the first half ending at June 30. Revenue was $18.1 million and the company had $8 million in cash. SELL RECOMMENDATIONS
Bellamy’s Australia (BAL)
Potentially tighter cross border e-commerce regulations to be introduced in China may have a negative impact on this infant formula company. We believe investors should by reducing BAL stock from portfolios. The company has generated impressive growth in the past two years, but we believe it’s unsustainable. APN Outdoor Group (APO)
Although the company reported a recent upgrade in profit guidance, we believe this will be short lived. The outdoor advertising space is extremely competitive and we were disappointed with its latest half year result. Despite the profit upgrade, we believe it’s too little too late.
Matthew Litchfield, PhillipCapital
BUY RECOMMENDATIONS Xero Limited (XRO)
We have an accumulate rating on this online accounting software group, which released a strong first half result on November 3. The strong result included global subscribers growing by an impressive 145,000, or 45 per cent, to 862,000 in first half of fiscal 2017. First half revenue growth was also strong, rising 48 per cent to $NZ137 million, or 55 per cent on a constant currency basis. We believe the company is on track to reach break even by fiscal 2020 without the need for additional capital. CSL (CSL)
This global blood plasma group has pulled back since its high of $121.25 on July 25. Closing at $102.47 on November 10, we believe it represents an attractive buying opportunity. We believe its latest result was clouded by higher than expected loses in the newly formed Seqirus division, but a turnaround is now underway. At its recent AGM in October, the company reaffirmed fiscal year 2017 guidance that included net profit rising 11 per cent on a constant foreign exchange basis. HOLD RECOMMENDATIONS Challenger (CGF)
This investment management firm continues to perform well. In the September quarter, CGF announced 3 per cent growth in total group assets. Total annuity sales were up an impressive 46 per cent. We believe Challenger is well placed to leverage off an increasing number of retirees looking for stable and reliable income. CSR (CSR)
CSR delivered an impressive first half result, with net profit after tax – before significant items – rising 12 per cent to $103.1 million. Stronger NPAT was driven by higher building volumes and prices on strong east coast residential activity. CSR expects product demand to continue in the near term. SELL RECOMMENDATIONS Genworth Mortgage Insurance Australia (GMA)
Third quarter underlying NPAT fell 19.3 per cent on the prior corresponding period to $47.4 million. The result missed market expectations. The company said third quarter NPAT was impacted by pressure in mining regions and a smaller high loan to value ratio market. We see better opportunities elsewhere. Incitec Pivot (IPL)
Net profit after tax for this explosives and fertiliser manufacturer fell 68 per cent to $128.1 million for the financial year ending September 30. It expects markets for its key products to remain challenging in 2017. I prefer companies that are expanding.
Peter Moran, Wilsons
BUY RECOMMENDATIONS Westpac Bank (WBC)
In a low interest rate environment, we’re not surprised WBC has reduced its return on equity target from 15 per cent to between 13 per cent and 14 per cent. We expect return on equity to remain flat over coming years, a better outcome than we expect for NAB and CBA. We see WBC as adequately capitalised and don’t expect dividends to fall going forward. The shares were recently trading on a price/earnings ratio of 13 times and a yield above 6 per cent. Afterpay Holdings (AFY)
The online retail merchant’s client base and end consumer numbers continue to grow. We expect most net additions will be smaller retailers and, as a result, expect average transaction sizes will be smaller, but margins will be higher. Small to medium sized businesses typically pay higher margins as a percentage of the transaction. The online retail market in Australia generates about $22 billion in sales. AFY offers significant merchant growth potential and strong operating leverage. HOLD RECOMMENDATIONS Macquarie Group (MQG)
First half net profit after tax of $1.05 billion was marginally ahead of our forecasts. The company is well managed and offers a solid competitive position, but the strong share price run in the past six months has priced in the good news. Looking ahead, potential issues include more turbulent markets if global interest rates rise and central banks removing stimulus. As a result, we see MQG as fairly valued and we have downgraded our rating to a hold. GUD Holdings (GUD)
GUD offers a mixed investment case. The auto business is delivering moderate but sustained growth and further acquisitions are on the agenda. However, GUD’s other business units, while much smaller than auto, continue to frustrate with lacklustre earnings contributions. We view the current share price as fairly valuing this outlook. SELL RECOMMENDATIONS
Iluka Resources (ILU)
We continue to retain a sell recommendation. The price of zircon, ILU’s most important commodity, continued to fall in the third quarter. An attempt to push through higher prices resulted in ILU customers sourcing zircon from other suppliers. We believe the market continues to be overly optimistic about a recovery. Steadfast Group (SDF)
This insurance broker has rallied this year as investors continue to anticipate solid earnings growth driven by acquisitions and higher insurance premiums. However, we believe price increases may take longer than expected. SDF faces increasing competition from other insurance brokers. Recently trading on 18 times earnings, we view the company as overpriced.
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