Matthew Litchfield, PhillipCapital
The company has fallen into our buy zone due to an underperforming car finance business cutting the share price. The core business continues to perform well with good growth plans offshore. The stock also offers shareholders a decent dividend yield, recently around 3.5 per cent fully franked. Despite the short term challenges, we believe value is emerging. Santos (STO)
We expect a brighter period ahead for this oil and gas producer after outlining a new strategy to drive sustainable shareholder value by becoming a low cost, reliable and high performance business. CEO Kevin Gallagher is impressive, and his plan to drive costs down enables the turnaround strategy to bring significant oil price leverage.
Aristocrat Leisure (ALL)
Despite the recent announcement CEO Jamie Odell is stepping down, I believe Aristocrat is a quality business. Profit after tax increased by 88 per cent to $350.5 million in 2016. The gaming machine company is in strong financial health and management expects strong growth to continue in its Americas segment and digital division.
Ardent Leisure (AAD)
While ramifications from the Dreamworld tragedy will linger for some time, we view Ardent Leisure’s assets as well balanced and enjoying a good position in each market they operate. Management is aiming to progress its value based strategy to the Main Event business in the US. Selling its marinas business at a premium to book value will improve the balance sheet capability of the group.
SELL RECOMMENDATIONS Woolworths (WOW)
While a turnaround is underway, I believe competitors, such as Aldi and Amazon, will negatively impact this retail giant. Our research expects margins to tighten and new entrants to provide a threat. Rio Tinto (RIO)
Australian miners are benefiting from a higher iron ore price, which has doubled in 2016. I’m not convinced the uptick is based on supply and demand fundamentals. I suggest taking profits while the price is high.
Peter Moran, Wilsons
Retail Food Group (RFG)
Provided an encouraging update at its AGM, confirming an increase in fiscal year 2017 net profit after tax guidance of about 20 per cent. Among the growth drivers is expanding the international franchises. Management expects another 140 store openings in the 2017 first half, of which more than 50 per cent are expected from international operations. RFG also announced a partnership with BP to explore opportunities in expanding the fresh food and coffee choices at about 1300 BP locations. Year to date trading suggests the traditional brands continue to generate moderate earnings growth. Saracen Mineral Holdings (SAR)
The recent sharp fall in the share price, which followed the gold price lower, provides an attractive entry point. Saracen offers leverage as a pure gold exposure, with significant production growth ahead generating strong free cash flow. During fiscal year 2017, we expect Saracen to generate about $82 million of free cash flow, adding to its net cash and bullion position of $40 million at the end of fiscal year 2016. HOLD RECOMMENDATIONS
Select Harvests (SHV)
The almond price appears to have found a base following a recent correction. While this is undoubtedly a positive for this almond producer, we have also noticed an increase in the cost of production, mostly due to higher lease costs. We believe costs will come down, but it will take time. As such, we see the shares as fully priced and likely to track sideways in the near term. Transurban Group (TCL)
The sharp fall in the Transurban share price in recent months can be attributed to falls in global government bonds. We expect the Australian 10 year bond yield will rise from 2.8 per cent to 3 per cent over the medium term. The risk is the yield moves higher over time. Against this backdrop, the toll road operator appears to be fairly valued. Despite recent weakness, we retain a hold recommendation. SELL RECOMMENDATIONS
Iluka Resources (ILU)
Iluka has announced the acquisition of Sierra Rutile for $A455 million. Iluka is proposing several operational changes, which could boost production to more than 240,000 tonnes of rutile a year, while lowering unit costs to below US$500 a tonne. However, even after factoring in these improvements, we estimate the deal is only value neutral at our long run rutile price of $US1000 a tonne (versus the spot price of $US750 a tonne). We expect ILU to spend more than $US200 million on expanding production as the acquisition will probably be cash flow negative until 2020. Metcash (MTS)
We’re concerned about the impact the Aldi rollout in South Australia and Western Australia will have on the Metcash food and grocery business. We also believe Woolworths is starting to become more competitive, placing further pressure on margins. Given the difficult trading environment, we retain a sell recommendation.
Gavin Wendt, MineLife
Two of the most important commodities at the moment are zinc and lithium and Metalicity offers investors prime exposure to both. Its advanced Admiral Bay zinc project is one of the world’s largest undeveloped zinc deposits at a time when zinc prices have skyrocketed by almost 90 per cent during calendar 2016. Also, it offers exposure to high quality lithium acreage within the Pilbara region of WA, right next door to Pilbara Minerals’ Pilgangoora project.
Anova Metals (AWV)
The stars set to align in a major way early in the New Year for its Big Springs gold project in the US state of Nevada. Firstly, the company has announced a series of impressive drilling results from recent programs, which are likely to boost the overall JORC resource base during the first quarter of calendar 2017. Secondly, the company is anticipating final environmental approvals during the first quarter, which will clear the way for pre-mining activity to start.
St George Mining (SGQ)
The company attracted solid market interest during 2016 with respect to its Mt Alexander nickel sulphide project in WA. Drilling is taking place at its Cathedrals, Stricklands and Investigators prospects, where encouraging results have emerged from testing of highly prospective, massive nickel-copper sulphide targets over a strike length of 3.5 km. Drilling has revealed an under explored nickel?copper system, which is growing with every completed drilling program.
Emmerson Resources (ERM)
The company has enjoyed a top 2016 and there’s no reason why the positive momentum won’t continue into 2017. The company has successfully used high tech modern exploration techniques in evaluating the gold potential of its Tennant Creek Mineral Field. The focus is on near term, high grade mining opportunities, such as its Edna Beryl deposit. It has returned outstanding drill results of 5 metres at 251 grams a tonne gold, 2 metres at 613 grams a tonne gold and 1 metre at 1043 grams a tonne gold.
Legend Mining (LEG)
LEG sold its Cameroon metal assets for $17.5 million in 2015. In conjunction with successful prospector Mark Creasy, the company has now refocused its exploration and appraisal activity on its priority Fraser Range nickel acreage in WA. The stock has enjoyed a great run, so consider taking profits.
BHP Billiton (BHP)
The mining behemoth has recovered from below $15 – its lowest levels since the GFC – to trade at $25.96 on December 14. The biggest contributing factor has been the major iron ore price rally during 2016 to levels around $US80 a tonne, although I believe this is unsustainable. The company has its fortunes heavily leveraged to this one commodity, which accounts for about 50 per cent of its earnings. Some investors might want to consider taking profits around these strong price levels.
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