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Tony Paterno, Ord Minnett

BUY RECOMMENDATIONS

Scentre Group (SCG)

Chart: Share price over the year

We see the regional mall REITs as oversold. Scentre is the best way to play this theme given it owns an impressive portfolio. We believe impending transactional evidence will show its book values are highly conservative. Scentre has a strong, low risk earnings outlook. We expect between 4 per cent to 6 per cent per annum growth over the next three years, boosted by debt funding its growing development work book. Scentre is well placed, owning 16 of the top 25 most productive malls in Australia. 

Fortescue Metals Group (FMG)

Chart: Share price over the year

Fortescue has fallen more than 20 per cent from its 2017 highs on concerns of lower iron ore prices and weak price realisations. We believe this has largely played out. There’s significant volatility in iron ore markets, so the marginal investor is likely to wait on the sidelines. Fortescue is attractive, based on a low enterprise value to an operating earnings multiple of 3 times. Potential exists to return significant cash to shareholders via share buybacks or dividends over the medium term. 

 

HOLD RECOMMENDATIONS

Medibank Private (MPL)

Chart: Share price over the year

We believe there’s valuation support when taking into account a lack of gearing, an undemanding share price and the long term industry growth dynamics. But in the absence of catalysts, we can’t see that value crystallised in the next 12 months. There’s a possibility that any performance misses could be magnified given the weak rate and volume environment. 

CIMIC Group (CIM)

Chart: Share price over the year

In the past 18 months, CIMIC has made significant headway in improving operational efficiency and reducing gearing in its business. We remain positive about the company’s long term prospects, believing it will benefit from the eventual ramp up in construction volumes. But we also note the current volatility in commodity markets pose a material risk to its resources-exposed business lines. 

 

SELL RECOMMENDATIONS 

Tabcorp Holdings (TAH)

Chart: Share price over the year

Tabcorp has defensive cash flows and a consistent history of returning capital to shareholders, while digital migration is positive for margins. But it’s exposed to declining wagering yields from competitive pressures. We believe execution risks exist regarding the Sun Bets business and the possible integration of the UBET brand, which is pending ACCC approval, in relation to the proposed merger with Tatts Group. In our view, valuation support is modest, particularly given downside risk to earnings. 

BWP Trust (BWP)

Chart: Share price over the year

Its first half 2017 result shows about 20 per cent of portfolio property leases will expire in the next three to four years. A significant number of existing Wesfarmers tenants will depart. This follows a recent decision by Bunnings to back fill select Masters stores. Dividend growth in the near term may be constrained, given BWP’s 100 per cent payout ratio. 

 


Michael Heffernan, PhillipCapital

BUY RECOMMENDATIONS

Commonwealth Bank of Australia (CBA)

Chart: Share price over the year

Still Australia’s premier bank, it posted a satisfactory third quarter trading result. Although the Federal Budget bank tax has caused uncertainty, I can’t see it derailing CBA’s favourable outlook. Expected stronger economic growth during the next few years should materially benefit the banking sector. 

Link Administration Holdings (LNK)

Chart: Share price over the year

A major share registry business that consistently delivers sound results in challenging circumstances. Its attractive fundamentals paint a positive outlook, as does the prospect of continuing strength in the sharemarket.

 

HOLD RECOMMENDATIONS

Folkestone Education Trust (FET)

Chart: Share price over the year

Australia’s leading child care centre landlord has been a quiet achiever since the demise of ABC Learning Centres. Recently, its dividend yield was about 6 per cent, and the growth outlook for child care continues to look robust, particularly after the Federal Budget boost to child care affordability.  

Macquarie Group (MQG)

Chart: Share price over the year

More diversified than the four majors, it’s been a strong sharemarket performer in the past 12 months. Additionally, it benefits from increasing sharemarket activity, which should be reflected in growing revenue and profit. Its recent report exceeded expectations.

 

SELL RECOMMENDATIONS

AMP (AMP)

Chart: Share price over the year

Posted net cash outflows of $199 million for the quarter ending March 31, 2017. Since listing in 1998, this financial services company has been a major disappointment. In my view, prospects of an imminent turnaround are slim.

JB HI-FI (JBH)  

Chart: Share price over the year

This outstanding sharemarket performer in recent years and retailer of home entertainment products continues to benefit from the demise of Dick Smith. Acquiring The Good Guys was also a shrewd move. However, discretionary retailers are doing it tough. In my view, negative sentiment from the impending arrival of Amazon is hurting the retail operating environment across Australia.

 


Tony Locantro, Argonaut

BUY RECOMMENDATIONS

PharmAust (PAA)

Chart: Share price over the year

PAA is an emerging biotech junior with a growing revenue stream of more than $3 million a year and a cancer drug known as MPL in phase 2 trials on canines. The market capitalisation recently was $11 million, which, in our view, is modest. It has about $3 million in cash and a re-invigorated executive team to drive the growth story. PAA subsidiary and molecule maker Epichem is driving revenue and exports to 33 countries. The shares were priced at 7.2 cents on May 19.

OpenDNA (OPN) 

Chart: Share price over the year

OPN is a demographic profiler, developing services for companies to directly target readers and consumers with products that interest them. On the Sportsblog app, readers are able to tailor their interests and receive relevant content. Revenue is likely to flow from cost per click/impression and from advertising. OPN has been a disappointing performer since listing in November last year. But it appears to be building some strong alliances and contracts. 

 

HOLD RECOMMENDATIONS

HRL Holdings (HRL) 

Chart: Share price over the year

HRL is an environmental management company, focusing on hazardous materials and asbestos services in Australia and New Zealand. HRL recently acquired Morrison Geotechnic and this will enable it to bid for a more complete line of work. The share price has been under pressure due to a large capital raising at 10 cents. But we believe strong revenue growth is likely, with new contract wins. Potential exists for corporate activity.

Stavely Minerals (SVY) 

Chart: Share price over the year

SVY has several exploration tenements in Queensland and Victoria. Development potential exists via a copper resource that’s being enhanced via gold and silver credits. Management holds about 45 per cent of the company, and with an on-going pipeline of high risk/high reward projects, it’s a worthy speculative hold at current prices. The stock was priced at 12 cents on May 19.

 

SELL RECOMMENDATIONS

Commonwealth Bank of Australia (CBA) 

Chart: Share price over the year

In my view, the risk/reward profile is no longer attractive given bank levies and the possibility of a major property correction in Sydney and Melbourne. The yield remains attractive, but sustaining the record profit run is a big challenge. It’s been a dream run post the GFC for the banking sector and blue chip investors should consider lightening into any near term recovery.

Newcrest Mining (NCM) 

Chart: Share price over the year

Australia’s largest gold producer is exposed to gold price volatility and institutional money flow. In my view, the seismic event that damaged the Cadia operation will result in falling production and increasing costs. A switch into Northern Star Resources (NST) should be considered along with the pre-developers, such as Dacian Gold (DCN) and Gascoyne Resources (GCY).

 

>Please note that Commonwealth Bank of Australia is recommended as a buy and a sell this week, as analysts take different views on the company’s outlook. 

 

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