Andrew Doherty, Morningstar
Rio Tinto (RIO)
This diversified global resource leader offers a portfolio of world class assets in aluminium, coal, copper, diamonds, gold, iron ore, industrial minerals and uranium. Operations span six continents, but sovereign risk with most assets in Australia, the US, Europe and Canada is low. A major equity raising and asset sales have improved the balance sheet, which became over-geared in the Alcan acquisition.
The MAC Services Group (MSL)
This provider of mining accommodation services enjoys strong relationships with existing clients. It benefits from a first-mover advantage, and the ability to provide a complete package bundled in one price. Key customers include global mining operators, engineering and contracting groups.
Navitas is an industry leader in providing pre-university and university pathway programs to overseas students from Asia, the UK, Canada and Singapore. Since 1995, student numbers have increased at an annual compound rate of 25 per cent to more than 15,000. Capital requirements are modest and cash flow is exceptionally strong, enabling high dividend payout ratios.
Toll Holdings (TOL)
This integrated supplier of transport and logistics services is expanding into Asia following several acquisitions. Strong cash flow is a recurring feature. Its resilience during the economic crisis underscores the quality of Toll’s earnings and balance sheet.
Spotless Group (SPT)
An integrated services provider, including cleaning, laundry, food and coat hangers. Its businesses have little in common and cost benefits have been limited. The coat hangers business is capital intensive, and has volatile sales and input costs. Retaining this business vastly reduces the investment appeal of this stock.
Pacific Brands (PBG)
PBG manages some of Australia’s strongest consumer brands. Most products have strong positions in competitive and moderate growth segments. There’s a high level of execution risk in the radical restructure plan to reduce costs by sending manufacturing to Asia. In any case, it’s naturally a low margin, low growth business.
Andrew Inglis, Shadforth Financial Group
ResMed is a world leader in treating sleep disorders and offers an enviable track record of revenue growth. Continuing growth is expected over the long term as sleep disorders are linked to cardiac arrest, stroke and to vehicle and workplace accidents. ResMed is using some of its $400 million in cash for a share buy back. A weak US dollar and uncertainty regarding the new US healthcare legislation are short-term negatives, but the long- term story is compelling.
Beach Petroleum (BPT)
Beach has $150 million in cash to fund its active exploration program. The company generates revenues of more than $500 million a year from its Australian operations, and will soon generate revenue from its Egyptian tenements. Beach believes it may have found a large unconventional shale gas reserve in the Cooper Basin and is actively working to prove this. Beach is a speculative buy.
ANZ Bank (ANZ)
Major bank shares have all rallied strongly in recent months, but are traditionally weak after going ex-dividend. Continue holding ANZ due to the strong turnaround in earnings as bad debt levels subside. Also, expect ANZ to put its strong balance sheet to work with more Asian banking acquisitions. ANZ’s Asian banking business makes it a higher risk investment, but this additional risk should reap long-term rewards for shareholders.
Singapore Telecommunications (SGT)
Indian subsidiary Bharti Airtel has 40 per cent of its business in broadband, which is unaffected by price-cutting. SingTel’s balance sheet is strong, and the company provides good exposure to fast growing mobile phone use in Asia.
Pacific Brands (PBG)
While Pacific Brands offers a stable of high profile clothing brands, retailers, with sufficient scale, are increasingly importing clothes direct from Asia, either as private label brands or cheaper branded product. Expect this trend to erode market share and profitability.
David Jones (DJS)
David Jones is a very well run business. However, its share price recently reached all-time highs and looks to have run ahead of the real economy, particularly with interest rates rising and an absence of government handouts. While retaining a core holding, it’s a good time to take some profits.
Peter Rudd, Balnave Capital Group
A leading supplier of Australian building materials through its Austral bricks and masonry lines and Bristile roofing products. A share purchase plan raised $175 million from 12,450 shareholders. Trading below recent highs, the price should recover given the shares are no longer being sold to take up the SPP.
Woodside Petroleum (WPL)
A major LNG supplier to global markets via its 16 per cent interest in Western Australia’s massive north-west shelf project. Woodside’s production will substantially increase from 2014 when the nearby Pluto project is fully operational. A core holding in any Australian energy stock portfolio.
Myer Holdings (MYR)
Listed in early November, the stock’s been trading below its $4.10 issue price on market concerns of lower consumer discretionary spending after an end to the Federal Government’s cash stimulus package. However, the stock isn’t expected to fall much from current levels as retail turnover increases during the traditionally strong Christmas/New Year trading period.
Half way through its five-year rejuvenation program for Coles, results are beginning to show the diversified conglomerate making inroads into arch rival Woolworths’ market share. On the resources side, stronger coal prices and higher volumes should benefit its Queensland mining interests – provided the Australian dollar doesn’t strengthen further.
Gunns Limited (GNS)
A weak local construction market, lower managed investment scheme income, disappointing woodchip sales to Japan and a stronger dollar have all put pressure on the group’s revenue levels and profit margins.
The stock has performed well since our buy recommendation several months ago. We suggest taking profits at current price levels. More overseas travel and accommodation, as Australians take advantage of a strong currency and an improving economy, are already factored into the share price.
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