Matthew Felsman, APP Securities
BUY RECOMMENDATIONS MGM Wireless (MWR)
My pick for stock of the year in 2019, as the story gains momentum and institutions join the tightly held register. MGM produces Spacetalk – an all-in-one mobile phone, smart watch and GPS tracker aimed at kids aged between four and 12. The device enables parents to know precisely where their children are via an app on their mobile phone. Spacetalk blocks access to the internet and the dangers of social media. MGM’s product is one of the best in the industry. The company’s credentials are impressive, offering cheap valuations fundamentally and by sector comparisons. Operates in a niche market, offering growth and expansion can be easily scaled. The company is well managed by an experienced team that owns many shares. Ticks all the boxes. Ahead of the high volume Christmas and the back to school sales period, MGM is a stock to own. I own shares in MWR. Appen (APX)
A global leader in machine learning and artificial intelligence. On November 22, 2017, the shares were priced at $5.74. The shares hit a year high of $16 on August 28, 2018. After recent market volatility, the company is more reasonably priced considering its long term growth potential. Given the tech focused company delivered a recent upgrade to earnings guidance, the short term stock specific risk now looks satisfactory. The shares closed at $12.49 on November 22.
HOLDS RECOMMENDATIONS Western Areas (WSA)
Base metal prices have corrected almost 20 per cent in the past few months, and, unsurprisingly dragged several of Australia’s quality resource stocks lower. In our view, WSA looks cheap, as we see this stock trading closer to $2.80 in 2019. Also, the US dollar appears to be weakening, implying that our resource stocks remain poised for a rally into Christmas. The shares closed at $2.17 on November 22. Orica (ORI)
In my view, the worst is behind this commercial explosives and chemical company. ORI reported a 2018 statutory net loss after tax of $48 million. Excluding individual significant items, net profit after tax was $324 million. Technically, the chart points to ORI breaking 2017 highs. In this market, a low beta stock, such as ORI, appeals given it has almost no correlation with the S&P/ASX200.
SELL RECOMMENDATIONS Afterpay Touch Group (APT)
Operates a buy now, pay later platform. The stock has corrected more than 50 per cent since late August. A potential Senate inquiry into payday lenders, lease-to-buy schemes and buy now, pay later providers leaves these companies exposed to a volatile 2019. The technical picture shows this stock could easily trade up to 10 per cent lower from here. The stock finished at $11.12 on November 22.
CYBG PLC (CYB)
Shares in this banking stock have plunged from $4.91 on November 14, 2018 to close at $3.60 on November 22. The shares reached a 52 week high of $6.36 on August 9 this year. There’s too much uncertainty surrounding Brexit and financial markets hate uncertainty. On a technical basis, the chart shows it’s possible for the stock to fall another 10 per cent.
John Forwood, Lowell Resources Funds Management
Indago Energy (INK)
Owns a revolutionary process for extracting heavy oil from reservoirs. Existing and expensive technologies can only extract a limited amount. Indago’s process involves using an organic compound to reduce the viscosity of heavy oil and to lower the pour point. The company is currently testing the technology in a 100 per cent owned heavy oil reservoir in Kentucky, while working with owners of heavy oil projects in other corners of the globe. The shares closed at 5.5 cents on November 22.
Adriatic Metals PLC (ADT)
Adriatic Metals is proving up high grade polymetallic projects in Bosnia and Herzegovina. Adriatic has enjoyed drilling success, and has four rigs in operation on these projects. The thick gold zones identified at the flagship Rupice project are potentially a big boost to project economics.
Kidman Resources (KDR)
The company had a market capitalisation of almost $500 million on November 22. It’s focusing on developing a major pegmatite project in Western Australia and associated downstream processing to supply lithium buyers, mostly from China. Lithium is a key component of new age batteries, especially those used in electric vehicles. The project has advanced to a joint venture with the world’s largest lithium producer SQM. The joint venture is moving towards financing options. Long term investors in the battery sector should stay for the ride, but those looking for more exciting exploration in the battery space might look elsewhere.
Bounty Mining (B2Y)
Bounty is ramping up production of high quality coking coal, mostly for the export market where prices are strong. B2Y announced the first shipment of 55,000 tonnes in August and is aiming for an annual rate of 190,000 tonnes. Global steel production is holding up, which is a boon for Australian iron ore and coking coal exporters. Bounty also holds further coal projects in the Bowen Basin and has ambitious growth plans for the future.
BHP Billiton (BHP)
The global miner is currently conducting an off-market share buyback and will distribute a special dividend in 2019. Depending on a holder’s individual taxation circumstances, it could be advantageous to sell some BHP shares into the buyback. BHP continues to generate strong cash flows. However, we believe other smaller explorers and producers can produce better returns, albeit at a higher risk profile.
We expect falling crude oil prices to reduce this energy giant’s revenues in the short to medium term. The company has longer term issues with supplying gas to its part owned LNG export facility in Gladstone, Queensland. Gas is in short supply in eastern Australia and several big name projects have failed to deliver. Meanwhile, the Federal Government is tightening the screw on reserving supply for the domestic industry. Not a good outcome for Santos.
Tony Paterno, Ord Minnett
Sims Metal Management (SGM)
A metal and electronics recycling company, with primary operations in the US, although it also has significant exposure to Europe and Australasia. The company is focusing on internal initiatives to generate earnings growth, such as cost-outs, productivity improvements and supply chain and logistics optimisation.
Seven Group Holdings (SVW)
SVW looks poised to deliver significant growth. Its equipment management arm WesTrac Group is benefiting from a recovery in mining capital expenditure. An east coast infrastructure boom is lifting profits at the operationally geared Coates Hire – an equipment hire business. Despite increasing valuations, the shape and focus of the business is changing for the better. We see potential for further earnings upgrades.
We’ve been unimpressed by the rate of earnings growth outside what has been delivered by cost saving initiatives. However, a good performing portfolio of growth brands is driving sound top line growth. Below the top line, there’s cost pressures. We expect this protection solutions company to deliver modest mid term earnings growth.
GPT Group (GPT)
A big diversified property group, GPT provides exposure to retail property (50 per cent of assets), office (35 per cent) and industrial (15 per cent), with a majority weighting in New South Wales and Victoria. A funds management business operates at a high margin. We estimate annual earnings growth of between 2 per cent and 3 per cent per annum over the next three years. The company is trading in line with our valuation.
Domino’s Pizza Enterprises (DMP)
Achieving growth potential will be difficult, in our view. Earnings forecasts for the medium term fell short of market expectations. We’re lacking sufficient confidence the company can deliver margin expansion targets.Consequently, we believe the valuation is no longer attractive. While the price/earnings multiple has fallen, it was still recently factoring in too much growth.
We believe this investment management firm’s fiscal year 2019 targets will be challenging to meet. Margin pressures may emerge as it chases volume. The shares have fallen from $13.67 on November 21, 2017 to close at $9.32 precisely a year later.
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