Tom Bleakley, BW Equities
Phoslock Environmental Technologies (PET)
PET has won multiple contracts in China, where the Government has committed to spend $500 billion over five years on cleaning waterways. PET’s CSIRO developed technology is a natural clay like product used for treating blue green algae in waterways. The product has potential worldwide applications. Directors and management have plenty of skin in the game, owning 30 per cent of issued capital.
Boss Resources (BOE)
BOE holds one of only four uranium export licences in Australia. The previous owner of BOE’s uranium deposit spent $170 million on a state-of-the-art processing plant and related infrastructure. Consequently, BOE can soon begin mining in the lowest cost quartile. The uranium price has risen from a low of $18 a pound in November 2017 to above $27 a pound in December 2018 following various uranium mine closures across the world.
PNV posted half year revenue growth of about 400 per cent on unaudited sales of its proprietary synthetic wound dressing product BTM (Biodegradable Temporising Matrix). It gained almost 5 per cent of US market share in its first full year of sales. BTM reduces the chances of infection from wounds and burns, and, in our view, delivers a superior aesthetic result relative to competitors. Significant near term growth opportunities exist.
Elixinol Global (EXL)
EXL is the first ASX listed cannabis stock to report a profit. It posted 2018 first half revenue of $14.9 million, an increase of 110 per cent on the prior corresponding period. EXL vertically integrates the non-psychoactive chemical in cannabis from grower to seller. EXL enjoys a sizeable market share in the US and is among the biggest brands in Japan. EXL has projected a compound annual growth rate of 55 per cent for the US cannabidiol (CBD) market until 2021. SELL RECOMMENDATIONS JB Hi-Fi (JBH)
Australian household consumption slowed in the second half of 2018. A contributing factor was slower purchasing cycles on large ticket items and bulky goods. Improving the performance of The Good Guys acquisition will be challenging if shoppers continue to tighten their belts in an environment of increasing household charges and softer housing prices.
CAR is a great online business. But accessing credit is becoming more difficult following the fallout from the financial services Royal Commission. We expect tighter credit will make it more difficult for motorists to finance new car deals. New car sales have been falling since July 2018 when compared to the previous year. If car dealers reduce inventory levels, this may negatively impact CAR’s high online margin business.
Stuart Bromley, Medallion Financial Group
IDP Education (IEL)
Generated strong revenue growth in its two core business arms in fiscal year 2018, with English language testing up 22 per cent and international student university placements up 19 per cent. English continues to be the global business language. A growing middle class in India and China means more people are learning English while studying abroad. Consequently, in our view, IEL should enjoy continuing growth. Early results are also strong in the digital marketing and events space.
APX is globally recognised for developing human annotated datasets for machine learning and artificial intelligence. Its technology is in products, such as digital assistants, chatbots, search engines, image recognition and fraud protection. Currently servicing global tech giants, including Facebook and Microsoft, APX plays a vital role in the artificial intelligence space, where spending is expected to increase from $634.7 million in 2016 to $36.8 billion by 2025. APX posted a half year revenue increase of 106 per cent to $152.8 million. Until search functions and voice and image recognition are flawless, there will be a need for companies like Appen. APX also benefits from a weaker Australian dollar.
Forward prospects for this annuities provider are positive. Ninety six per cent of funds outperformed their benchmark, driving new flows of $5.3 billion in fiscal year 2018. We expect CGF to benefit from increasing demand for annuities in line with an ageing population. NextDC (NXT)
This data centre provider is continuing to invest heavily in increasing capacity and rolling out additional facilities. As a rapidly growing digital world drives ever increasing demand for storage, NextDC is set to capitalise on this lucrative space. Operating margins have grown from 13.6 per cent in 2015 to 41.9 per cent in 2018.
James Hardie Industries PLC (JHX)
This building materials company recently flagged a net profit warning for fiscal year 2019, indicating lower end guidance of $US280 million compared to lower end analyst expectations of $US313 million. Potentially higher input costs amid a possibly weaker US housing market could have a negative impact going forward.
Myer Holdings (MYR)
The struggling department store chain posted a 52 per cent fall in underlying net profit to $32.5 million for the 52 weeks to July 28, 2018. The company is focusing on profitable sales through a reduction in discounting. But we see this as a potential risk, as customers have become conditioned to purchase on promotion. The online retail world continues to create headwinds for bricks and mortar retailers and this remains a concern.
Tony Paterno, Ord Minnett
Treasury Wine Estates (TWE)
Continues to execute extremely well, focusing on fewer brands and flexible sourcing. TWE is also well placed to access the structural growth drivers of Asian wine demand, particularly from China. Further, the company has a disciplined approach to using capital and generates strong cash flow. These attributes provide potentially strong earnings growth on a multi year basis, despite near term forecasts assuming disruption from changes in the US route to market, which, once complete, provide further growth potential.
Caltex Australia (CTX)
Caltex is undergoing significant change and is now starting to land some strategic initiatives. The asset optimisation review has concluded, with a plan to sell some retail sites. The transition from the franchise to corporate operating model is a challenge, but the cost has been well flagged and is an enabler of the new convenience strategy.
Suncorp Group (SUN)
This financial services provider is pulling many levers in trying to raise margins. The Australian commercial cycle is turning more positive. The company is selling its Australian life insurance business for about $725 million, which we expect to lead to a capital return.
Tabcorp Holdings (TAH)
We believe the defensive characteristics of lotteries will support the share price in the near term, as markets remain volatile. Corporate bookmakers will continue to invest in Australian wagering, which will intensify competition in the wagering market. The shares have risen from $4.14 on December 21 to close at $4.61 on January 16.
Medibank Private (MPL)
The private health insurance sector is under increasing political pressure to continue with very low premium rate increases into the future. In this environment, we believe valuation support is lacking and there remains a risk to MPL earnings. We believe the outlook for the next 18 months will be challenging.
Monadelphous Group (MND)
We believe this engineering contractor is likely to experience headwinds in fiscal year 2019, as large LNG-related oil and gas contracts roll off. However, MND is well positioned to benefit from recovering mining capital expenditure. The company has a strong net cash balance sheet, enabling M&A (merger and acquisition) aspirations, particularly with respect to infrastructure. However, in our view, the stock trades at a premium valuation and we see risks to consensus.
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