Broker Stock Recommendations
Peter Rudd, ARMYTAGE CAPITAL
Babcock & Brown Wind Partners Group (BBW)
The group’s reducing involvement in European wind farms, an emphasis on its Australian assets and a move away from Babcock & Brown in terms of management, ownership and name should combine to re-rate this stock. Management confirming a first half distribution of 4.5c a share provides an attractive yield.
Macquarie Office Trust (MOF)
A share price fall from the recent 20c entitlement issue and a likely interim dividend should provide a good yield. But the stock should still be considered speculative given ongoing global real estate market concerns and possible further valuation write-downs.
New Hope Corporation (NHC)
A major independent Queensland coal producer in the ASX top 100, the group is well cashed up after the sale of its New Saraji coking coal leases to neighbour BHP Billiton/Mitsubishi in September. This allows for ongoing exploration expenses and rig refurbishment costs.
Spark Infrastructure Group (SKI)
Revenue from the group’s South Australian electricity transmission and distribution activities, along with its “poles and wires” in the Melbourne CBD and central and western Victoria, provides a good level of recurring income and a 15 per cent dividend yield.
Flight Centre (FLT)
Half year operating cash flow was unexpectedly disappointing, a result of poor trading conditions late last year. Airline traffic is suffering due to the global financial crisis.
Victorian bushfire and North Queensland flood claims, along with increased provisioning for bad and doubtful debts, had a negative effect on overall financial performance. The group faces big challenges going forward amid downsizing of its banking division.
Carey Smith, ALTO CAPITAL
Corporate Express (CXP)
Australia’s biggest provider of consumable office products reported earnings for the December half in line with expectations, and, more importantly, maintained its dividend at 13c a share. While we expect earnings and cash flows to be impacted by a slowing economy, the group’s strong balance sheet and dominate position in the industry should enable it to increase market share.
Energy and Minerals Australia (EMA)
EMA owns the Mulga Rocks uranium deposit in Western Australia, recognised as the biggest deposit outside control of the majors. Corporate activity in the Australian uranium sector has recently heated up, with more than US$600 million in takeovers and project investments in the past 12 months. We believe that EMA is on the radar screen of international investors and corporations. Expect a major corporate transaction within the next six months.
The over subscribed retail offer that raised an additional $1.5 billion on top of the $2.9 billion from institutional investors has well and truly removed any concerns regarding the group’s debt levels. The capital raising enables management to focus on its retail, coal and chemical businesses. While turning around the Coles business is expected to take several years, the results to December 2008 provided the first glimmer of hope.
Fleetwood Corporation (FWD)
The share price of mobile accommodation provider Fleetwood has fallen 65 per cent fall since November 2007 due to investor concerns about the construction and resources industry, one of group’s major clients. The company is conservatively funded with only $11 million in net debt and it has a history of paying special dividends – which we expect to be retained during the next 12 months. Fleetwood should be considered an income investment.
The Reject Shop (TRS)
While the fundamentals of this discount retailer are some of the best in the industry, we’re concerned about the group’s high relative valuation. The company trades on a price/earnings ratio of more than 15 times compared to an industry average of less than 10 times. The share price may feel the pressure if earnings disappoint in the next six to 12 months.
As one of Australia’s biggest drilling contractors, we expect earnings and cash flows to be put under pressure as the slowdown in the resources industry reduces the amount of available work for its drilling rigs. Debt is about equivalent to market capitalisation, so any equity raisings to reduce debt levels will dilute existing holdings. Expect earnings to fall during the next 12 months.
Ben Polkinghorne, PATERSONS
St Barbara (SBM)
This gold miner will produce about 300,000 ounces in 2009, ramping up to 400,000 ounces in 2011 – all driven by increasing production at the Gwalia Deeps underground. The company’s production rate puts it among the top five ASX listed gold companies. Investors are switching to gold in this uncertain global economy.
Oil Search (OSH)
Reported a record full-year result in 2008. Adjusted net profit of US$240 million was driven by record high oil prices. The company’s real value driver is likely to be a planned Papua New Guinea LNG project with partner Exxon Mobil. Expect a decision later this year. Oil Search is debt free and has cash reserves of US$535 million.
First half net profit after tax for 2009 fell 8 per cent on the previous corresponding period to US$270.5 million. Profit was impacted by significant items of US$75.2 million, mostly due to restructuring costs and acceleration of pallet scrapping. Brambles is well managed, generates strong cash flows and offers a solid balance sheet. The CHEP pallet business is almost a monopoly in many of its markets. Earnings, however, are linked to global growth and the outlook is challenging.
Suncorp’s insurance division has been hit with net claim costs of $180 million due to the Victorian bushfires and North Queensland floods. The banking division potentially faces rising corporate bad debts and exposure to Gold Coast property stgelopers. A potential break-up of the insurance and banking divisions could unlock shareholder value.
Platinum Asset Management (PTM)
One of Australia’s leading global equity managers and, historically, a strong fund performer. But with equity markets tumbling, all fund managers, including Platinum, are experiencing declining funds under management. This means much lower management fees. Platinum has no debt and $170 million in cash, so there’s no balance sheet risk.
Ten Network Holdings (TEN)
Ten faces a deteriorating advertising environment. Ten’s major shareholder CanWest may need to sell down its 37 per cent stake to reduce debt. Lack of interest in a discounted institutional placement paints a bleak outlook.
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