One way to generate capital growth in this market is to own shares in listed takeover targets. Suitors generally pay a handsome share price premium for an acquisition. If the premium is big enough, the target’s board may recommend the deal. Companies with good assets, earnings, prospects and manageable debt appeal as potential takeover targets. Suitors are looking for acquisitions that will complement existing business models and enable them to expand and grow profits.

Recent merger and acquisition activity outside the mining sector includes Commonwealth Bank buying Count Financial, SABMiller bidding for Foster’s Group and Horizon Roads offering 55 cents a share for toll road operator ConnectEast. Turmoil on global financial markets leaves a raft of undervalued companies.

Today, four brokers have put forward six stocks they believe offer bright outlooks and should reward investors over the longer term. They also outline why these companies – involved in information technology, telecommunications, online travel, financial services and engineering – would appeal to suitors as takeover targets.

UXC Limited (UXC)

UXC Limited provides information, communication and technology solutions and services to big corporations in Australia and New Zealand. Patersons Securities associate adviser Hamza Habib says UXC has moved from a net debt to a net cash position after recently selling its field solutions business. “Both, the timing and the sale price ($61 million) exceeded expectations,” he says. Habib says the company expects to meet strong revenue and earnings growth targets for the next three years. He says UXC delivered a strong full-year 2011 result with EBITDA (earnings before interest, tax, depreciation and amortisation) growing by 7 per cent to $33 million and revenue by 11 per cent to $522 million. Habib says UXC expects to resume paying dividends in the 2012 first half, which provides an additional short-term catalyst. “With restructuring and simplification initiatives completed, the company is well placed to again focus on growing market share, revenue and earnings on the back of recent contract wins and a strong contract order book,” Habib says. He says UXC appeals to suitors given its solid market share, open share register, significant revenue and potential to grow earnings per share.


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M2 Telecommunications Group (MTU)

Habib says the National Broadband Network will change the telecommunications industry landscape to the benefit of Telstra’s competitors. “Under the NBN plan, all telecommunications providers will essentially act as resellers,” he says. Habib says M2 Telecommunications Group won’t have to alter its business model to any significant degree to transition to the NBN. The company already operates as a reseller of services on networks owned by Telstra and Optus. Operating in Australian capital cities, Habib says M2 is Australia’s biggest network-independent provider of fixed line, mobile and broadband services. The company’s technology, flexibility and minimal network infrastructure means low capital expenditure. Habib says the company delivered a strong full-year 2011 result, with EBITDA growing by 54 per cent to $48.3 million and NPAT (net profit after tax) by 72 per cent to $27.6 million. “In the past 10 years, M2 has delivered earnings per share growth and increasing dividends, which has been reflected in a higher share price,” he says. “The company provides an attractive profile for any likely suitor as it offers growing market share with low capital expenditure, and is NBN ready.”

Webjet (WEB)

Online travel service provider Webjet is growing courtesy of a user friendly website backed by a top business model, according to Cleo Nanni, of Novus Capital. “Solid growth indicates the Webjet brand has been widely accepted as the site of choice for booking airfare?travel,” Nanni says.  “Aggressive television and radio advertising has?enhanced the brand enormously.” Nanni says total transaction value was up 17 per cent to $592 million for the year to June 30, 2011 and NPAT was up 5 per cent to $11 million.  The fully franked dividend for the year was higher at 11 cents. Nanni says Webjet is working on expanding its hotel database from about 69,000 to more than 100,000. “Despite negative economic data for the retail sector, travel?spending continues to grow online,” Nanni says. He says Webjet’s business model appeals because it simply works. “Any number of online competitors may be interested in acquiring Webjet to increase scale – but at the right sale price,” Nanni says.


Chris Elliott, of Shadforth Financial Group, believes the financial services industry is ripe for consolidation given the immensely challenging investment environment, fierce competition and more government regulation under future of financial advice reforms. He says AMP may be seen as one of the best potential targets for any domestic or overseas suitor looking to gain a stronger position in the Australian financial services industry. AMP has strong brand recognition, a big customer base and a broad financial adviser network. It’s a major beneficiary of compulsory and voluntary superannuation contributions. Elliott says the recent acquisition and integration of Axa Asia Pacific’s Australian operations lifted adjusted NPAT by 22 per cent to $452 million for the 2011 first half. A dividend of 15 cents a share was retained, although only 30 per cent franked. Elliott expects a full year dividend yield of about 7.5 per cent. Elliott says AMP, as a stand-alone entity, will continue to be a major player in the investment and superannuation markets. But AMP also appeals as a potential takeover target because of its strong market share, reasonable share price and attractive multiples, he says.

Austin Engineering (ANG)

Peter Russell, of Russell Research, believes engineering companies servicing the resources sector enables investors to take advantage of the mining boom with less risk. Companies “making the shovel” to extract minerals benefit from more mining, but aren’t held hostage to fluctuating commodity prices on a daily basis. Increasing mining volumes means more manufacturing and engineering services.  He says Austin Engineering is in the right place for investors. Servicing the resources sector, Austin’s share price has grown 20-fold since listing in March 2004.  Its focus on cutting-edge welding and robotics has driven acquisition growth across Australia, Oman, Chile, Brazil and the US state of Wyoming. Austin makes quality dump truck bodies, specialist equipment and fabrications for major resource groups worldwide. Full year 2011 was yet another record year despite delays with new operations in Chile and the Hunter Valley amid start-up costs in Indonesia and Columbia. Russell expects full-year 2012 to deliver benefits from these initiatives, strong workloads and a multi-year Xstrata contract in Peru. Austin has $37 million in net cash and Russell expects today’s earnings per share of 30 cents to grow by 30 per cent this year. It offers a franked dividend yield above 3 per cent. In relation to potential corporate activity, listed company Bradken has a 19.1 per cent stake in Austin, which Russell says underpins any share price downside. He says Austin and Bradken have similar businesses, enabling cost saving synergies to be extracted if a deal was done. If another company made a bid for Austin, Russell says he would expect Bradken to fiercely compete to the benefit of Austin shareholders. “You don’t need to be a Bradken to buy this story,” he says.

Forge Group (FGE)

Perth-based engineering and construction company Forge Group works with BHP Billiton, Woodside Petroleum, Chevron and other firms across a broad range of commodities. Fully-owned subsidiary Cimeco won a small Gorgon project in October 2009. Wins have continued to flow, with earnings upgrades. Russell says that at the end of August 2011, Cimeco received a notice of award for engineering, procurement and construction works at Fortescue Metals Group’s Solomon Hub. A $200 million contract is expected this month. Recently, it was awarded a port materials handling contract for Hancock Prospecting’s Roy Hill Iron Ore Project, positioning it well for the construction phase. Forge posted another record for full-year 2011, with revenue growing 72 per cent to $425 million. Net profit after tax was up 32 per cent to $38.8 million and it has net cash of $70 million. Russell expects earnings per share growth of between 15-to-20 per cent this year to more than 50¢ cents. On the corporate appeal front, Forge struck a strategic alliance last year with listed engineering company and construction group Clough Limited in a bid to scale up and win more contracts. Clough now has a 33 per cent stake in Forge Group.

UXC Limited (UXC) IT Services 51 cents
M2 Telecommunications Group (MTU) Telecommunication Services $2.96
Webjet (WEB) Online Travel and Accomodation Services $1.90
AMP (AMP) Financial Services $3.75
Austin Engineering (ANG) Engineering and Manufacturing Services $3.49
Forge Group (FGE) Engineering and Construction Services $4.22

Price current to market close, 4 October 2011

Please note that simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of should seek professional advice before making any investment decisions.

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