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Share Tips
Broker Stock Recommendations 29 September – 6 to BUY, 6 to SELL and 6 to HOLD
Anthony Black - September 29, 2008
 DAVID SPRY
FW HOLST
BUY RECOMMENDATION
Tatts Group (TTS)
Despite the loss of earnings from poker machines post 2012, there are still significant growth opportunities available both organically and through acquisitions. The forecast dividend yield is attractive at 8.8 per cent fully franked.
United Group (UGL)
The outlook for this diversified infrastructure services group remains strong, underpinned by continuing growth in the infrastructure and resource sectors. It provides industrial maintenance, engineering, manufacturing and business outsourcing services to companies here and overseas. UGL continues to pursue a growth strategy aimed at improving recurring revenue streams.
HOLD RECOMMENDATION
CSL (CSL)
This blood products group continues to benefit from a robust plasma market. The acquisition of Talecris, a global maker of plasma therapies, should provide substantial synergy benefits and lift earnings per share. CSL should also become a major global vaccine player over time.
JB Hi-Fi (JBH)
Demand for home entertainment products remains strong despite a general softening in the retail market. We expect future growth to be under-pinned by new stores and the continuing strength in technology development.
SELL RECOMMENDATION
Mirvac Group (MGR)
With significantly lower distributions forecast in 2009 and a challenging property market, particularly in New South Wales, we expect the stock to under-perform.The property trust market in general will remain under pressure until liquidity eases in credit markets. Across the board, an increasing supply of Australian commercial property will be available for sale and this is expected to pressure prices.
Boral (BLD)
This building materials group faces significant challenges in the US due to an uncertain outlook regarding housing activity. It’s difficult to see any upside in US housing anytime soon. The opposite applies, with more bad news likely to flow from the US. The operational headwinds in the US and Australia will continue to dampen investor sentiment towards the stock.
 SIMON BOND
ABN AMRO MORGANS
BUY RECOMMENDATION
Transfield Services (TSE)
The company delivered strong cash flow, up 22 per cent in full year 2008. It’s mostly a service based business now as the infrastructure assets have been separated. It’s building a diverse, sustainable business that started in Australia, expanded into New Zealand and has been operating in the US for the past two years. The current focus is to increase alliance work. TSE offers a strong order book of $11 billion (up 21 per cent) and this doesn’t include contract extensions. Debt is sound and no re-financing is required until 2010. The board expects to achieve net profit after tax growth of between 10 per cent and 20 per cent in 2009 – in line with our forecasts.
Leighton Holdings (LEI)
Leighton is Australia's biggest project development and contracting group and number 25 in the world. It’s diversified across mining, infrastructure, utilities and property. It has more work in Abu Dhabi than it can handle and is bidding for more than $4 billion worth of mining contracts in Indonesia. The value of Australia's major construction projects has doubled in the past 12months to more than $30 billion, comprising $9 billion in resources, $5 billion in social infrastructure, $4 billion in water and $13 billion in transport. Construction activity is expected to stay at a high level, at least until 2012. Full-year 2009 guidance includes 17 per cent revenue growth to $17 billion and 15 per cent profit growth to $700 million.
HOLD RECOMMENDATION
AMP (AMP)
While encouraged by the relative defensiveness of AMP’s first half result, we believe the current volatility in financial markets is likely to mean that investors will remain wary of market-related stocks in the short-to-medium term. As such, we do not see any rush to upgrade our call. Our valuation of $8.19 implies a multiple of 17 times ABN AMRO’s full year 2009 forecast earnings, which we would normally associate with AMP’s more typical rating in much stronger market conditions. We remain cautious about performance and transaction fee levels.
Insurance Australia Group (IAG)
We retain our hold call, with a revised price target of $3.90 a share. It was $4.10. A back-to-basics plan involving the sale of problematic UK assets remains a logical approach for the group. We expect these initiatives to re-build the group's reported margins above 10 per cent in the absence of major storm losses. However, we believe the benefits of restructuring will take 12-to-18 months, and, in the interim, investors should be aware that risks remain. Emerging economic and inflationary pressures on its business and stiff competition have the potential to consume cost savings.
SELL RECOMMENDATION
Aristocrat Leisure (ALL)
The poker machine maker’s Australian division was significantly impacted by macro factors. Aristocrat attributes this to a significant deterioration in market conditions. A 41 per cent reduction in hardware sales contributed to this weakness, but ALL says its share of the install base remained static at 67 per cent. Share of total sales in Australia was also flat on the previous corresponding period. North America was weak, but better than expected. A strong Australian dollar against the US greenback also had a negative impact on first half results.
Boral (BLD)
As a building materials group, we see further downside risks to the current share price in response to a decline in subsequent approvals data and cuts to consensus net profit after tax expectations in full-year 2009 and beyond. The US housing crisis doesn’t help. Other downside risks include a protracted downturn in Australian construction activity that spills into 2009 earnings. Higher costs and squeezed margins are also on our risk list.
 SEAN CONLAN
MACQUARIE PRIVATE WEALTH
BUY RECOMMENDATION
OZ Minerals (OZL)
This copper, gold, lead, silver and zinc producer announced it had increased Prominent Hill's mineral resource by 35 per cent for copper and 100 per cent for gold. In this current risk-averse market environment, we prefer base metals miners with solid balance sheets, good exposure to copper, organic growth potential and relatively diversified operating and geopolitical risk exposure.
Toll Holdings (TOL)
Despite the recent resignation of CFO Neil Chatfield, we retain TOL as our top pick in the transport sector. The company’s balance sheet remains well geared, which will allow it to take advantage of falling acquisition multiples, and fully participate in on-going logistics consolidation.
HOLD RECOMMENDATION
David Jones (DJS)
Business cycle investors will be challenged by the David Jones proposition. David Jones has built cost flexibility into its asset base and redefined the market it serves to expand potential for the brand. However, we are concerned about household cash flows, which we believe are negative, and its impact on consumption.
Fortescue Metals Group (FMG)
The sharp correction in FMG’s share price has forced us to re-evaluate the value proposition. More importantly, we believe that an apparent reduction in the potential for equity dilution takes a degree of risk out of the investment equation. We continue to see on-going risk in its ramp-up schedule.
SELL RECOMMENDATION
Goodman Fielder (GFF)
The food maker looks set to face another difficult year in 2009. Downside risks to management’s forecast for flat profits remain. But next year’s second half should provide some comfort as GFF finally emerges from the shadows of high commodity inflation.
PaperlinX (PPX)
We have reduced our recommendation for this paper maker and distributor to under-perform with a $2.05 price target. We remain concerned about PPX's balance sheet and low interest cover. The company has flagged a possible equity raising and this is likely to weigh on the stock in the short term.
Anthony Black is a long-standing journalist, having worked in newspapers for more than 20 years. He was the Sunday Herald Sun’s finance editor for eight years and his reports were published in News Limited papers across Australia.
More articles from this edition of CompareShares:
Fundamentals: Use these 5 ratios to unearth superior stocks
Share Tips: Broker Stock Recommendations 29 September – 6 to BUY, 6 to SELL and 6 to HOLD
Ask the Expert - CFDs: When there’s panic and investors sell, who are they selling the shares to?
Commodities: Following a steep correction, it’s all systems go for the commodities sector
Stocks: Top 5 CFD stocks for the week
Stocks: Stock of the week – Oz Minerals
Markets: Ex-ASX chief warns against regulation
US Stocks: US markets still edgy over bailout talks
German mortgage: German mortgage bank 'near bankruptcy'
Retail: Myer reports net profit up 40 per cent
Finance: Former James Hardie bosses to face court
Acquisition: Spanish Santander to buy B&B savings
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