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Share Tips
Broker Stock Recommendations 3 November – 6 to BUY, 6 to SELL and 6 to HOLD
Anthony Black - November 3, 2008
 Michael Zollo
TAYLOR COLLISON
BUY RECOMMENDATIONS
AMP (AMP)
AMP has worked hard to turn its business around, reducing its risk profile, increasing revenue growth and cutting costs. The company has evolved into a well-managed wealth manager with solid market positions and significant distribution capabilities. Although the decline in market indices will erode margins and, therefore, short-term earnings, we maintain a positive 12-month view of AMP.
Nufarm (NUF)
We view NUF as a well-run crop protection company, which in recent years has been benefiting from reduced profit volatility due to the diversity of its global operations. We are mostly positive about NUF's prospects, as seasonal conditions in the key Australian market show signs of improvement. The company's geographic diversity and quality management are clear positives. Full-year 2009 earnings will be assisted by acquisitions, while organic growth rates will remain subject to favourable seasonal conditions.
HOLD RECOMMENDATIONS
Wesfarmers (WES)
While our long-term outlook is positive, there are many short-term hurdles the company must overcome, which may cause downward pressure on the share price. The equity raising means refinancing problems are gone, but we remain wary about the high spend WES faces in turning around the Coles businesses. Expect capital expenditure to be high for at least the first three years of integration. For the moment, we are neutral on WES.
Sims Group (SGM)
Sims Group earnings improved in the past year due to the acquisition of Metal Management in early 2008. But earnings declined from the June 2008 quarter as Sims wrote down $70 million in inventory, and margins fell due to lower scrap prices. Management indicated that margins and volumes are expected to be “significantly affected" in the second quarter. Given the challenging short-term outlook, we remain cautious and maintain a neutral outlook.
SELL RECOMMENDATIONS
River City Motorway (RCY)
While Brisbane’s population is expected to grow strongly in the next 20 years, the financial returns to RCY for constructing and operating the North South Bypass Tunnel are heavily contingent on the tollway achieving prospectus traffic volumes. These figures look optimistic, and with RCY ceasing to pay distributions for at least three years, there is no compelling reason to hold the stock. The company still has debt issues.
Monadelphous Group (MND)
The link between lower commodity prices and a reduction in capital expenditure for mining exploration has been evident in the past. Despite forecasting earnings growth for full-year 2009, our confidence wanes about earnings for 2010 and 2011. MND trades at about a 50 per cent premium to its peers on full-year 2009 average price/earnings. In an equity market with plenty of opportunities, MND could struggle to see further multiple expansion and for this reason we maintain a negative view.
 Scott Marshall
SHAW STOCKBROKING
BUY RECOMMENDATIONS
Alumina (AWC)
The company’s share price in US dollar terms is now the lowest since mid 1999 and AWC output is set to increase. Solid third and fourth quarter earnings should be supported by the collapsing Australian dollar. AWC’s share price is under-pinned by a 7 per cent dividend yield, and there is ongoing market speculation that Alcoa may launch a bid for AWC, which represents 20 per cent of world alumina production.
Sonic Healthcare (SHL)
Sonic Healthcare’s radiology division is expected to benefit from the Federal Government’s intention to increase rebates after 10 years of flat or declining rebates. Our recommendation is based on SHL's market leadership in Australia, the US and Europe. The company also offers growth and synergy opportunities, quality management and positive exposure to a falling Australian dollar.
HOLD RECOMMENDATIONS
Boral (BLD)
We have cut our profit forecasts again, and to below management guidance. Today’s environment is difficult for this building materials group. The group is responding, but US housing activity in 2009 is expected to be 60 per cent below recent levels. With Australian housing activity 25 per cent to 30 per cent below underlying demand, the group will continue to encounter difficulties. The bright spot is BLD is leveraged to any eventual housing recovery, possibly in late 2010.
Seek (SEK)
With the economy clearly slowing, we have downgraded our forecasts to reflect lower volumes in the company’s core online employment advertising business. SEK remains the clear leader in the online employment market and is well positioned for future growth when the economy improves. We like the business model, but need to see more vigorous employment growth and consumer confidence.
SELL RECOMMENDATIONS
Virgin Blue Holdings (VBA)
The airline can expect more pressure during the next 12 months as oil price falls will be partly offset by a weaker Australian dollar. Only 65 per cent of VBA’s oil demand is protected by currency hedging. Establishing various subsidiaries in regional markets here and overseas will impact earnings. Profits will not match interest paid for the next 12 months. Slowing economies will have a negative impact on capacity. Any share price recovery over the medium term will by met by Toll shareholders selling.
Tabcorp Holdings (TAH)
Tabcorp is facing significant structural change in the wagering industry, just as the Victorian Government is about to re-tender the single wagering licence post 2012. While we expect TAH to retain its Victorian licence, it’s still uncertain and so are the licence conditions. TAH said the totalisator operation was facing a major loss of turnover to out-of-state bookmakers. TAH intends to manage its gaming business to maximise profits leading up to the expiry of its licence in August 2012. TAH will take advantage of the newly renegotiated licence with the NSW government by spending $475 million on expanding Sydney’s Star City Casino.
 Carey Smith
ALTO CAPITAL
BUY RECOMMENDATIONS
Mincor Resources (MCR)
This Kambalda nickel miner had a very respectable 2008, producing 16,500 tonnes and posting a profit after tax of $64 million. It’s now possible to buy stock in a company for significantly less than its liquidating value; that’s net cash of $92 million plus a hedge book of more than $40 million in the money against a market capitalisation of about $130 million. Expect it to perform very well over next two years compared to the broader market.
Aquarius Platinum (AQP)
This South African based platinum producer has seen its share price fall from $19 in May to about $2.70 (October 31) after a significant fall in the platinum price. Producing about100,000 ounces a quarter makes AQP one of the biggest platinum miners in the world. It should benefit strongly from any upturn in the platinum price.
HOLD RECOMMENDATIONS
Amcor (AMC)
This global packaging company operates in every major geographical region, offering a broad range of plastic, fibre, metal and glass packaging solutions. The recent decline in oil and steel prices will significantly reduce the group’s input costs, partly offsetting slowing global growth. Trading on a price/earnings ratio of about 12 times and offering a dividend yield of 6.5 per cent, the company appears to be fairly priced.
Foster’s Group (FGL)
Australia’s largest beverage producer is progressing with its restructuring program to close down or sell unprofitable brands and to reduce overall costs. The group’s major cash generators are beer and low-to-mid priced wines, which are somewhat shielded during economic downturns. This will enable the group to maintain positive cash flow. A fair price at today’s levels.
SELL RECOMMENDATIONS
Sonic Healthcare (SHL)
This medical diagnostics company provides pathology and radiology services across Australia, Europe and North America. Earnings have more than tripled in the past five years. This great earnings record has resulted in the market pushing up the company’s price/earnings ratio to almost 20 times 2008’s earnings. We believe this is unsustainably high and any disappointment is likely to result in a large share price fall.
CSL (CSL)
This blood products group has experienced tremendous growth over the past few years, resulting in market capitalisation increasing to more than $20 billion on earnings of $700 million for 2008. That puts the group on a very high price/earnings ratio (about 28 times), meaning that any earnings disappointment is likely to result in a share price fall. The risk/reward of today’s share price is too heavily skewed towards the risk end.
www.altocapital.com.au
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:
Stocks: Broker Recommendations November 3rd – 6 to BUY, 6 to SELL and 6 to HOLD
Super: The secret to having a big super nest egg
Commodities: Is the commodities boom over?
Expert Panel: Why do companies care when their share price falls?
Stocks: Stock of the week - Toll Holdings
CFDs: Top five CFD stocks for the week
Credit Crisis: Future Fund "can't save mortgage funds"
Economy: Aussie households tightening belts
Property: Property prices fall in September
Rates: Bigger rate cut tipped for Cup day
Inflation: Headline inflation falling
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