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 MARKET REPORTS |
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Analyst report - shares
Reporting season winners
September 17, 2007
Brendon Lau, ShareAnalysis
As another good reporting season winds down, we take a look at companies that are poised to deliver another year of solid growth amidst the turmoil on the global credit market and growing concerns about a potential US economic recession sparked by a shockingly poor US job report.
Stocks in the investment banking and wealth management sectors have been hit hard by worries over the US sub-prime fallout. We believe several stocks in these categories have been oversold, especially Babcock & Brown (BNB), which beat our profit expectations by $31M. BNB has also raised its FY07-08 guidance and we suspect the revised guidance is conservative.
Although it is more expensive now to raise debt, many quality companies seem to have little difficulty raising capital. Higher borrowing costs are also not having as much of an impact on BNB’s babies (listed satellite funds launched by BNB) as some have feared. In fact, the tighter credit market may be beneficial, as it reduces competition for global assets.
This is one reason we retain our positive view on some listed trusts such as Challenger Diversified Property Group (CDI) and Babcock & Brown Infrastructure (BBI). These trusts have delivered surprisingly strong results and represent a good balance between yield and growth.
CDI beat its own prospectus forecast by over 11% and increased its FY08 guidance. Its relatively low gearing puts the company in a more stable position during the current credit turmoil, and we believe CDI has scope for growth via acquisitions. Meanwhile, BBI seems to have been successful in diversifying its underlying asset base. Its investment in ports is a step in the right direction, considering the strong demand for shipping facilities. Furthermore, its involvement in the Alinta (AAN) acquisition should contribute to its earnings growth. It would be unsurprising if BBI continues down the acquisition trail, supported by reliable cash flows from its portfolio of assets.
Meanwhile, the strong advertising market, continuing growth in new media and our robust economy should continue to bolster the fortunes of Fairfax Media (FXJ). Its acquisition of Rural Press has been positive so far and more cost savings from synergies are still to be realised. FXJ’s shares have been trading sideways while the ACCC examines its planned acquisition of Southern Cross Broadcasting’s (SBC's) metropolitan radio stations and Southern Star’s TV production and distribution business from Macquarie Media Group (MMG), provided MMG’s takeover bid of SBC is successful. A favourable ruling could be a share price catalyst for FXJ.
As the employment rate continues to exceed expectations in the current tight labour market, retailers and job search companies like Seek (SEK) should continue to do well. We covered the retail sector three weeks ago, and maintain our positive view on the sector.
Finally, a number of companies exposed to infrastructure construction are on our BUY list. This is partly driven by Australia’s 2Q GDP, which soundly beat expectations, thanks to investment in infrastructure. However, we generally prefer construction and engineering contractors and equipment rental businesses to construction material companies.
More articles from this week's CompareShares newsletter:
Stocks: American revolution comes full circle
Fundamentals: Paid off in dividends
Investing: The ultimate starter strategy for building wealth
Retirement: When work stops, but the bills don’t
Resident Trader: Taking a stab at trading forex
CFDs: The calm before the storm
Companies: Reporting season winners
Stock of the week: Blue skies for Hastie Group
International: Back to school for the US
Brendon Lau is the Editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research.
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
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