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Stock Tips
Broker Recommendations May 12th – 6 to BUY, 6 to SELL and 6 to HOLD
Anthony Black - May 12, 2008
 PETER RUSSELL
INTERSUISSE
BUY RECOMMENDATION
QBE Insurance Group (QBE)
QBE enjoyed a record year in 2007 – but the share price still fell 23 per cent. QBE lodged a bid for Insurance Australia Group in April and IAG’s share price is now closely tracking the offer of 0.142 QBE shares plus 70¢. QBE lifted profit 30 per cent last year when all insurers were finding it tough. Its share price has substantial upside, but IAG significantly increases potential – and IAG needs QBE.
Mincor Resources NL (MCR)
High nickel prices and production are generating strong cash flow to pay dividends, make more nickel acquisitions and fund exploration. More exploration success at Kambalda is a distinct possibility given Mincor’s record, drilling results and ore bodies. Mincor has found a new high-grade nickel intersection that supports prospects of 20,000 tonnes a year for 20 years. The company is under valued.
HOLD RECOMMENDATION
Incitec Pivot (IPL)
This fertiliser maker will most likely merge with Dyno Nobel (DXL) in June to form a fertiliser and explosives powerhouse, offering cost savings, flexibility and exposure to key agri-business and resource inputs. The half-year result was outstanding on surging fertiliser prices, and its share price has almost tripled in a year. IPL remains on a sound price/earnings rating of about 15 times.
St George Bank (SGB)
St George reported a satisfactory half-year result. Cash profit was a record $603 million. It lifted its dividend 6¢ to 88¢, with no need to underwrite the dividend reinvestment plan. Cost to income fell, loan impairment increased only marginally and net interest margin slid only five basis points - better than Westpac and ANZ. Continue to hold and accumulate SGB as a leading bank.
SELL RECOMMENDATION
Spotless Group (SPT)
Despite efforts, this serial underperformer remains unattractive. Its Australasian laundry and catering, managed services and cleaning contracts offer thin profits, and its retailer garment hanger division may be sold. In March, it bid for Programmed Maintenance (PRG), a provider of property maintenance, asset management and recruitment and managed labour in Australia, NZ and the UK. PRG has a sound track record, strategy and prospects. SPT’s overall bid is worth about 60¢ more than PRG shares - a paltry offer. The PRG board says reject the bid. We agree.
Perpetual (PPT)
Mostly a wholesale funds manager, Perpetual is one of several exposed to weak markets here and overseas. Its earnings fell with its funds under management, and it has lost business. Expect a very slow recovery in earnings. There are far better prospects in the resource and infrastructure sectors and companies that support them.
 MARK GOULOPOULOS
TOLHURST
BUY RECOMMENDATION
Hastie Group (HST)
Specialises in air conditioning, refrigeration and electrical systems. While the share price has partially recovered since the severe market correction in early March, the company still offers excellent value. Its strong market positions, experienced board and management, diversified income streams and favourable industry dynamics make it an attractive investment.
Macmahon Holdings (MAH)
An engineering contractor mostly focused on mining and civil services. These sectors are experiencing high growth rates that should continue over the medium term. Macmahon continues to win contracts and, combined with a strong balance sheet and management’s sound strategic positioning, the company appears well placed to deliver sustained and attractive earnings growth over the medium term.
HOLD RECOMMENDATION
Just Group (JST)
Premier Investments has lodged an opportunistic takeover offer for this clothing retailer. The bid combines $2.20 in cash and 0.25 Premier Investments shares for each Just Group share. The cash and shares bid undervalues the company given the potential of its brand and business. Continue holding during the takeover process as a higher offer may emerge.
Petsec Energy (PSA)
An oil and gas explorer and producer focused on the Gulf of Mexico, the US and the Beibu Gulf in China. Petsec’s exploration wells in early 2008 have generally disappointed the market, resulting in considerable share price weakness. The most recent Moonshine well in Louisiana was, however, a success, resulting in a short-term share price rally. While most recent results haven’t met expectations, hold for longer term value.
SELL RECOMMENDATION
Oil Search (OSH)
The share price has risen significantly during the past week, mostly due to positive sentiment towards Australian gas companies. The company is expensive at today’s price based on traditional valuations. We believe much of the perceived value is factored into the company’s PNG project proceeding, but this is yet to happen. If, and when, it does, it will require a large amount of capital expenditure, therefore other energy stocks are preferred.
Equigold NL (EQI)
A gold producer with two Australian projects, it is also focused on developing its Bonriko deposit on Africa’s west coast. Equigold has entered into a merger agreement with Lihir Gold, which should benefit both companies. The merger agreement is via a share swap and, given Lihir is trading considerably above our valuation, we recommend selling Equigold and waiting for a more attractive entry price for Lihir Gold.
 ANDREW DOHERTY
MORNINGSTAR
BUY RECOMMENDATION
Bradken (BKN)
This mining and rail equipment maker is well placed to benefit from the continuing resources boom. The stock was savaged in December on news that this year's profit would be cut by temporary troubles in one division and softer demand flowing from infrastructure bottlenecks. Today’s share price offers an attractive entry point for higher-risk investors.
QBE Insurance (QBE)
One of the best managed groups in the global general insurance and re-insurance industries. Extensive risk management is in place to protect all stakeholders. A strategy based on a combination of organic growth and insightful acquisitions should deliver above average earnings and dividend growth.
HOLD RECOMMENDATION
WorleyParsons (WOR)
Provides a range of services, including design, and construction and management to resource companies, here and overseas. Strong cash flow is generated from most of its businesses involved in growing oil and gas markets . Other positives include limited capital expenditure and gearing.
Woodside Petroleum (WPL)
As Australia’s premier oil play, WPL’s operations encompass LNG, natural gas, condensate, crude oil and LPG. Moves into Africa, the US and the Middle East add an international dimension. LNG interests in the North West Shelf Joint Venture off WA are the mainstay. Earnings multiples are high, but the key is the future. Production is forecast to grow strongly.
SELL RECOMMENDATION
Emeco Holdings (EHL)
AN earthmoving equipment leasing company that holds leading positions in Australia and Indonesia. Services the mining industry, but little sector diversification is a negative. The stock should be treated as highly cyclical and suitable only for higher risk investors. A series of profit downgrades breeds mistrust. The recent share price rally provides an opportunity to exit.
Aristocrat Leisure (ALL)
Generates global revenues from making electronic gaming machines and is also involved in distribution and software. It has long-term growth potential in the US, Japan and elsewhere. Changes to gaming regulations and volatile demand have caused earnings to disappoint. A stronger Australian dollar doesn’t help.
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:
Stock Tips: Broker Recommendations May 12th – 6 to BUY, 6 to SELL and 6 to HOLD
Stock Picking: Top down versus bottom up analysis
Investor profile: A veteran trader warns against complex systems
Market reports: Top Ten CFD stocks for the week
Stock pick: Stock of the week – Cue Energy Resources
Finance: Profits show big banks weathering storm
Companies: Westpac approaches St George over merger
Companies: China forms company to make jumbo jets
Economy: Ripper plays down WA minerals boom
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