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Share Tips
Broker stock recommendations 16 June – 6 to BUY, 6 to SELL and 6 to HOLD
Anthony Black - June 16, 2008
 STEVEN HING
NOVUS CAPITAL
BUY RECOMMENDATION
Fortescue Metals Group (FMG)
The iron ore producer has dipped from $12 to trading below $10 on June 13. Expect support at these levels. I am a buyer of iron ore stocks, and firmly believe that FMG represents good value given an easier entry for Chinese investors compared to BHP Billiton or Rio Tinto.
Flinders Mines (FMS)
Has just announced a name change from Flinders Diamonds after discovering an iron ore deposit in the Pilbara near Fortescue. I wasn’t a believer until recently, but the recent rally suggests that it definitely has a resource. Expect the stock to move higher as the resource is confirmed.
HOLD RECOMMENDATION
BHP Billiton (BHP)
Concern is mounting that the BHP Billiton/Rio Tinto merger will fall over as Rio continues to say it is being under-valued by BHP. I suspect that despite BHP filing merger papers with the European Union, it’s prepared to walk away. The Brazilian, Russian, Indian and Chinese economies are still bubbling along and will require coal and iron ore, so, over the longer term, BHP will have a much higher value as earnings continue to rise.
Westpac Bank (WBC)
Westpac has fallen sharply since announcing its planned merger with St George Bank. I believe Westpac is the only likely suitor for St George and, assuming it passes ACCC regulation hurdles, WBC/SGB will become Australia’s biggest bank. Westpac, at $22 levels, is undervalued and it should return to $24/$25 levels after the ACCC’s decision is most likely passed in August.
SELL RECOMMENDATION
General Property Trust (GPT)
The property trust sector has taken a dive and has been re-rated since the Centro sell-off. GPT has fallen through support at $2.90 and appears to be heading lower in the short term. Dividend yields are under pressure, so expect more selling.
James Hardie Industries (JHX)
The US housing crisis has hit this building materials company hard, with JHX falling through support at $5.40. A bleak housing outlook in the US and UK is compounded by Australian housing affordability at an all-time low. The company’s earnings potential is likely to remain under pressure.
 MARK GOULOPOULOS
TOLHURST
BUY RECOMMENDATION
Westpac Bank (WBC)
The bank’s recent interim profit result was at the upper end of market expectations in what has been a challenging environment. The solid performance highlights why the bank trades at a premium to its peers and, although the banking sector will continue to face challenges in the coming year, Westpac will continue to perform well.
Melbourne IT (MLB)
Melbourne IT is Australia’s biggest domain name registrar, and globally it’s in the top five. The company has enjoyed strong organic growth during the past few years, and recent acquisitions of WebCentral last year and Digital Brand Management Services last month will continue to drive growth.
HOLD RECOMMENDATION
Origin Energy (ORG)
UK-based British Gas (BG) has increased its proposed takeover bid for Origin from $14.70 to $15.50 a share. The offer was pitched at a significant premium to Origin’s recent share price, but the recent deal between Santos and Malaysian LNG giant Petronas shows that higher valuations for Origin are possible. Continue holding the stock as a potentially higher offer from another party may emerge.
Foster’s Group (FGL)
The resignation of chief executive Trevor O’Hoy on June 10 and a strategic review of the wine business have pushed up the company’s share price. With the market pressuring for a shake-up of the business, there is potential for corporate activity in the form of a potential sale of some, or all of the company’s wine assets. The strategic review should deliver positive returns over the medium term.
SELL RECOMMENDATION
Santos (STO)
The takeover bid for Origin Energy has ignited takeover speculation in other Australian gas stocks. Santos has selected Malaysian oil and gas company Petronas to be a 40 per cent partner in its Gladstone LNG project. Petronas will invest $US2.008 billion in the Gladstone partnership. This has significantly increased valuations for Santos although, at current prices, the stock looks over valued.
Sky City Entertainment (SKC)
Despite consistent speculation of a potential takeover of Sky City, the stock has been a disappointing performer during the past 12 months. The poor performance has been driven by the introduction of smoking bans at some of its casinos, and it has other operational issues. Better opportunities for growth exist in other gaming companies.
 SEAN CONLAN
MACQUARIE PRIVATE WEALTH
BUY RECOMMENDATION
Sims Group (SGM)
Sims provides a unique exposure to scrap metal prices. With an improving scrap price outlook, we believe the company's product and geographic exposure offers an attractive investment. Further, with a solid balance sheet position, Sims is likely to continue on its acquisition trail.
Orica (ORI)
In the context of the broader market, this chemical and explosives company provides relatively defensive exposure to resources-related demand. The real focus going forward is ORI's leverage to improving domestic ammonium nitrate volumes and price fundamentals as infrastructure bottlenecks ease and contract roll-overs occur at higher prices.
HOLD RECOMMENDATION
JB Hi-Fi (JBH)
We expect discretionary spending will remain under pressure in the 2009 financial year in response to higher petrol prices and potentially rising interest rates. While JBH is expected to fair better than most in this environment, it’s difficult to envisage a repeat of the significant upgrades achieved in the past few years.
WorleyParsons (WOR)
While engineering company Worley is a quality business that generates consistent profit growth and free cash flow, this is already factored into the share price. We continue to see upside earnings risk given strong core markets and a lazy balance sheet.
SELL RECOMMENDATION
ABC Learning Centres (ABS)
Operates childcare centres, but earnings transparency remains poor and one could argue that the business is being run to satisfy the creditors at the expense of equity holders. If credit markets continue to deteriorate, we would expect further asset sales and potentially more equity raisings.
Fortescue Metals Group (FMG)
While FMG will be one of those companies to benefit from a strong bulk commodities market, we struggle with the price and continue to see better value elsewhere in the sector. Expect it to under perform, and our price target is $4.91 a share.
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:
Share Tips: Broker Recommendations 16 June – 6 to BUY, 6 to SELL and 6 to HOLD
Fundamentals: Part 2 – Top 5 financials to know about a company
Stock watch: Austal Ltd – a low PEG suggests value
Contracts for Difference: Who said CFDs are too risky?
Commodities: An awakening US bear market
Companies: Singaporean player sues Opes Prime
Oil: Saudis to raise output in July: UN chief
Companies: Babcock & Brown denies being in default
Companies: Transpacific blames hedge funds for woes
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