Share Tips Broker Recommendations 30 June – 6 to BUY, 6 to SELL, 6 to HOLD June 30, 2008 Anthony Black
SIMON BOND ABN AMRO MORGANS
BUY RECOMMENDATION
Primary Health Care (PRY)
The key to Primary Health Care’s short-term performance will be bedding down the Symbion Health acquisition. Positive catalysts include a successful sale of Symbion consumer and pharmacy assets and the development of synergies in pathology, diagnostic imaging and medical centres.
Biota Holdings (BTA)
Biota has developed a sustainable business model that, together with an expectation of solid news flow, should see the share price move higher over the next six months. We recommend buying this leading anti-infective drug development company in anticipation of successful clinic and potential licensing deals.
HOLD RECOMMENDATION
Wesfarmers (WES)
If you're looking for a big cap, we think it's hard to go past Wesfarmers. Our view is based on the company's strong management and a diverse range of operating businesses, which tends to reduce earnings volatility. We expect strong earnings growth in the coal division on the back of high coking coal prices, with an additional $1 billion in earnings (before interest and tax) forecast in the 2009 financial year. The strong cash flows from coal should help fund the turnaround of the Coles Group, which will take years, but it’s likely to underpin longer term growth. Last, but not least, there's a fully franked dividend yield of 5.3 per cent, and we believe the stock will continue to deliver a solid income return while investors wait for the turnaround.
Worleyparsons (WOR)
This engineering services company is a most highly rated stock on short-term earnings multiples. To justify a buy, an upgrade to consensus earnings per share of 10-to-15 per cent is required. However, another deal is likely so hold.
SELL RECOMMENDATION
Sims Group (SGM)
Sticking to strategy, SGM’s acquisition of Pacific Coast Recycling is a further positive step in the execution of a sound long-term strategy. However, even following the recent profit upgrade, we believe the shares in this metal recycler remain expensive, and we maintain our sell recommendation.
Ten Network (TEN)
We have reduced our profit estimates by 17 per cent following the company’s recent profit warning. Despite the fall in the share price, we maintain our sell recommendation and believe there will be further deterioration in the advertising market. Revenue growth was down significantly in the last quarter. Ten is still expensive compared to its peers.
BRENDAN FOGARTY ALTO CAPITAL
BUY RECOMMENDATION
QBE Insurance Group
In this current difficult market, it’s best to stick to quality stocks with a long-term history of consistent earnings growth. QBE fits the bill here as it’s rated one of the best managed insurance groups in the global general insurance and re-insurance industry. An enviable track record of strong earnings, with a minor blemish following the events of September 11, 2001, is testament to a first class business model and risk management. Having fallen from a high of $35.49, QBE is now on a fully-franked dividend yield of 6.5 per cent. While it’s doubtful we have seen the low in both this stock and the market, its current value suggests to accumulate gradually for longer term growth objectives.
Aquila Resources (AQA)
This coal producer has positioned itself perfectly to benefit from the commodity boom. It has various advanced coal projects on the east coast of Australia combined with an advanced iron ore project in Western Australia. Aquila is also poised to benefit from rising iron ore and coal prices, and the ongoing consolidation of the Australian coal sector.
HOLD RECOMMENDATION
Independence Group (IGO)
IGO has ample cash on hand to fund its 30 per cent share of development costs in the world class Tropicana Gold project in outback Western Australia. Its Long nickel mine in Kambalda is operating profitably despite an almost 60 per cent drop in the nickel price from its 2007 high. The share price should be supported around the $5 level due to corporate interest in the group’s projects.
National Australia Bank (NAB)
While the financial sector remains under immense pressure from the threat of further interest rate rises and the continuing global credit crunch, it’s not a time to hastily offload any of the big four banks. Our big four banks have a long term history of earnings growth in worse conditions than these. And they present substantially lower risk than the highly leveraged investment banking sector, where the likes of Babcock & Brown have been punished on the back of high gearing levels. NAB is my preferred bank exposure given its strong position in business banking and the scale of its operations. Hold for a fully-franked yield of 7.6 per cent and expect growth to resume in future years.
SELL RECOMMENDATION
Citigold Corporation (CTO)
CTO is developing the historic Charters Towers underground gold mine in Queensland, where production has been slower than planned resulting in the loss of about $1 million a month in cash. We believe market capitalisation of $190 million is simply too high considering the mine is only producing about 4000 ounces a quarter and burning cash at an unsustainable rate.
OneSteel (OST)
Australia’s biggest supplier of steel long products has benefited from a strong global steel market in recent years, creating excellent share price growth. But the environment is becoming much more challenging. Steel input prices have risen considerably, notably via the rapid continuing increase in iron ore and coking coal prices and spiralling energy production costs. Passing on the full effect of steel input costs is a difficult challenge if demand for steel starts to ease. Given steel consumption growth may slow on the back of an eventual downturn in global construction, its worth taking advantage of OneSteel’s strong share price by taking some profit at these levels.
The ASX share price has been weighed down by ongoing weakness in equity markets and the pending Federal Government decision on competition. While acknowledging both points, we believe ASX is a quality company and the stock has been oversold at current levels.
Sunshine Gas (SHG)
This coal seam gas company has quality tenements in south-east Queensland. SHG should continue to benefit from demand for cleaner burning energy, and higher parity between gas prices and the burgeoning oil price. Our share price target is $4.90.
HOLD RECOMMENDATION
Commonwealth Bank of Australia (CBA)
Although CBA appears cheap on an historical price/earnings basis, the operating environment for Australian banks remains challenging, and this will be the case for as long as tight conditions persist in global credit markets. Hold for yield.
Whitehaven Coal (WHC)
This Australian coal mining company has seen a recent surge in its share price partly due to increases in the coal pricing outlook and merger and acquisition activity in the sector. It has been trading at a premium to our $4.50 price target, so we have reduced our recommendation to a hold.
SELL RECOMMENDATION
Sigma Pharmaceuticals (SIP)
We believe SIP is a quality long term growth business, but remain concerned over relatively high debt levels and the uncertain short-term earnings outlook. As a result, in the short term, we recommend that risk-averse investors sell.
Babcock & Brown Land Partners (BLP)
Residential land sales continue to be impacted by rising interest rates and a slowing domestic economy. These issues combined with negative investor sentiment are likely to remain in the medium 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.
CFD CENTRE
BRENDAN FOGARTY
JARROD DAFFY
