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Share Tips
Broker Stock Recommendations 6 October – 6 to BUY, 6 to SELL and 6 to HOLD
Anthony Black - October 6, 2008
 KEITH THOMPSON
SHADFORTHS
BUY RECOMMENDATION
Billabong International (BBG)
Lifestyle brands continue to increase in popularity and BBG owns niche brands offering pedigree and credibility. The ability to generate almost 50 per cent gross margins demonstrates acceptance and successful marketing. Tiger Lilly, Xcel, Nikon, Custom, Element, Von Zipper and potential bolt-on brand acquisitions provide earnings growth. Historically, the brands endure consumer cycles well, relying on niche market status to isolate them from the general apparel market.
Oz Minerals (OZL)
OZL was born of the June 2008 merger of Zinifex and Oxiana. Production is primarily copper and zinc, with lead, gold and silver. Assets are mostly Australian, with some in Laos, Indonesia and Canada. Cash costs are close to the industry average. Major mines are Century in Queensland for zinc and Sepon in Laos for copper and gold. Prominent Hill in South Australia adds substantial copper and some gold from late 2008. The 2008 Allegiance acquisition brings nickel exposure via Avebury in Tasmania. Combined management is yet to establish a track record. OZL development options include expansion of existing mines, Martabe in Indonesia, Dugald River in Queensland and High and Izok Lakes in Canada. The balance sheet is strong with significant net cash. Tolerance of commodity, development and sovereign risk is needed.
HOLD RECOMMENDATION
Coca-Cola Amatil (CCL)
In Australia, CCL´s challenge remains managing input costs while encouraging demand despite higher petrol prices. Brand power and new products help. It’s still to gain the full benefits from expanding into packaged fruit and snack food after acquiring SPC Ardmona. Adding ready-to-drink beverages and premium beer gives mild blue sky. Its Indonesian operations are starting to improve and Korean operations are finally sold. Competitive advantages include the power of the Coke brand, distribution network, innovation and solid financial management. Fully franked dividends will continue.
Energy Resources of Australia (ERA)
ERA is the world's fourth largest uranium producer via its Ranger mine in Northern Territory. Operating since 1980, Ranger produces 12 million pounds a year. ERA's longer term future and growth relies on additional exploration success at Ranger and/or development of the nearby Jabiluka ore body, but this requires consent from traditional owners. Rio Tinto holds 68.4 per cent of ERA. The high dividend payout ratio is a comfort and so too is the strong balance sheet with modest debt. ERA suits investors looking for uranium exposure, while recognising legacy contracts crimp short-term profit leverage.
SELL RECOMMENDATION
Consolidated Media Holdings (CMJ)
CMJ is a holding company, with a focus on new media. It owns a 25 per cent stake in a pay TV operator (Foxtel), a 50 per cent stake in sports programmer (Fox Sports) and a 27 per cent stake in online employment site Seek. It also owns 25 per cent of PBL Media, which in turn owns the Nine Network and magazine publisher ACP. CMJ is unlikely to out-perform in the short term and we have concerns about visibility and disclosure. Further, we anticipate earnings downgrades across CMJ’s portfolio. Upside may include a revised bid from Illyria when funding becomes more readily available. However, the timing of any such bid remains highly uncertain.
Asciano Group (AIO)
AIO is the spin-off of Toll´s infrastructure-type assets, comprising Patrick´s port and stevedoring assets and Pacific National’s rail freight business. Despite strong market positions, these businesses potentially face stiffer competition. This may result in moderate earnings volatility at the EBIT (earnings before interest and tax) level. High financial gearing implies the potential for considerable earnings volatility after interest payments. A seemingly reliable and growing earnings profile has become less certain in the face of the credit and oil crises, rendering debt levels uncomfortably high. The weaker share price materially constrains capital raising and the recent share purchase plan failed to find the mark.
 ANDREW DOHERTY
MORNINGSTAR
BUY RECOMMENDATION
Telstra (TLS)
The dominant Australian telecommunications provider is a strong cash generator through healthy operating margins of about 42 per cent and moderate capital investment requirements. Revenue growth is not overly-sensitive to economic conditions. Broadband and mobile growth is offsetting structural declines in its copper wire business. The stock provides a reliable and growing dividend yield, currently above 7 per cent fully franked.
CSL (CSL)
CSL has built strong global positions in blood plasma markets through acquisitions and organic growth. It generates robust and growing cash flows, with limited sensitivity to economic conditions. It’s difficult for competitors to replicate CSL's efficiency scale and product diversity. We expect about 30 per cent earnings growth in the next two years, justifying the generous forward price/earnings multiple of 25 times.
HOLD RECOMMENDATION
Cochlear (COH)
An innovative leader in growing markets. The COH implantable device is the gold standard for enabling profoundly hearing-impaired patients to hear. Growth stems from further penetration of existing markets and entry into undeveloped markets, such as South America, Eastern Europe and China. This is a strong cash generator with impressive operating margins and modest capital expenditure requirements.
Computershare (CPU)
CPU is the only global share registrar administering more than 80 million shareholder accounts for over 13,000 corporations across 12 countries on five continents. With its scale, expertise, strong balance sheet and low capital requirements, CPU should grow earnings at a high rate for the foreseeable future, although cyclical fluctuations in sharemarket activity could generate substantial shorter-term volatility.
SELL RECOMMENDATION
CBH Resources (CBH)
CBH owns the Endeavor zinc/lead mine near Cobar in NSW, with annual capacity of 65,000 tonnes of zinc and 35,000 tonnes of lead in concentrates. Panorama in WA is a potential 20,000 tonnes a year of copper and 50,000 tonnes a year of zinc development. Production and costs have disappointed. Output of 30,000 tonnes a year of zinc and 25 tonnes a year of lead was expected from the Rasp mine in Broken Hill from mid 2008, but it’s been postponed indefinitely due to low prices.
Iluka Resources (ILU)
ILU is a leading mineral sands miner, focused on zircon, rutile, synthetic rutile and ilmenite. Murray and Eucla Basin growth, and the 1.25 per cent Mining Area C iron ore royalty underpin a transition from a stagnant low margin operator to a growing profitable miner. Cash flow will be under pressure, with high capital demands until 2010/11. ILU should then be a higher margin proposition with acceptable returns. The share price overstates the prospects.
 MARK GOULOPOULOS
TOLHURST
BUY RECOMMENDATION
Leighton Holdings (LEI)
The recent fall in Leighton’s share price has created an excellent opportunity to buy one of Australia’s best managed construction and contract mining companies. The company has a strong order book and has forecast strong revenue growth for 2009. This growth should continue into the medium term as non-residential infrastructure spending is likely to remain strong over this period.
Sonic Healthcare (SHL)
Sonic Healthcare’s share price has performed relatively well when assessed against the ASX 200 index due to its inherent defensive qualities as a healthcare company. The company’s successful international expansion has continued this year driven by further acquisitions in its core radiology and pathology divisions. This is an excellent portfolio stock offering solid growth with defensive characteristics.
HOLD RECOMMENDATION
Transurban Group (TCL)
Since the announcement that Transurban was cutting its dividend and raising equity to reduce debt, the stock has outperformed its peers and, considerably, the broader market. This is primarily due to its relatively conservative gearing after the restructure and consistent traffic growth across its portfolio of toll roads. Notwithstanding these positive drivers, the stock appears reasonably valued in the short-term.
Crown (CWN)
Since it’s demerger from Publishing and Broadcasting, the Crown share price has struggled due to perceptions that it carries a high level of debt and that this will hinder expansion opportunities. The acquisition of Cannery Casinos in the US was also viewed as being very fully priced. The opening of the City of Dreams Hotel/Casino in 2009 should, however, provide a catalyst for this undervalued company.
SELL RECOMMENDATION
Ausdrill (ASL)
Ausdrill is under takeover by Macmahon Holdings in a cash and share offer. The strong Macmahon share price has provided support for Ausdrill’s price due to the share component of the takeover offer. It’s become apparent, however, that the takeover is unlikely, which may lead to weakness in the Ausdrill share price. Added to this is anecdotal evidence that excess capacity in the resources drilling industry has developed, which may impact Ausdrill’s profitability in the short-term.
Babcock & Brown (BNB)
The recent share price rise may provide an opportunity to take a loss in this stock. Despite assurances from the company that they are in control of their own destiny, there is sure to be close scrutiny from banking syndicates. Asset sales have already been well flagged, and the focus is on the higher quality assets in the portfolio. But questions may well be asked about the quality of what is left at the end of this process.
www.tolhurst.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:
Investing: As stocks hit lows, when is the right time to jump back in?
Share tips: Broker Stock Recommendations 6 October – 6 to BUY, 6 to SELL and 6 to HOLD
Stocks: Stock of the week – CSL
Acquisition: Suncorp confirms acquisition interest
German Bailout: Rescue package agreed for German bank
Survey: Job ads growth at five year low
Markets: Investors expect market volatility
Recession: Bill Gates plays down recession fears
Currency: Australian dollar hits two-year low
Joint venture: OZ Minerals withdraws from Terramin JV
Lehman brothers: JPMorgan blamed for Lehman collapse
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