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Share Tips
Broker Stock Recommendations 17 November – 6 to BUY, 6 to SELL and 6 to HOLD
Anthony Black - November 17, 2008
 Brett Walker
STATE ONE STOCKBROKING
BUY RECOMMENDATIONS
Telstra Corporation (TLS)
The telecommunications giant recently announced the potential for 21mb speeds on its Next G mobile broadband network in 2009. Furthermore, Telstra is largely immune from the credit raising issues now facing the market, with no debt re-financing due in 2009. Revenue growth has again been confirmed at the 3 per cent-to-4 per cent level for 2009, and management has forecast free cash flow to increase from $4.6 billion to $6 billion in 2010. The current dividend yield is 6.5 per cent versus the prevailing RBA cash rate at 5.25 per cent.
Riversdale Mining (RIV)
Riversdale is cash backed to $1.80 a share, and it’s Benga coal project in Mozambique is worth 98 cents a share based on what Tata Steel paid for 35 per cent of the project. This suggests a value of $2.78 a share without assigning any value to Zululand Anthracite Coal operating in South Africa, which returned a profit of $16.2 million last financial year. RIV is unhedged and has no debt, so there are no complications in this story. Being in Africa, it’s not without risk, but it’s cheap. The stock was trading below $2.70 on November 14.
HOLD RECOMMENDATIONS
Harvey Norman (HVN)
With the share price down from a peak of $7.25 a year ago, HVN is better placed than its peers to weather the slowdown in retail spending, with a dominant market position and conservative balance sheet. Trading on a modest historical price/earnings of 11 times and a dividend yield of 4.6 per cent means any further falls in price should be limited. Harvey Norman is conservatively funded, with net debt-to-equity of 23 per cent for 2008.
Wesfarmers (WES)
This diversified industrial giant is facing increasing interest costs associated with the Coles acquisition, slowing retail spending and fading bulk commodities prices. Management, however, is experienced and the task does not appear beyond them. Trading on a modest price/earnings of 11 times means any further price falls should be limited. With $5 billion in loans and borrowings due for refinancing in October 2010, any recovery in international credit markets would be a major positive in terms of interest costs.
SELL RECOMMENDATIONS
Babcock & Brown (BNB)
Falling asset values coupled with debt exceeding $9 billion is a major cause for concern. The sale of BNB's management agreements will provide a band-aid, but will also reduce the revenue base. BNB will be in real risk of breaching its debt covenants in the future, and, therefore, it holds too much risk for us.
Minemakers (MAK)
We’re starting to see a sharp downturn in demand for phosphate products as a result of the global credit crunch. Minemakers is still quoting prices between US$450 and US$500 a tonne free on board from Morocco. While this may be the case, the next round of price negotiations will undoubtedly see a sharp fall in the price of phosphate, already anticipated by the market. We consider the stage 1 MAK operation to be high cost, with capital expenditure of about $500 million required to bring the cost of production below the long-term phosphate price of US$50 a tonne. For those still sitting on a 300 per cent gain prior to the initial phosphate announcement, take your sizable profit and run.
 Cleo Nanni
NOVUS CAPITAL
BUY RECOMMENDATIONS
Orica (ORI)
Even with higher input costs and unfavorable foreign exchange movements, ORI reported 2008 full-year net profit after tax of $539.6 million. After adjustments and distributions on the preference shares, the underlying NPAT came in at around $551.6 million, which is 16 per cent ahead of the previous corresponding period and above some analysts forecasts. The company declared a final dividend of 55 cents a share, bringing the total full-year payout to 94 cents. The company expects 2009 full-year NPAT to beat 2008.
Rio Tinto (RIO)
Iron ore and copper producers are likely to be the big winners from China's $586 billion economic stimulus. However, analysts have lowered commodity price forecasts across a broad range of Rio's commodities. Analysts say it may be a while before there is a boost in prices, resulting in possible earnings downgrades. Over the longer term, expect China and other developing economies to continue driving demand and, as a result, commodity prices will increase.
HOLD RECOMMENDATIONS
News Corporation (NWS)
The global media giant reported operating income of US$953 million in the first quarter, down 9 per cent on the previous corresponding period. Net income was US$515 million, down 29.6 per cent, even though total revenue rose 6.2 per cent to US$7.5 billion. Cable programming, direct broadcast and newspapers delivered double-digit growth, but this was offset by sharp declines in film and television operating income. Management has reduced guidance, forecasting that full-year 2009 operating income will fall. But I maintain a hold rating on this company.
Ansell (ANN)
Ansell has reiterated its full-year 2009 guidance. If the share market remains weak, Ansell's defensive characteristics will see it outperform. ANN confirmed the global economic slowdown had a negative impact on occupational sales, although professional and consumer divisions were more stable. In Australian dollar terms, full-year 2009 and 2010 earnings per share forecasts should increase by more than 10 per cent.
SELL RECOMMENDATIONS
Timbercorp (TIM)
This agribusiness company has revised down its full-year 2008 net profit after tax forecasts to between $40 million and $44 million. It’s due to a one-off provision of $19 million, relating to removing and replacing most varieties planted for the company’s 2004 and 2005 table grade projects. TIM has advised that further capital works are still required. TIM expects to release its full year 2008 result on November 27.
Aristocrat Leisure (ALL)
The gaming machine maker’s operations are likely to remain challenging for some time. The recent US election saw voting against the opening of some potential new gaming jurisdictions, while several key players in the global casino space continue to wrestle with solvency issues. The weakening global growth outlook is likely to have a negative impact on the gambling sector.
 Peter Russell
INTERSUISSE
BUY RECOMMENDATIONS
Telstra Corporation (TLS)
Australia’s gorilla of telecommunications is three years into its major transformation and it stacks up very well against its global peers. Its share price has outperformed the market, sliding only 9 per cent over the year. We attribute this to its commanding position and major progress in simplifying and focusing its processes. Profits, strong cash flow and dividends will rise.
United Group (UGL)
This group has an $8 billion order book of specialised engineering, maintenance and facilities management contracts with major companies and governments in Australia, Asia, North America and Europe across infrastructure, rail, resources and services. Consistent profitability and strong finances make it resilient. A high level of essential infrastructure spend will continue across its regions and provide growth.
HOLD RECOMMENDATIONS
Orica (ORI)
ORI continues to expand in mining services around its leading global market share in explosives. It retains minor chemicals and its consumer product businesses. Well managed with sound financial disciplines, its key driver is the development of China and India. Orica’s inherent strengths and flexibility in building new capacity will ride through any downturn. A long term buy.
WorleyParsons (WOR)
One of the top ten global engineering design firms, it’s well managed and has major international growth options. Strong cash generation, limited capital needs and low gearing allow for acquisition and dividend growth. Seventy-five per cent of income is from oil and gas projects. To match growing energy demands, these projects will continue even at lower oil prices.
SELL RECOMMENDATIONS
Lend Lease Corporation (LLC)
A major global developer of retail centres, urban reconstruction projects, US military housing and aged care facilities. The company has large exposure to the property and construction markets in the UK and elsewhere which, unfortunately, look set for a deep and long decline. As with other property shares, stand aside despite the price falls already.
Transfield Services (TSE)
An international provider of maintenance, asset management and project management services. It operates mostly in Australia, but also in North America where expansion was funded by heavy US dollar debt, which has significantly risen as the Australian dollar has fallen. New capital is required, margins are quite thin and the company is looking for a new chief executive. Uncertainties overwhelm the potential.
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:
Stocks: Broker Recommendations November 17th – 6 to BUY, 6 to SELL and 6 to HOLD
Super: Why you should know about the transition to retirement strategy
CFDs: Top five CFD stocks for the week
Stocks: Stock of the week - Hastie Group
Commodities: Getting exposure to the gold price via an ETF
Global Crisis: Investors urged: don't make rash calls
Companies: Murdoch denies newspapers are dying
Companies: B&B warns of potential loss with GPT
US: Freddie Mac loses $US25.3 billion for the quarter
Companies: ConsMin staff slashed on slowdown
Credit Crisis: Govt buys mortgage-backed securities
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