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Share Tips
Broker Stock Recommendations 21 July – 6 to BUY, 6 to SELL and 6 to HOLD
Anthony Black - July 21, 2008
 CAREY SMITH
ALTO CAPITAL
BUY RECOMMENDATION
Oxiana (OXR)
Oxiana has completed its merger with Zinifex to become the world’s second biggest zinc producer by mine production. With the commissioning of Prominent Hill later this year and Martabe late next year, annual production is forecast to increase to 750,000 tonnes of zinc, 200,000 tonnes of copper, 400,000 ounces of gold, 10 million ounces of silver, and 75,000 tonnes of lead. With the share price almost 50 per cent off its November highs, we believe the company offers compelling value.
Harvey Norman (HVN)
There is no better management team in the retailing sector than Harvey Norman when it comes to dealing with weakening consumer confidence, as they have been operating in the industry since the 1960s and have experienced many an economic downturn. With the share price almost 60 per cent of its highs and trading back at 1999 levels, we consider the stock to be excellent value.
HOLD RECOMMENDATION
Intrepid Mines (IAU)
Intrepid is one of the few Australian junior gold companies to be trading profitably. Its Paulsens underground gold mine in Western Australia is producing about 80,000 ounces a year, and the Casposo project in Argentina is forecast to add an additional 60,000 ounces by 2010. The group’s hedge book is expected to be extinguished by the end of the year, enabling the company to fully participate in the strong gold price.
WA Newspapers (WAN)
Perth’s only daily newspaper was been caught up in the equity market sell off, along with most media companies. The share price is more than 50 per cent off its peak. We cannot see any re-rating events in the short term so recommend investors hold due to the solid 6.5 per cent fully-franked dividend yield. The elephant in the room is Kerry Stokes (owner of Channel 7) who paid $11.20 a share last year for a 19.4 per cent stake, and has not hidden his interest in gaining control.
SELL RECOMMENDATION
Avoca Resources (AVO)
Avoca is commissioning its 1 million tonnes per annum gold treatment plant at Higginsville. The treatment of high grade ore is expected to start soon. The commissioning stage of any project is when the unexpected happens and things go wrong. Avoca faces this possibility. We believe the group’s market capitalisation at more than $500 million is excessive considering current reserves are only sufficient for a mine life of less than five years.
Leighton Holdings (LEI)
We believe the share price decline of this construction and engineering firm is only just beginning, with the downturn in the global construction sector likely to continue over the long term. With Leighton trading on a relatively high price earnings ratio above 20 times, any earnings slowdown is likely to result in a significant down grade from broking analysts.
 MARK GOULOPOULOS
TOLHURST
BUY RECOMMENDATION
QBE Insurance Group (QBE)
QBE is one of the best managed insurance groups in the world. It has a long history of strong profit growth and excellent share price performance. Earnings growth has been driven by increasing profits organically, and through a well managed acquisition strategy. Also, the company carefully manages its risk through diversifying product and geography. The current weakened share price represents outstanding value for long-term investors.
Macquarie Group (MQG)
The Macquarie Group share price has been decimated along with most other financial sector stocks in Australia, despite the fact that MQG is one of the best capitalised and well managed investment banks in the world. While US and European investment banks are writing off billions of dollars in sub-prime and other property loans, Macquarie has shown considerable resilience.The group offers diversified businesses through many geographic regions, and profit growth should resume in time. In the meantime, the share price is about 50 per cent off its peak and is trading below nine times earnings, while offering a fully-franked dividend yield above 6 per cent.
HOLD RECOMMENDATION
Fortescue Metals Group (FMG)
We have updated our commodity price and exchange rate forecasts to reflect the increased iron ore price settlements achieved by BHP Billiton and Rio Tinto, and the stronger Australian dollar. The net effect of this is an increase in our price target for this iron ore company and a resulting upgrade from sell to hold. Should the company meet its production forecast, we feel it’s appropriately valued at current levels.
United Group (UGL)
We have downgraded our short-term recommendation due to conservatism approaching the full-year 2008 result due in mid August. The share price of this diversified infrastructure and services group may be sold down if investors detect any weakness in the result. This could also be exacerbated if the company does not give firm guidance for the 2009 year.
SELL RECOMMENDATION
Origin Energy (ORG)
With the sparring between Origin and potential suitor BG Group well advanced, it’s becoming increasingly unlikely that a third party will enter the takeover battle. A best case scenario for Origin shareholders would be for BG to effectively bid against itself by raising its offer. However, with the share price already trading at a significant premium to the existing bid, an even higher offer may not match the current price. For this reason, it may be prudent to sell and reinvest the proceeds in other stocks offering better value.
ABC Learning Centres (ABS)
The past 12 months have been disastrous for this company providing childcare and education services. What began as weaker earnings quickly translated into a collapse of the entire business model. With the founder no longer having a material shareholding in the company, and the outlook for the international business looking uncertain, it may be best to cut losses and invest in higher quality situations.
 MICHAEL HEFFERNAN
AUSTOCK
BUY RECOMMENDATION
Adelaide Brighton (ABC)
Supplies cement and lime to the construction, engineering and resource sectors in Australia. It recently bought Queensland’s Hanson Building Products Group, which is expected to lift earnings per share. The company anticipates future earnings per share growth to be a robust 9.7 per cent for the year ending in December.
BHP Billiton (BHP)
Australia’s biggest company is a world leader in resources and it’s benefiting from high oil, iron ore and metal prices. Strong economic growth in developing countries is a catalyst for continuing demand, which underpins future profitability. Even without a successful takeover of RIO, BHP is a quality stock with quality assets.
HOLD RECOMMENDATION
Woolworths (WOW)
This retail giant continues to deliver results for consumers and investors. The company has a strong record of profitability and excellent sharemarket fundamentals as shown by fourth quarter sales rising by 7.5 per to $11.4 billion. The company is expected to post a rise of more than 20 per cent in full-year net profit.
Orica (ORI)
A leading Australian chemical, paint and consumer product maker, and a major supplier of explosives to the mining and quarry industries. Its retreat in price has probably been overdone, even though concern exists over the buying power of global and North American mining companies.
SELL RECOMMENDATION
Foster’s Group (FGL)
Australia’s leading beer and wine producer recently issued a profit downgrade and its CEO resigned. A divestment of the wine business makes sense, but until that happens, investors should look elsewhere.
Coca-Cola Amatil (CCL)
Rumours abound that this soft drink giant may be looking at buying the Foster’s wine business. Such a purchase is not without risk in a slowing economy and it’s hardly positive for short-term profitability.
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 Stock Recommendations 21 July – 6 to BUY, 6 to SELL and 6 to HOLD
Managed funds: How to pick a champion managed fund
Stock picks: Stock of the week – Mermaid Marine Australia
Expert panel: Why do futures prices converge on spot prices during the delivery month?
Superannuation: SMSFs – Negative returns not required
US markets: The worst is yet to come
Economy: Export rise buffets Aussie economy
Takeover: Eagle Boys devours Pizza Haven
Finance: Monitoring of super funds stepped up
US Banking: Treasury chief says US banking is sound
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