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Share Tips
Broker Stock Recommendations 18 August – 6 to BUY, 6 to SELL and 6 to HOLD
Anthony Black - August 18, 2008
 BRENDAN FOGARTY
ALTO CAPITAL
BUY RECOMMENDATION
BHP Billiton (BHP)
Global commodities will not slow following the Beijing Olympics. Chinese GDP remains robust, with growth at 10.4 per cent to June. As a result, it’s worth buying BHP as a preferred exposure to continuing demand for the diversified commodities they produce. BHP was recently noted as the biggest short-selling stock in the world. The share price fell sharply driven by hedge fund trading, meaning a recovery might be swift if the downward trend reverses. The commodity cycle won’t end with Beijing 2008.
Independence Group (IGO)
Expect this mid-sized nickel and gold miner to recover from the sharp sell down that has seen its share price nose-dive from its all time high of $9.39 to around $2.70 on August 15. A company buy-back of up to 10 per cent of its issued capital should provide the trigger for IGO to reverse its downward trend and begin a gradual recovery based on initial short covering and cheap fundamentals. Independence Group retains ample cash to fund its 30 per cent share in developing the world-class Tropicana Gold project in outback Western Australia. Its Long nickel mine in Kambalda continues to operate profitably despite the nickel price falling by almost 60 per cent from its 2007 high. Target a recovery to around $5, assisted by potential corporate activity and strong balance sheet fundamentals.
HOLD RECOMMENDATION
ResMed Inc (RMD)
Remains a global leader in treating sleep apnoea. But the medical device market has been subdued despite offering potential as a long term growth area. Sleep disorders are on the rise around the world. ResMed, an innovative leader in this field, continues to introduce associated products, such as airflow generators, masks and nasal pillows. Unfortunately, there is no yield for income-conscious investors given ResMed’s strategy to reinvest profits into new product development. ResMed is suitable for those seeking to include a prospective growth stock in a longer-term portfolio.
Harvey Norman (HVN)
This well-managed blue chip retailer has proven itself as a solid growth stock. Its franchisee system has been highly effective in adding incentives to store management, and further international growth opportunities offer longer-term earnings upside. The negative now is the retail cycle itself. Several months ago, retail spending appeared to have reached a short-term peak, while import costs are adversely affected by the recent fall in the Australian dollar. Hold for longer term growth as this quality retailer will ride out this storm and many more to come.
SELL RECOMMENDATION
Iluka Resources (ILU)
This mineral sands miner operating in the Murray and Eucla Basin regions continues to be a low- margin operator under significant pressure from the recent downturn in the commodities cycle. While the commodities cycle should remain vibrant, mineral sands markets are far more patchy and carry greater risk. There are far better exposures to the resource sector than Iluka.
Origin Energy (ORG)
The current offer from British Gas for this blue chip energy provider presents a very good opportunity to sell and take profits. Origin is currently trading at a significant premium to the recently rejected second offer price of $15.50 from British Gas. If the corporate play fails to succeed, expect a short term fall in Origin’s share price.
http://www.altocapital.com.au/
 PETER RUDD
CARROLL, PIKE & PIERCY
BUY RECOMMENDATION
McPherson's (MCP)
Benefits are now flowing from the group’s new state-of-the-art Sydney warehouse, consumer product development and distribution centre for its strong brand names, including Wiltshire cutlery, Multix cling film and Swisspers personal items. The company has import costs under control.
WestpacBank (WBC)
This major bank, with a strong Australian customer base, has gained regulatory approval to pursue its take-over of St George. It has negligible exposure to the US sub-prime crisis, although the weakening New Zealand economy could be a concern. Bolstered by a recently completed $1 billion preference share capital raising, the bank has one of the strongest balance sheets of the “big four’’ Australian banks.
HOLD RECOMMENDATION
Ausenco (AAX)
Recommended as a buy last month, the shares of this assaying group for mining and exploration samples have increased by more than12 per cent since then, helped by a 3 per cent lift in declared dividends to 25 cents. Based on a higher 30 cent dividend this year, this smaller cap stock is on an attractive 8 per cent fully-franked dividend yield.
Rio Tinto (RIO)
Trading at a discount to the BHP Billiton offer of 3.4 of its shares for each Rio one, the group continues to increase its resource base and announce new projects, such as its Brazilian and Guinea iron ore ventures. The closure of high cost, energy-hungry Chinese aluminium smelters favours Rio’s Canadian operations, where its smelters are mostly fed by greener, cheaper hydro electricity.
SELL RECOMMENDATION
Asciano Group (AIO)
Listed in June 2007 and holding the important rail and port assets that were formerly part of Toll Holdings. Asciano’s huge debt levels have weighed down its share price. The unsolicited takeover bid in early August, led by the TPG Capital Group in the US, drove Asciano’s shares up 60 per cent from recent lows. That’s provided a good exit opportunity.
Westfield Group (WDC)
This group is a major global real estate force, being the world’s biggest shopping centre owner, with 118 facilities across Australia, New Zealand, the US and the UK. It’s also the lead developer for the 2012 London Olympics site and the World Trade Centre in New York. But falling UK and US property values and alleged income tax irregularities by the controlling Lowy family could cloud the group’s outlook.
 SIMON BOND
ABN AMRO MORGANS
BUY RECOMMENDATION
Warrnambool Cheese & Butter Factory (WCB)
WCB is among the biggest milk processors in Australia and the only ASX listed dairy company. It makes quality bulk and branded dairy products for wholesale and retail customers in domestic and export markets. It sources milk from suppliers spread across the productive dairy regions of central Victoria through to the south-east regions of South Australia. WCB has consistently grown milk supply and profits simultaneously, a great achievement in the dairy industry.
Cardno (CDD)
Full-year guidance provided in May suggested net profit after tax of between $25 million to $27 million for 2008, representing an increase of between 43 and 54 per cent on the previous corresponding period. With only a month left when announced, it’s safe to say that management of this engineering consultant had a high level of confidence in meeting guidance. Following the turbulence in international markets, investors are more focused on 2009 outlooks. We believe CDD will continue to deliver significant growth.
HOLD RECOMMENDATION
Babcock & Brown (BNB)
Our concerns include the potential for further sizeable write-downs. The second is possibly needing to provide bridging loans to satellite funds and the third is potential further delays to asset sales. However, we believe there is substantial value in BNB's development assets. Provided the company can navigate safely through the current storm, there is value to be unlocked, although it may take time for the company to repair its reputation. Our target price is $7.50.
Crane Group (CRG)
While the plumbing products supplier delivered only 8 per cent earnings per share growth in 2008, this is a credible result given the tougher environment. Macro risks still present challenges, however, at this stage are reflected in our forecasts. While the potential for interest rate cuts is positive in the longer term, housing affordability will remain a long-term issue as will residential stock levels.
SELL RECOMMENDATION
Seven Network (SEV)
Our sum-of-the-parts value for Seven falls to $9.79 from $11.42 due to a lower cash balance and a share price fall in its WA Newspapers investment. If we assume a $300 million investment in wireless broadband, then our sum-of-the-parts value would fall to $7.22. The one reason for owning Seven, in our view, is it’s traded significantly below its sum-of-the-parts valuation. However, sum-of-the-parts support has been steadily disappearing and we still see significant risk around the use of cash. Given declines across the sector, there are several other media companies trading at much bigger discounts to valuation.
Bendigo & Adelaide Bank (BEN)
Fierce competition for deposits, uneconomic debt/securitisation markets and the continuing cyclical deterioration in bad debts provide further downside risk to this bank. Few, if any, financial stocks have escaped the credit crunch that is not over yet.
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 18 August – 6 to BUY, 6 to SELL and 6 to HOLD
Superannuation: Your retirement: how much income do you need?
Ask the expert: What are naked options and why are they risky?
Resident trader: Should you jump off the sharemarket train or hang on for the ride?
Savings tips: Female wardrobe wastage – averages $8000
Stocks: Stock of the week - White Energy Company Ltd
Commodities: Fears rise that resources boom ending
Credit Crunch: Credit crunch up to 18 more months
Economy: Recession fears Europe's economy shrinks
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