18 Share Tips – 4 March 2013

Richard Batt, Shadforth Financial Group

BUY RECOMMENDATIONS

Breville Group (BRG)

Chart: Share price over the year to versus ASX200 (XJO)

The company’s recently reported first half result was in line with forecasts, but overshadowed by management flagging the potential loss of its Canadian distribution agreement for Keurig products in 2014. The share price fell significantly on the back of this news. While negotiations are continuing, this sell-off looks overdone, providing an opportunity for investors to establish a holding. The shares finished at $5.40 on February 27.

Medusa Mining (MML)

Chart: Share price over the year to versus ASX200 (XJO)

An emerging gold producer with its main mine located in the Philippines. The company is one of the lowest cost gold producers on the ASX. It’s debt free and has strong cash flows, enabling it to self-fund its expansion ambitions. Forecast gold production is between 80,000-to-90,000 ounces for 2013, with a target of 400,000 ounces by 2016.

HOLD RECOMMENDATIONS

Ramsay Health Care (RHC)

Chart: Share price over the year to versus ASX200 (XJO)

RHC has reported a half-year net profit of $138.4 million, a 10 per cent increase on the previous corresponding period, as an ageing population lifts demand for medical services. The company is a dominant player in the private hospital market and it has the pricing power to offset escalating costs through its leading facilities.

QBE Insurance Group (QBE)

Chart: Share price over the year to versus ASX200 (XJO)

QBE has posted a weaker-than-expected cash profit of $US761 million for the year to December 2012, while earmarking it will axe 700 jobs. The result was disappointing, but the company has a solid business model and has outperformed most global peers over the long term due to its strong operational management team. We recommend investors retain their exposure.

SELL RECOMMENDATIONS

Transfield Services (TSE)

Chart: Share price over the year to versus ASX200 (XJO)

TSE recently announced a first half loss of $247 million, due to massive writedowns on the back of a weakening mining sector. TSE generates a significant proportion of its revenues in the resource and industrial markets. Any continuing slowdown or deferral in spending by resource companies could further lower the company’s earnings. Due to the uncertain outlook, we recommend investors look at alternative investments.

Metcash (MTS)

Chart: Share price over the year to versus ASX200 (XJO)

A wholesale distribution and marketing company specialising in groceries, fresh produce, liquor, hardware and consumer goods. A low margin business, MTS relies on food price inflation to grow returns. It operates in a competitive industry, with dominant players Woolworths and Coles increasingly trying to chew away at MTS’s market share. We believe there are better opportunities elsewhere in the sector.

Peter Day, Macquarie Private Wealth

BUY RECOMMENDATIONS

CSL (CSL)

Chart: Share price over the year to versus ASX200 (XJO)

This blood products company supports all aspects of the process – from collecting and testing donated plasma to producing a range of plasma-derived products. Margin expansion will drive outperformance. Upgrading net profit growth guidance by 24 per cent for this half means it should comfortably meet or even exceed full year guidance.

CFS Retail Property Trust Group (CFX)

Chart: Share price over the year to versus ASX200 (XJO)

Its portfolio comprises 29 retail assets located across Australia, housing more than 4100 tenants. The portfolio of property assets was valued at $8.4 billion, with an occupancy rate of 99.7 per cent. It yields just below 7 per cent and falling interest rates are good for this sector.

HOLD RECOMMENDATIONS

GWA Group (GWA)

Chart: Share price over the year to versus ASX200 (XJO)

Makes and distributes household consumer products. Restructuring costs and related capital investment will cost about $20 million, but the company expects the profit and cash impact to be largely offset during the year through property sales and working capital management improvements.

Metcash (MTS)

Chart: Share price over the year to versus ASX200 (XJO)

A marketing and distribution company operating in the food and consumer goods categories. Management remains focused on growing the group’s businesses and implementing initiatives to reduce costs. The board upgraded guidance from low to mid single digit growth in underlying earnings per share for the full year.

SELL RECOMMENDATIONS

Cabcharge (CAB)

Chart: Share price over the year to versus ASX200 (XJO)

Its primary income source is fees from passengers using Cabcharge cards or dockets. Its business model remains under attack on several fronts. Regulatory overhangs are the key near-term concern. The stock remains below previous highs and, with so much uncertainty, we expect the share price decline to continue.

Iluka Resources (ILU)

Chart: Share price over the year to versus ASX200 (XJO)

This mineral sands producer has operations in Australia and the US. It’s announced further production cuts. In our view, the stock is overvalued after already building cost savings and a recovery in volumes at prices marginally above the current spot price from 2014. The risk to our forecasts is to the downside if zircon sale volumes don’t recover to historical levels or prices fall further.

Boe Campion, Ord Minnett

BUY RECOMMENDATIONS

Macquarie Telecom (MAQ)

Chart: Share price over the year to versus ASX200 (XJO)

We recently upgraded Macquarie Telecom to a buy with a price target of $10.56. With Intellicentre 2 (IC2) now operational, we believe Macquarie Telecom has a platform for profitable growth for several years. We expect financial year 2014 to show solid earnings per share growth driven by sales growth in IC2, the potential for new revenues from a government contract won in October 2012 (as well as possible further contract wins), and growth in cloud computing revenues. The shares were trading at $7.70 on February 28.

Bega Cheese (BGA)

Chart: Share price over the year to versus ASX200 (XJO)

Reported a solid first half result ahead of our expectations despite a highly competitive market, a strong Australian dollar and volatile commodity prices. We are upgrading our earnings per share forecasts by 3 per cent for financial year 2013 and 8.2 per cent for financial year 2014. We would be owners of the stock into the second half of 2013, with the added benefit of the shareholder limit set to loosen from 5 per cent to 10 per cent in August 2013.

HOLD RECOMMENDATIONS

Sims Metal Management (SGM)

Chart: Share price over the year to versus ASX200 (XJO)

Reported its first half result, with operating earnings of $94 million towards the top end of the $88 million-to-$96 million guidance range. No formal earnings guidance was provided for full year 2013. However, outlook commentary indicated that ferrous markets found a floor in November last year and have recently increased significantly from the trough reached in the second half of calendar year 2012. Non-ferrous markets continue to trade at low levels.

Telstra (TLS)

Chart: Share price over the year to versus ASX200 (XJO)

Telstra’s first half result should reassure holders, particularly given a strong margin performance. The lingering question is how much more can go right from here? But it seems too early to expect much to go wrong.

SELL RECOMMENDATIONS

Seek (SEK)

Chart: Share price over the year to versus ASX200 (XJO)

We retain our view that the outlook for the 2013 calendar year for online employment volumes remains challenging.  The decline in employment print classifieds has accelerated and will shrink the remaining market – and the trading multiple.

Boral (BLD)

Chart: Share price over the year to versus ASX200 (XJO)

We’re concerned the share price is running well ahead of the domestic housing cycle. Boral recently acknowledged it was difficult to predict a recovery in the Australian housing market due to its current volatility. We also note that Boral’s US business is likely to remain loss making for longer as the company upwardly revised its “break-even” number of US housing starts by 10 per cent.

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Why the Federal Reserve is Digging an Ever-Deeper Hole

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