What a week. With global stockmarkets gyrating (Dow down 7% for the week), the stockmarket languishing at 13-month lows and the crises in the US and Europe clouding the outlook, brokers have been sifting through Australian companies in search of those who are set to gain in these tumultuous times. With the market seemingly in freefall many investors are looking for a safe place to hide. Brokers are too, if their stock picks are anything to go by, with plenty of blue chips and fewer miners.
We've tracked down no less than 29 buys from brokers Australia-wide over the past week (see table below). Amongst them are fewer resources companies than were seen earlier in the year, although perennial favourites Atlas Iron, White Energy and Coal & Allied (this week's Bull of the Week) figure in the list. It may surprise that several retail stocks are there, including the no.1 shorted stock on the ASX JB Hi-Fi, as well as Westfield and Kathmandu. Brokers believe that these stocks have been oversold and this presents a good opportunity to get in. As a case in point, NZ-based Kathmandu has bucked the weak retail trend in reporting EBIT of between $NZ63 million ($A50.6 million) and $NZ65 million in the year to June 31 - up to 36 per cent higher than the $NZ47.9 million reported in 2009/10.
For those who prefer to stick to blue chip stocks in these volatile times, brokers have buys on Woolworths, Wesfarmers, CSL, Cochlear and Telstra. And if it's speculative small caps you're after, one you may wish to have another look at is Service Stream (SSM), which we ran as Bull of the Week at the end of May. While it has pushed lower as the sharemarket has tumbled, it is rumoured that SSM has been shortlisted for a massive construction contract for NBN Module 2, and broker Citi says that the company is set to win in a big way if this comes through. Either way Citi thinks that the stock is extremely underpriced with a PE of 6.6.
Today we take a closer look at White Energy (WEC), a clean coal technology company that is on several brokers' buy lists and has been in the news over recent months - although it hasn't been all good news, with the share price hammered over the past week as global markets plunged.
White Energy (WEC) - a high-risk Buy from Citi, $4.10 target price
| Closing price|| $1.85|
| Weekly change|| $-0.29|
| % change|| -13.6%|
Citi - BUY, High Risk, price target $4.10
Southern Cross Equities - BUY
Madison Williams - BUY
Chart: Share price over the year to 05/08/2011 versus ASX200 (XJO)
Stock code: WEC
Charts: White Energy Limited
More news: White Energy Limited
Investor Centre: White Energy Limited
With this week's sharemarket crash, "high risk" is hardly what most investors are looking for. Nonetheless, White Energy Company (WEC) is worth investigating considering the massive premium brokers are attributing to the clean coal company.
After hitting an all-time high of $4.16 nine months ago on 11th October 2010 WEC promptly went into freefall, and by the end of this week it was sitting at less than half that amount - a paltry $1.85. It was the failed A$486m Cascade coal transaction that had been the catalyst for the share price decline, with many investors jumping ship. Although it had been steadily climbing in recent weeks Friday's 13.6% capitulation - making it the third hardest hit stock on the ASX200 - sent it back towards 12-month lows.
Despite the dismal share price performance it should make investors more confident that one of WEC's directors John Kinghorn has recently doubled his stake in the company, spending $19.2 million to become a substantial shareholder with 6.3 per cent of WEC.
And although the share price has been hammered over the past year and there is a cloud over the future for this clean coal company, the 26.9% jump in just three days a few weeks ago suggests that things are improving, or that there is the possibilty that the company could be subject to a takeover bid.
Knight Capital is of the same opinion. In its report on Emerging Australian Coal Producers it suggests that coal sector consolidation will continue. "We are bullish on the overall coal sector consolidation theme," it says. "Over the last 3 years, most of the listed independent larger and medium sized coal companies have been taken out or are already in play." It lists White Energy as one its preferred plays in the coal space, even in the absence of M&A activity. You can read the full report here.
So what is all the fuss about? Well, WEC is the exclusive worldwide licensee of the Binderless Coal Briquetting (BCB), a clean coal technology developed by the CSIRO. According to WEC, BCB is "a low cost mechanical process that upgrades high moisture, low value sub-bituminous and lignite coals through a process of dehydration and compaction. The resultant product is a dense, physically and chemically stable briquette with higher energy content and value which can be handled like normal coal."
Those brokers that are bullish on the stock have price targets ranging from $3.50-$4.25, a significant premium to the current share price. However each of them place a caveat that the operational issues in Indonesia need to be resolved.
Asit Sen from Madison Williams has a buy on WEC with a price target of A$4.25. "We see underlying value in White Energy’s franchise, particularly given the track record of the ex-Felix senior management team," Sen writes. "However, the next six months are key, particularly with respect to progress in resolving operational issues at the Tabang facility in Indonesia." Sen has a fair-value range of A$3.00-A$5.50 but notes that the valuation is sensitive to production ramp up, the discount rate, and margins.
Fleur Grose, Southern Cross Equities also has a buy on WEC, albeit with a lower price target of $3.50. "We believe the technology works and success at the first plant will result in the approval of others," says Grose. "An upgrade of the coal drying system, the dust extraction system, and the briquette handling and stockpiling systems is due to be completed by September which will allow ramp-up thereafter." You can read the full report here.
Meanwhile David Haddad from Citi, lists WEC as a high-risk buy, with a price target of $4.10 - down from his previous price target of $5.55. Haddad notes that the failed A$486m Cascade coal transaction has flattened the share price because many saw this "as proof that the binderless briquetting technology did not work and traditional coal assets were needed to fill the gap." Despite downgrades to his assumptions, Haddad still rates WEC as a Buy, although he notes that it is "High Risk". "Our NPV of A$8.22 incorporates a slower rampup and higher costs and uses a WACC of 10%," he says. "Our target of A$4.10 is based on a 50% risk-weighting of NPV, which we believe is appropriate given past challenges with the full-scale plant." Despite the challenges, Haddad believes that WEC will offer good returns once it beds down the Tabang plant. You can read the full report here.
Based on Thomson Reuters data, three analysts have a buy on the stock, one has a hold, none have a sell.
Citi's "high-risk" label on the stock shouldn't be taken lightly. With stockmarkets diving and a move away from risky assets, there's every possibility that some stocks will be all but wiped out by the crash.
That's not to say that WEC will be hit hard, but as a high risk play there's every possibility that the share price will slide along with other hopeful miners. Caveat emptor.
>>Back to the newsletter to view other articles - August 6th 2011
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