Collected Wisdom

PORTFOLIO POINT: This is an edited summary of Australia's best-known investment newsletters and major daily newspapers. The recommendations offered represent the views published in other publications and may not represent those of Eureka Report.
Shares of Telstra Corporation (TLS) will come into focus later this month as it prepares to deliver its December-half results. Fallout from the federal government's $15 billion national broadband network (NBN) exclusion is weighing on the stock, as is speculation that chief executive Sol Trujillo will follow chief operating offer Greg Winn and head for the exit.

Telstra, embroiled in a long-running stoush with the federal government over the NBN, was kicked out of the tender race in December last year. The move has cast doubt over Telstra's future earnings and profit margins and with the current process unresolved Telstra could lose up to $2 billion in revenue

Despite the setback, Telstra has outperformed the benchmark ASX 200 by 23% during 2008 and is confident of achieving its $6–7 billion free cash flow target in fiscal 2009-10. Analysts expect a 7.5% lift in Telstra’s 2008-09 net profit to $3.97 billion, but its first-half figures may fall below the $1.93 billion posted in first half 2008.

Several stock pickers have cut Telstra’s target price from $5.25 to $4.55 but have maintained their “buy” holding on the telco, forecasting better net profit results in the June half.

Stock pickers expect 2008-09 sales revenue of about $25.5 billion and the dividend of 28¢ a share appears safe, with expectations of an increase in 2009-10. Investors are advised to buy Telstra at current levels.

Explosives, paint and chemicals manufacturer Orica (ORI) is off to a solid start, with the Melbourne-based company set to post its eight straight year of profit growth. However, there are some concerns that a weaker demand for explosives from miners could have an adverse impact on the company’s earnings. Orica shares are trading at $12.29 and the target price has been revised downwards by some publications.

One stock picker has dropped its target price from $18.26 to $17.78, while maintaining a “buy” recommendation. Another publication has reduced its target from $26.50 to $20, after the company announced plans to cut capital spending by more than $100 million this year and signalled delays in selected projects. However, the publication says at current levels the stock is on a 20–30% discount to its historical price/earnings multiple and retained its “outperform” rating.

While the weaker resource sector outlook weighs on Orica’s forecast, the government’s plan to boost infrastructure funding, as part of its proposed $42 billion stimulus plan, may provide some breathing space for Orica. Investors are advised to buy Orica at current levels.

All eyes will be on Rio Tinto (RIO) on Thursday (February 12) as it releases its full-year 2008 results this week (its financial year ends December 31), with the market eagerly awaiting an update on the mining giant’s financial restructuring plan.

One stock picker has maintained its “hold” rating on Rio, despite lowering its earnings estimate to $US9.3 billion. It has also lowered the target price from $33.60 to $30.15 ($17.25 below Rio’s current price of $47.40) and forecasts the group will “pass” on its dividend – that is, a full-year 2008 dividend of 0¢ and earnings per share of 0¢.

However, some newsletters have advised investors to “buy” Rio shares, saying a capital raising could be on the cards as the miner tries to reduce its debt base. Rio still needs to cover $US5.5 billion of debt despite its recent asset sales, and any deal struck with significant shareholder Chinalco would not do much to help its balance sheet, says one publication.

Another stock picker says the global miner’s stock has been heavily sold, at an excessively sharp discount, since heavyweight suitor BHP Billiton walked away from a proposed takeover, and that resource stocks should improve as commodity stockpiles fall and prices normalise.

Although there is some concern that the miner may be forced to sell good assets, hurting its ability to grow once the recession lifts, reducing its substantial debt burden will be at the top of the miner’s agenda and the stock may not be the best buy for conservative investors.

Industrial conglomerate CSR (CSR), which has borne the brunt of a downbeat housing market, is another company that will be closely monitoring the passage of the federal government’s latest stimulus package.

However, there is doubt whether the government decision to pay for the insulation of 2.2 million Australian homes by 2010 will be the remedy for the $1.8 billion Sydney based aluminium, building materials and sugar company.

About 40% of the company’s earnings are linked to the residential housing sector, and while some analysts say there is a good chance CSR will enjoy sufficient revenue gains during the stimulus period, (see The pink batts recovery), there are fears it may actually be worse off afterwards.

The real concern is that increased activity in the insulation market could lead to overcapacity and that earnings growth may not be enough to offset the downbeat housing environment. Adding to this negative scenario is the continued weakness in the markets for CSR’s other major products, aluminium and sugar.

One stock picker puts CSR’s earnings per share estimates at 14.2¢ for 2008-09 and 17.8¢ in 2009–10, while another stock picker is tipping 13¢ and 11.9¢ respectively. The average price target on the stock is $1.92 and it has been trading between $1.27 and $3.44 over the past 12 months.

With CSR shares ending the week down 1.39%, to $1.41, investors are advised CSR may be a speculative buy at current prices.

Suncorp Metway (SUN) shareholders are bracing themselves for a rough ride, after the bank/insurance company's disappointing profit guidance and the departure of chief executive John Mulcahy. Today (February 9) the stock fell by 25% to about $5.30 in the wake of a deeply discounted institutional equity raising and fears the insurer may be caught for big bills from Victoria's bushfires.

The Brisbane-based company’s $900 million capital raising initiative at $4.50 apiece, a whopping 35% discount to the stock’s last trading price on February 2009, is also expected to extend the downward pressure on Suncorp shares. The company said last week that its first-half profit could fall by as much as 45% on last year, and slashed its full-year dividend guidance to 40¢.

With so much dirty laundry, it’s no surprise that several publications have lowered their price target on Suncorp shares. One stock picker has set a price target of $6 down from $9, while another has cut the target to $7 from $11

Bad debts remain the biggest risk factor for Suncorp and there is growing speculation that it may have no option but to split its banking and insurance operations. However, there is some light at the end of the tunnel. Suncorp is at least working to dig itself out of a hole and a successful capital raising should take its banking Tier-1 capital to 10.9%, which should be enough for the bank to ride out the recession, according to one publication. Investors are advised to sell Suncorp-Metway shares at current levels.

Qantas (QAN) shares have taken a tumble after a 66% decline in the airline’s first-half net profit and a $500 million capital raising, gave little joy to shareholders.

The profit figures came well below the expectations of most stock pickers and the placement of 270.3 million new ordinary shares at $1.85, a 17% discount to its closing price of $2.29 on February 2, was not well received by the market.

One publication has cut Qantas’s target price from $2.78 to $2.30 and trimmed its earnings numbers despite the airline maintaining its full year guidance. Another says there is considerable doubt whether the airline will meet its current guidance this year. However, it added that Qantas shares, currently trading under $2, represent a price to book ratio smaller than 0.8 times and were an "a good entry level" stock for those willing to chance their arm

Despite the profit slump, there are a few positives out there for the airline. Qantas has resolved its operational issues, raised capital to strengthen its solid balance sheet and so far the ratings agencies are maintaining their position.

At current levels Qantas shares offer a high risk opportunity to the investor; less adventurous investors are advised to hold.

Now to heavy moving equipment seller Emeco Holdings (EHL), whose shares may be set for a rebound and is being tipped by one stock picker as a potentially undervalued stock. The publication says demand for EHL stocks has edged up in the past few weeks, with Barclays Global Investors picking up a substantial chunk of shares at current price.

Directors of the Sydney-based Emeco have also been quite active since last October, buying large number of shares at a price four times higher than current price. Barclays Global Investors bought 175,415 Emeco shares on January 20, increasing its holding from 31,409,142 shares (4.98%) to 31,584,557 shares (5.01%).

Trading at about 18¢, well below its stated net tangible asset value, the $114 million company has so far provided excellent dividends to shareholders. Investors are advised to buy Emeco shares under current prices.

Integrated fertiliser company Incitec Pivot (IPL) provides an intriguing prospect for investors comfortable with cyclical stocks looking for an opportunity to build a position. The Melbourne-based company, which bought explosives group Dyno Nobel last year, has been hurt by falling fertiliser prices and has cut its 2008-09 guidance by about 32%.

The profit hit coming on the back of $819 million capital issue in November, pushed shares down by more than 30% last week and the company’s 2008-09 and 2009-10 earnings per share forecasts have fallen a further 23%.

One stock picker has dropped its valuation by 45% to $2.40, but says Incitec does have some positive momentum, with the company taking measures to strengthen its debt position.

Incitec's 2008-09 gearing using net debt/equity is set to fall to about 38% compared to 2007-08’s uncomfortable 65%, the stock picker said.

In September, IPL refinanced most of its 2007-08 $2.2 billion short-term debt, extending maturity until September 2011. The November 2008 capital raising has also allowed the company to repay about $900 million.

For the time being, Incitec will be considered as another resources counter, subject to the bumpy agri and resources cycles, the stock picker said.

At current prices around $1.80, Incitec is on under seven times the 2009-10 price/earnings multiple, helped by a 10% fully franked dividend yield, which is clearly subject to global growth not weakening further.

Investors comfortable with cyclical stocks are advised to accumulate Incitec below $1.90 a share; conservative investors are advised to hold.

Watching the directors

Week to February 5

• Tabcorp Holdings Ltd (TAH) director Brett Paton bought 10,000 shares for $65,100 on-market on February 4. He indirectly holds 10,000 shares.
• Botswana Metals Ltd (BML) director Patrick Volpe indirectly bought 1,346,000 shares worth $33,366 on-market on February 3. He directly holds 3,000,000 options and indirectly holds 11,702,159 shares.
• Timothy Goyder, a director of Chalice Gold Mines (CHN), bought 1,384,000 Chalice Gold shares on February 3, increasing his stake from 15,856,458 shares (21.78%) to 17,240,458.
• CMI Limited (CMI) managing director Raymond David Catelan buys 46,600 ordinary shares and 51,599 Class A shares in on market trade.
• Liontown Resources Ltd (LTR) director Doug Jones bought 500,000 shares for $6500 on-market on February 4. He holds 560,000 shares and 5,000,000 options. Directors AW Kiernan bought 1,000,000 shares for $13,000 on-market on February 4, while director Tim RB Goyder bought 3,105,000 shares for $40,365 on-market. He holds 21,434,002 shares and 750,000 options.
• Reward Minerals (RWD) director Michael Ruane bought 758,130 shares on February 3 by purchasing on-market and exercising options.
• Esplanade Property Fund (EPF) director Graeme Yukich was directly and indirectly issued 865,650 DRP units worth $69,252 on January 30. He directly and indirectly holds 52,576,310 shares.
• Saferoads Holdings Ltd director Darren John Hotchkin bought 239,329 shares for $83,065.15 on-market on February 2, 2009.
• Swick Mining Services Ltd (SWK) director Kent Jason Swick indirectly bought 800,000 shares worth $200,873 on-market between January 27 and 29. He directly holds 13,182,410 shares and 600,000 performance rights and indirectly holds 14,582,410 shares.

nRecent directors' trades worth more than $200,000
Date	Company	Ticker	Director	Volume	Price	Value	Action
29/01/09	Swick Mining Services	SWK	Kent Swick	800,000	0.25	$200,873	BUY
27/01/09	Gujarat NRE Minerals	GNM	Arun & Mona Jagatramka	2,200,000	0.28	$616,000	BUY
13/01/09	Oaks Hotels & Resorts	OAK	Toni Cunning	1,190,500	0.42	$500,010	BUY
05/01/09	Prime Media	PRT	Paul Ramsay	1,500,000	1.3	$1,950,000	BUY
23/12/08	Washington H Soul Pattinson	SOL	Michael Millner	34,017	8.64	$293,979	BUY
23/12/08	CSG Limited	CSV	Denis Mackenzie	500,000	0.45	$225,000	BUY
22/12/08	Gindalbie Metals	GBG	George Jones	600,000	0.586	$351,375	BUY
22/12/08	United Minerals Corp	UMC	Matthew Hogan	950,000	0.35	$332,500	BUY
15/12/08	National Hire Group	NHR	Dale Elphinstone	233,878	1.9	$444,933	BUY
15/12/08	Jumbuck Entertainment	JMB	Tom Kiing	1,228,023	0.39	$478,929	BUY
11/12/08	National Hire Group	NHR	Dale Elphinstone	941,711	1.88	$1,770,276	BUY
11/12/08	Mintails Limited	MLI	Bryan Frost	13,000,000	0.026	$340,000	BUY
09/12/08	Collection House	CLH	Dennis Punches	3,707,283	0.35	$1,297,549	BUY
08/12/08	Origin Energy	ORG	Gordon Cairns	23,000	16.22	$373,060	BUY
08/12/08	Ramsay Health Care	RHC	Kerry Roxburgh	21,439	9.679	$207,514	BUY

Source: The Inside Trader