Australia | Nov 28 2006
By Rudi Filapek-Vandyck
Like an accident waiting to happen, small cap specialists at Smith Barney Citigroup believe it is only a matter of time before Coates Hire (COA) will start disappointing on earnings. The question is when, not if, they argued in a recent update on Australian small cap stocks.
The reason behind their pessimism is the building market in the eastern states of Australia. Citigroup talks of “an air pocket” resulting in emerging price discounting to stave off fierce competition and safeguard sales. Citigroup recommends switching into Emeco (EHL) instead because of a less mature growth phase compared with Coates.
The broker has made no changes to its short list of preferred small cap plays in the Australian share market. Key Buys remain Commander Commnications (CDR), Energy Developments (ENE), the aforementioned Emeco, Repco (RCL), Transfield (TSE) and Wattyl (WYL).
Interestingly, Coates Hire still has a position on Macquarie’s updated list of top stock recommendations this week, better known on the street as the Pick of the Crop. Both lists have no further overlap.
We did note, however, that Credit Suisse analysts on Monday pointed out the future for embattled Wattyl is likely to remain bleak. Credit Suisse made some deductions from the recent Orica (ORI) market update and deduced, among other things, that if Orica’s paint operations are winning market share, Wattyl must be losing some.
Other negatives Credit Suisse derived from the Orica update were the fact that raw material price increases apparently are not abating while the outlook for end-user demand is expected to remain weak.
Citigroup thought it was time to highlight the momentum building in renewable energy and emissions trading in Australia (talk offshore has been going on for longer). This should support future prospects for Energy Developments, the report points out.