Rudi's View | Jul 05 2007
This story was first published two days ago in the form of an email sent to registered FNArena readers.
By Rudi Filapek-Vandyck
Where is the value in today’s Australian share market?
On entering the new financial year I asked the question to the FNArena Sentiment Indicator and the answer is for a highly unsurprising “mining and related companies” plus a few underappreciated value propositions.
The Indicator uses individual stock recommendations by ten major equity researchers in the Australian share market to gauge which stocks on the Australian share market rank the highest, and the lowest, in terms of securities analysts’ expectations for the year ahead.
Given that the market has become more comfortable with the outlook for base materials, and with analysts adjusting their price forecasts higher as spot prices have remained at elevated levels for much longer than previously anticipated, it is no wonder that resources stocks have made a come back over the past weeks.
This process has still much further to go judging by the fact that both BHP Billiton (BHP) and Rio Tinto (RIO) remain amongst the highest rated stocks according to the Indicator. Both companies are rated eight times Buy and two times Neutral and their respective average price targets are indicating potential share price upside of 7% and 9% respectively.
While these figures don’t seem overly attractive it’s probably a fair assumption that most analysts expect they will have to raise forecasts again in the second half of 2007 and this is likely to push up their share price targets as well.
Key in the outlook for resources companies is that China continues its healthy appetite while problems in the US sub-prime home loan sector don’t morph into something more serious.
Most experts would stick to the view that copper, as a global demand indicator for industrial materials, will continue to show the way for the sector. Market consensus anticipated a serious price pull back for the red metal at the beginning of the year, but resources specialists at GSJB Were remained of the view that this was a wrong assumption. The past six months have vindicated this view and market expectations regarding the price of copper have increased significantly over the period.
Deutsche Bank was the latest to close the gap in price estimates with GSJBW this week. Citing a continuation of “exceptional Chinese demand” Deutsche Bank analysts lifted their average copper price forecasts to US$3.09/lb and US$3.00/lb for 2007 and 2008 respectively.
The main story from the past few months, however, concerns bulk materials such as coal and iron ore with securities analysts gradually increasing their price forecasts for next year (and often beyond).
The FNArena Sentiment Indicator’s Top Ten of most highly recommended stocks does not contain any bulk focused mining companies, but it does rank Aditya Birla (ABY) as the second highest rated stock in the Australian market.
Aditya Birla is potentially one of the largest copper producers in the country with two mines operating in the East Pilbara in Western Australia and in northwest Queensland but the stock has yet to attract the attention of most investors in Australia. The fact its production potential has remained out of reach due to some pesky technical problems, not uncommon among junior producers, hasn’t exactly helped its case.
The company’s share price surged from below $2.50 to around $3 at the beginning of June and has held on to this price level. According to the four analysts who cover the stock in our database there should be at least another 20%+ in share price appreciation forthcoming plus some 10% in dividends. This obviously requires the copper price stays high while production hick ups remain a thing of the past.
Other companies in the Top Ten with a clear link to the mining industry are equipment provider Emeco (EHL) and engineer Macmahon Holdings (MAH) while drilling services specialist Boart Longyear (BLY) and lifting and engineering company Boom Logistics (BOL) narrowly missed the cut ranking 13th and 14th respectively.
Two small cap resources companies made it into the Top Twenty: Perilya (PEM) and Kagara Zinc (KZL).
Upcoming stars in the rankings are Hastie Group (HST), specialised in airconditioning and refrigeration with high growth potential according to the analysts who cover the stock, and shipbuilder Austal (ASB).
Hastie Group recently made its entrance in the Top Ten as two major brokerages, Deutsche Bank and ABN Amro, initiated coverage on the stock in June. Both experts share the view the market is under-appreciating the company’s growth profile for the next few years.
Austal is riding the wave of general optimism that more contracts from the US Defense force are poised to come its way.
Other Top Ten members are Rupert Murdoch’s News Corp (NWS) and insurer QBE (QBE). News Corp shares are weighed down as the market remains highly skeptical towards management’s plan to acquire Dow Jones & Co, publisher of the Wall Street Journal and Barron’s. QBE is expected to continue releasing positive announcements, including overseas acquisitions.
The perceived discount for News Corp shares is currently in excess of 35% as the odds seem to have turned in favour of another milestone transaction for Rupert Murdoch.
The title of Most Highly Recommended Stock in the Australian share market currently goes to Macquarie Leisure (MLE), property developer and strategic investor in leisure and entertainment assets. Apart from an estimated dividend yield of circa 6.5% the shares are believed to be trading at a discount of nearly 13%.
Pointing a finger at rising bond yields may only explain half of the MLE story as the market has arguably grown less enamoured with the Macquarie Bank (MBL) model. Apart from Macquarie Bank itself several other listed Macquarie vehicles are also trading at a discount to their intrinsic valuation.
It is difficult to predict when the market will embrace the Macquarie model again, if ever.
For more details on the above mentioned stocks, and some 480 others, see FNArena’s monthly Australian Super Stock Report. The July edition has just been released and is available on our website for paying subscribers and those who sign up for a free trial.
FNArena monitors and reports on a daily basis on views and opinions by ABN Amro, Aspect Huntley, Citi, Credit Suisse, Deutsche Bank, JP Morgan, GSJB Were, Macquarie, Merrill Lynch and UBS.