Emerging Company Upside And Index Promotion And Relegation

This story features BOART LONGYEAR GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BLY

By Chris Shaw

The outlook for the global economy is currently being impacted by the European debt crisis and concerns over China's growth outlook, but in comparing expectations for the US and Australian economies Deutsche Bank prefers the prospects of the former.

While Australia is forecast to grow by a cumulative 5.2% from December 2009 to June 2011 Deutsche expects the US will record growth of 5.3%. The difference in favour of the US should be a little more pronounced in 2010, reflecting the benefit of a stronger recovery giving growth is coming from a lower base.

Deutsche has extended this view to a suggestion Australian companies with exposure to the US should perform relatively well over the next year. The broker has therefore applied this to its emerging company coverage universe to come up with a favoured investment list. This list includes Bradken ((BKN)), Boart Longyear ((BLY)), Campbell Brothers ((CPB)), Flight Centre ((FLT)), SAI Global ((SAI)) and Navitas ((NVT)).

For Bradken, Deutsche suggests its earnings estimates in both 2011 and 2012 may prove conservative given the company's leverage to a cyclical recovery in the US via its engineered products operations in particular.

As well Deutsche sees the company as continuing to look at acquisitions, with its 16% stake in Austin Engineering ((ANG)) an example as this is not viewed as a passive stake. The broker's valuation based price target on Bradken is $8.00 and is rates the stock as a Buy.

Boart Longyear is similarly rated as a Buy on valuation grounds, Deutsche expecting revenues will grow from FY10 on as global exploration budgets begin to expand. Also the debt issues that have hindered the company have now been addressed, so Deutsche see upside from current levels.

Deutsche expects FY10 will be difficult for Campbell Brothers when compared to FY09, but again conditions are expected to turn around from FY11. As well, margins should improve as cost management initiatives have been put in place, supporting growth forecasts. Given a significant discount to its valuation based price target of $32.20 Deutsche has a Buy on Campbell Brothers.

Flight Centre is similarly at a significant discount to Deutsche's valuation, one it suggests is not justified given an expectation travel numbers will lift as the global economic environment improves. A lift in travel numbers should also boost segment margins, which further supports the broker's Buy rating.

One attraction of SAI Global for Deutsche is the company's ability to generate organic growth through cost control and the development of new products. As the cycle turns earnings growth should be solid, especially as further acquisitions are also expected.

On Deutsche's numbers SAI is trading on a below peer earnings multiple despite a stronger growth profile, so on value grounds a Buy rating is justified. Deutsche has a target on the stock of $4.65.

Navitas is expected to generate net profit growth of around 20% through FY12 according to Deutsche as international student numbers are expected to remain solid. This appears priced into the stock in the broker's view, so Deutsche has a Hold rating and $4.60 price target on the stock.

JP Morgan has also updated its preferred stock list for emerging companies, its list containing a number of alternatives to those offered by Deutsche Bank. Only Campbell Brothers makes both broker's lists, JP Morgan's other preferred emerging company exposures being Blackmores ((BKL)), Credit Corp Group ((CCP)), Miclyn ((MIO)), Norfolk Group ((NFK)), Retail Food Group ((RFG)), Salmat ((SLM)) and Tox Free Solutions ((TOX)).

JP Morgan rates all these stocks as Overweight.

The broker has also looked at potential index changes given the S&P/ASX is expected to announce the results of its June Index Review on Friday June 4th. Any changes will take effect from Monday June 21st.

The biggest index likely to be affected is the ASX100, with JP Morgan expecting Ten Network ((TEN)) will replace Connect East Group ((CEU)). In the S&P/ASX200 Australian Agriculture ((AAC)) is expected to be replaced by White Energy ((WEC)), while there is a chance Sundance Resources ((SDL)) could be replaced by Sandfire Resources ((SFR)).

In the MSCI All Australian 50 Index JP Morgan expects Macquarie Airports ((MAP)) will be replaced by Mirvac Group ((MGR)), while in the All Australian 200 it anticipates While Energy and Sandfire replacing Nexus Energy ((NXS)) and Dominion Mining ((DOM)).

There is potential for Consolidated Media Holdings ((CMJ)) to be replaced in the All Australian 200 index as well, with Macquarie Atlas Roads ((MQA)) the most likely replacement in JP Morgan's view.

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