Treasure Chest: Brokers Update Portfolio Preferences

This story features WOOLWORTHS GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: WOW

By Eva Brocklehurst

Macquarie is increasing exposure to growth and risk. The strategy portfolio has been updated and out goes Woolworths ((WOW)), while Fortescue Metals ((FMG)) has replaced Rio Tinto ((RIO)). Perpetual ((PPT)) has been added to gain greater equity market growth exposure. REA Group ((REA)), Breville ((BRG)) and SAI Global ((SAI)) have been added to provide exposure to companies with sustained above-average growth prospects. Weightings have been increased in Flight Centre ((FLT)) and reduced in James Hardie ((JHX)). Macquarie holds the view that this cycle recovery will remain comparatively weak, and the best offerings for investors come from those with strong business models or sectors with demand that exceeds the economy's growth rate.

Citi has added Australia's Suncorp ((SUN)) to its Pan Asia focus list, while Commonwealth Bank ((CBA)) has been removed. Suncorp is rated a Buy with with its general insurance base offering greater scale and lower unit costs than most of the competitors in the Australian general insurance market. The list comprises regional analysts' 30 strongest Buy ideas for the next 12 months. Included in the list is ResMed ((RMD)), where the broker thinks the prospects for ongoing market growth are strong and risks to forecasts are on the upside. The catalyst for ResMed is any acceleration in US market growth which will drive earnings upside and a re-rating.

Rio Tinto is on the list. The large cap miner has lower operating risk than for smaller companies and there is upside risk if bulk prices rise further than anticipated, sxays Citi. The catalysts include approval of the 360mt iron ore expansion and progress on asset sales, which should enable an increase in shareholder returns from capital management. Santos ((STO)) is included too. The company is well placed to book substantial reserves as east coast gas prices increase. The broker thinks Santos can develop the GLNG train 3 in time, as well a benefit from the PNG LNG train 3. Santos trades at a material discount to the broker's risk-adjusted valuation and is considered the most attractive in the large cap coverage.

BA-Merrill Lynch has set up five "super" sectors from which to draw a favourite Buy stock. These super sectors are Consumer, Basic Materials, Interest Rate Sensitive, Resources/Energy and Transport/Utilities. The choice is based on top-down macro themes and bottom-up stock specifics as well as catalysts in the shorter term.

The current winning five includes CSL ((CSL)), which has spent three years amassing market share and expanding margin from increased scale and efficiency. The broker sees strong cash generation and balance sheet, enabling the company to pursue growth options and capital management. BlueScope Steel ((BSL)) has significant upside in the Australian business through impacts from the weakening Australian dollar, demand improvement and recovery in regional spread. The broker highlights potential for reinstating the dividend or further acquisitions.

National Australia Bank ((NAB)) is making progress on costs. Merrills believes NAB can organically generate around $1.40/share of surplus capital beyond its fully franked dividend in the next three years. Santos is the preferred pick in mining and energy. The pick is based on several factors including the PNG LNG start-up in 2014, rising domestic gas prices and under-utilised infrastructure. Origin Energy ((ORG)) is the best placed gas retailer in the national market, according to Merrills. It has enough gas locked in to supply all customers through to the early 2020s. Churn is expected to slow and margins increase from FY15.
 

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