Weekly Broker Wrap: Small Caps, Mining Services And Infrastructure

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            [0] => ((SAI))
            [1] => ((CDD))
            [2] => ((AMM))
            [3] => ((GEM))
            [4] => ((MGX))
            [5] => ((WSA))
            [6] => ((TLS))
            [7] => ((MIN))
            [8] => ((MRM))
            [9] => ((TOX))
            [10] => ((DOW))
            [11] => ((SVW))
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            [0] => SAI
            [1] => CDD
            [2] => AMM
            [3] => GEM
            [4] => MGX
            [5] => WSA
            [6] => TLS
            [7] => MIN
            [8] => MRM
            [9] => TOX
            [10] => DOW
            [11] => SVW
        )

)

This story features G8 EDUCATION LIMITED, and other companies.
For more info SHARE ANALYSIS: GEM
The company is included in ASX300 and ALL-ORDS

-Opportunities in small caps
-Bounce for mining services?
-Some upside for infrastructure?
-Bullish and bearish views abound
-CIMB sees iron ore support, coal subdued
 

By Eva Brocklehurst

Citi is looking for some opportunities in small cap stocks and has found them. The broker asserts the market needs some positive earnings revisions to drive further gains in share prices. This is starting to happen and 2014 earnings are expected to justify the current valuations. Citi does not think valuations are as stretched as they appear on face value. Small caps may appear expensive relative to ASX100 names but in terms of the small industrials versus large industrials they look fair value to the broker.

The best sector is commercial services and for Citi this brings SAI Global ((SAI)) and Cardno ((CDD)) to the fore. These stocks offer solid earnings leverage to improving visibility on 2014. The broker also likes Amcom ((AMM)) and G8 Education ((GEM)). Citi also sees opportunities in small resources, where there's been some positive earnings revisions for the first time in two years. The broker's top picks here are Mount Gibson ((MGX)) and Western Areas ((WSA)).

Morgan Stanley observes that rising bond yields and the US tapering debate have focused investors on the impending underperformance of bond proxies. The broker believes the global hunt for equity yield is starting to change. This was driven by low cash rates and bond yields and a shortening of the investment horizon, as well as the ageing of asset owners. Morgan Stanley sees a lifting in risk appetite and this should drive a re-balancing towards growth stocks. Bond yields have moved higher and this will weigh on yield proxies. The most negatively exposed to this trend are utilities, infrastructure and real estate. Retail-driven, blue chip defensives such as major banks and Telstra ((TLS)) should stay relatively supported.

Bedeviled by the resources slowdown, mining services could find a seasonal bounce into the new year, according to Morgan Stanley. Looking at how well the sector follows seasonality the broker, while remaining cautious, sees potential for a trading rally into 2014. In 2013 the sector followed the seasonal trends, albeit the magnitude of rises and falls was more severe. Mining services fell 19.3% through November, the biggest monthly fall since the GFC. Morgan Stanley acknowledges the fundamentals remain weak, with capex budgets being reduced and the supply/demand shifting in favour of clients, and expects a sustained period at base levels. Preferred stocks are Mineral Resources ((MIN)), Mermaid Marine ((MRM)) and Tox Free ((TOX)) – the only one to rise in November out of the mining services stocks under the broker's coverage.

Mindful of the view that Australian resources investment faces a multi-year headwind, BA-Merrill Lynch has looked at whether infrastructure can fill the gap. The broker has previously suggested civil infrastructure growth would decline after reaching a peak of around 4.5% of GDP this year. A near-term decline in spending is still expected – of 7% in 2014 and 6% in 2015 – but the broker thinks the change in federal government, amid a recognition of soft economic growth and the need to support infrastructure, might provide upside risk to that forecast. The proposed timeline for priority infrastructure projects means it's unlikely there is sufficient mobilisation to have a positive impact until FY15 at the earliest. Hence the broker is cautious about the FY14 outlook. In this area Downer EDI ((DOW)) and Seven Group ((SVW)) are the preferred picks, given strong balance sheets and more favourable exposure to the operations, maintenance and production end of the value chain.

Merrills' emerging market and Asia fund managers survey has revealed some extreme viewpoints. This survey shows investors are bullish on the US dollar and bullish on global growth but bearish on emerging markets. Two factors explain the pessimism on emerging markets. There is a strong aversion towards commodities, energy and materials and big hopes for the US dollar's appreciation. In terms of geographies, positioning on China has rebounded, Russia is well regarded and sentiment on Brazil has deteriorated. Sector-wise, positions on defensives were cut dramatically in favour of cyclicals. The tapering expectations continue to mean managers are shunning ASEAN while preferences are strong for north Asia – Korea, Taiwan and China. Merrills notes Australia is an unloved market in the fund managers' view.

CIMB expects that supply will increase in much of the metals suite, coupled with an increasingly healthy demand outlook next year. Iron ore prices are expected to be driven by perceptions that a flood of new capacity is about to hit rather than because of relatively resilient Asian steel production. CIMB thinks this concern is overdone. The analysts expect average 2014 iron ore price forecasts of US$124/t. All coal types are expected to show sluggish demand, with prices downgraded. Metallurgical coal in Asia continues to be well supplied for 2014 and the premium hard coking coal forecast has been reduced to US$151/t.

The outlook for copper is neutral and the price forecasts have been downgraded. Conversely, the analysts expect aluminium prices to recover, as uncertainty over LME warehousing issues are resolved. Gold sentiment is about as negative as the analysts have experienced. Economic growth forecasts and capital flows towards the US are winning favour. Hence, gold companies are finding temporary savings and relying on high grades to improve cash flow in the short term. CIMB forecasts gold around US$1,275/oz in 2014 and US$1,100/oz longer term.

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