the australian top picks for 2004

The road to riches
By Geoffrey Newman
January 02, 2004

Last year's dogs could be this year's winners and the lust for gold will continue,
according to The Australian's panel of stock pickers.

The equities experts who have offered their tips for 2004 have continued with
many of the strategies that brought them success last year.

With the environment for stocks looking solid but still full of risks this year, the
panel has chosen companies whose earnings or prospective earnings suggest
the market is still undervaluing them.

"We believe 2004 will be another testing year for investors," Investors Mutual
director Anton Tagliaferro said. "Continued uncertainty in the direction and
magnitude of movement in both the interest rate and currency markets - will
undermine investor confidence and make markets volatile during 2004."

Jason McIntosh, executive director of Fat Prophets, the winner of the 2003
competition with a huge 70 per cent return, is distinctly bearish about stock
markets next year but still sees superior returns possible. "If international
markets come under renewed selling pressure in 2004, we remain confident
that respectable returns can be achieved," Mr McIntosh said.

"But this will depend on selective picking among certain stocks and sectors."

Gold stocks abound in the Fat Prophets portfolio and also pop up in others.
The 20 per cent rise in the price of the metal failed to translate into much of a
share price rise in 2003 but with further gains in bullion expected, the view
seems to be it is only a matter of time.

Other mining stocks like BHP also appear, with some on the panel betting on a
continued rally in commodity prices, driven by demand from a booming China
and a recovering US economy.

Defensive yield-focused stocks still provide some balance to the portfolios but
after years of outperformance by the major banks, only National Australia Bank
gets the nod this year.

But given the bullish predictions by some economists about the world economy
next year, resource stocks are relatively scarce, with some warning they are
already overvalued after the price gains in 2003 and some concerned about the
effect of the rising dollar.

Many of the stocks chosen to outperform this year were some of the worst last
year or received the worst press, reflecting the contrarian leanings on the panel.
With stocks like HHG, AMP, Spotless, Mayne, Tower and Namoi Cotton, the
panel notes, the market has perhaps become too bearish and failed to look at
the underlying value.

Earnings growth is a major theme in 2004, with several analysts suggesting
that the easy gains in the market were made last year and further share price
rises will rely on firms showing they can grow their business.

Jason McIntosh, Fat Prophets
Emperor (EMP)
Lihir (LHG)
Placer Dome (PDG)
Oil Search (OSH)
Minerals Corp (MSC)
Collection House (CLH)
Mayne Group (MAY)
Tower (TWR)
Village Roadshow (VRL)
Namoi Cotton (NAM)

With forecasts of continued strength in the gold price, McIntosh has picked
three gold stocks among his top ten performers for the coming year.

Emperor, with its key gold mine in Fiji, lagged behind the rest of the sector in
2003 but McIntosh reckons its underperformance will not continue with the
potential for higher gold prices and lower operating costs to dramatically
improve its finances.

Lihir, with its big resource in Papua New Guinea, its high cost structure and
relatively low hedging has significant leverage to the gold price. Placer Dome is
in a similar hedging position and remains the most profitable big cap miner per
ounce of gold mined.

Oil Search continued to deliver good results from its petroleum producing
assets but McIntosh believes the resurrection of the PNG pipeline project – to
pipe gas from the PNG Highlands to Australian markets – could be the catalyst
for a re-rating of the group.

McIntosh likes Minerals Corp, which is on the verge becoming a global
producer of kaolin from its Queensland operations, and sees a recovery for debt
collection agency Collection House with the current price failing to reflect its
earning potential.

McIntosh reckons Mayne, which cleaned up its books in the past year by
writing down the value of key assets, represents a "classic case of buying a
fallen blue chip at opportunistic prices". He is also betting on a share price
rerating of fallen financial services group Tower and reckons investors should
get in on Village Roadshow, given its growth prospects in the film production
industry. Namoi Cotton growers were crippled by the drought, which halved the
crop size in 2003, but should perform well as the industry recovers.

Geoff Wilson, Wilson Asset Management
Loftus Capital (LCP)
Reckon (RKN)
Harvey World Travel (HWT)
Mariner Financial (MFI)
McGuigan Simeon (MGW)
Leighton Holdings (LEI)
Telecom NZ (TEL)
OAMPS (OMP)
HomeLeisure (HLD)
Mark Sensing (MPI)

Wilson is sticking with three of his picks for 2003 – Loftus Capital, McGuigan
Simeon Wines and Reckon. Loftus, a listed investment company, is trading at
a 12 per cent discount to its net tangible asset backing, with well-managed
software maker Reckon boasting strong cash flow and starting to expand by
acquisition. Wilson believes McGuigan

Simeon, "exceptionally well managed by Brian McGuigan", is one of the world's
lowest cost winemakers and will benefit through 2004 from a record vintage and
the acquisition of Miranda. New management at Harvey World Travel should
deliver strong profit growth, while Bill Ireland's new Mariner Financial business
is expected to grow “significantly” in 2004.

Developer and contractor Leighton has a record $4 billion order book and a near
monopoly position in Australia. Telecom New Zealand, Wilson says, is "the
most attractively positioned telco in the world", with strong cash flow and a
debt reduction plan that will see a big increase in dividends. Mark Sensing, a
provider of thermal paper and film products, was recently recapitalised, has a
new management team and should return to profits in 2004. OAMPS, the
insurance broker, has been a big beneficiary of improving insurance premiums
and could grow profits by 25 per cent in 2004.

HomeLeisure, a wholesale and retail supplier of home products, is benefiting
from the strong dollar because it imports from China.

Paul Xiradis , Ausbil Dexia
Aristocrat (ALL)
Alumina (AWC)
Australian Worldwide Exploration (AWE)
BHP Billiton (BHP)
CSL (CSL)
HHG (HHG)
Minara Resources (MRE)
The News Corporation Ltd (NCP)
Macquarie Airports (MAP)
Toll Holdings (TOL)

Xiradis is showing faith in Aristocrat Leisure after another horror year that saw
profit warnings and a management purge. The success of management will be
crucial, but he says Aristocrat's solid global market position and proven track
record in gaming technology should help it beat average earnings.

Alumina, the holding company spun out of WMC, should benefit from tight
alumina supply through 2004. But hopes of a takeover by Alcoa have been
dampened by the rising dollar. AWE has a balanced oil and gas production
portfolio and is ramping up exploration offshore New Zealand and in Australia's
Otway Basin.

With the oil remaining strong and the potential for higher base metal prices,
BHP Billiton’s profits could be upgraded. Xiradis also rates blood products
group CSL, whose acquisition of the Aventis Behring plasma business makes it
more efficient and delivers a broader product offering and stronger marketing
reach.

HHG, the AMP's British spin-off, continues to trade below its embedded value.
With little downside risk, improving equity markets could offer upside. Minara is
a play on the soaring nickel price as the company, with its strong financial
position, bulks up production at its Murrin Murrin operations. News Corp,
publisher of The Australian, should experience a strong rerating given its strong
internal profits growth and recent "astute acquisitions".

The company, says Xiradis, has never been in better health. Macquarie
Airport’s portfolio of airports offers profit upside, with Sydney likely to benefit
from the lauch of Qantas's discount airline Jetstar.

Toll has a "defensive earnings stream" and strong management that has an
"outstanding track record of value creation".

Glenn Mumford, ABN AMRO Morgans
BHP Billiton (BHP)
Westfield Holdings (WSF)
Macquarie Infrastructure (MIG)
Rinker (RIN)
Flight Centre (FLT)
Lihir Gold (LHG)
Kip McGrath (KME)
Alchemia (ACL)
Perseverance (PSV)
Village Life (VLL)

Mumford has a couple of picks from the mining sector. He believes "structural
and cyclical support" for the sector will underpin BHP Billiton, with Lihir Gold, a
laggard among its peers in 2003, set to benefit from soaring gold bullion prices
through 2004. Gold prices will also help Perseverance as it moves towards
development of its Fosterville mine in Victoria.

Mumford also rates Westfield Holdings, a consistent outperformer which should
return to a "growth trajectory" after a muted 2003. The ramp-up of Macquarie
Infrastructure’s new UK toll road should drive a re-rating of the stock. Mumford
says Rinker, the building materials group spun out of CSR, is undervalued
compared to its US peers and has "superior" growth prospects in its key
markets.

Flight Centre’s management should be capable of maintaining the travel group’s
above-average long-term growth rates, while childcare centre operator Kip
McGrath has excellent growth opportunities that do not require any capital
expenditure calls on investors.

Mumford reckons Alchemia, a Brisbane-based biotech recently floated in an
offer underwritten by ABN AMRO Morgans, has an extemely commercial
business model, while aged home operator Village Life provides "profitable
leverage" to Australia’s ageing population.

Anton Tagliaferro, Investor Mutual
Transurban (TCL)
Vision Systems (VSL)
Amcor (AMC)
Spotless Group (SPT)
National Australia Bank (NAB)
AMP (AMP)
Qantas (QAN)
Telstra (TLS)
Australian Leisure and Hospitality (ALH)
DCA (DVC)

Tagliaferro reckons 2004 will be another testing year for investors as continued
uncertainty in the "direction and magnitude" of interest rates and the currency
undermines confidence. He avoids resources shares, most of which he says
are grossly overvalued. Tagliaferro likes toll road operator Transurban for its 5
per cent dividend yield and rising traffic numbers.

He’s also partial to technology outfit Vision Systems, whose 2005 earnings are
forecast to improve significantly. The reported profits of Amcor and Spotless
Group have been hit by the rising dollar, but this does not affect the outlook for
rising profits.

Tagliaferro also recommends two companies with intertwined fortunes. He
reckons National Australia Bank "remains cheap on any measure" and should
do better this year provided it makes no rash acquisitions. Here he’s referring to
targets such as AMP, in which NAB has built up a small strategic stake.

He reckons 2004 could finally be the year that AMP, now divorced from its UK
assets, gets its act together as it benefits from Australia’s growing
superannuation pool.

Provided there are no external factors, Tagliaferro believes Qantas is set for a
record year. He also likes Telstra – "the cash flow king of the Australian stock
market" – whose attractive dividend yield, record profit outlook and strong
balance sheet make it a core holding. Australian Leisure and Hospitality, the
Foster’s pubs spin-off, should benefit from increased gaming spending in
Queensland and Victoria. And aged care and radiology business DCA should
continue to enjoy a rerating from investors as it delivers results ahead of market
expectations.

The Australian
BHP Billiton (BHP)
Aristocrat (ALL)
Mariner Financial (MFI)
Hardman Resources (HDR)
Adamus Resources (ADU)
HHG (HHG)
McGuigan Simeon (MGW)
Mayne (MAY)
Transurban (TCL)
National Foods (NFD)

The Australian’s top ten performed admirably in 2003 – with one glaring
exception. How wrong we were on AMP when we suggested that, at $11, "the
only way is up".

In fact, the only way was relentlessly down. We've ditched AMP this time, in
favour of its UK offshoot HHG, still 11 per cent owned by its former parent. HHG
is trading below its implied value, its funds management business should
benefit from improving markets and there is little downside in the run-off of life
insurance policies. BHP Billiton provides exposure to rising base metal prices,
partly driven by the Chinese economy, and strong oil prices.

Staying with oil and gas, Hardman Resources, with Woodside Petroleum as a
major shareholder, is determined to hang on to its 25 per cent stake in
discoveries off Mauritania, Africa.

Within six months Woodside and its partners are set to proceed with an oil
project at Chinguetti. Adamus Resources sits on 500 sq km of the rich Ashanti
gold belt in Ghana. It already has a 220,000 ounce deposit but is conducting a
massive drilling program. Bill Ireland's new Mariner Financial business will be
interesting to watch through the year, while Aristocrat Leisure, despite its
travails in 2003, is still churning out market-leading gaming machines.

While we're bottom fishing, Mayne could return to the winner's circle this year
with its low debt levels, strong balance sheet and a book value higher than its
current share price.

In a sector that has been hard hit in the past year, particularly by the failings of
Southcorp, McGuigan Simeon is one to watch. It is well placed in the tricky
export market because of its strength in the lower-priced popular premium
category. National Foods will likely deliver double digit earnings growth this
year as it pursues its own diversification strategy.

Parmalat's woes throw up the prospect of eagerly sought rationalisation in the
dairy sector. Transurban will thrive if it beats the Macquarie Infrastructure
Group's rival bid to build the Scoresby tollway project in Melbourne, and
paradoxically, if it manages to co-operate with MIG in a new partnership to
develop other road projects nationwide.