Optimism abounds here at The Weekend Australian as we take in the views of our contributors and market gurus on prospects for 2016. A turnaround may take time — even RBA governor Glenn Stevens suggests we chill out for a few months — but amid the commodity chaos there are gems to be found. Look for opportunities at home, from baby boomer needs to food and stocks likely to benefit from a lower Aussie dollar. Here are 100 thought-starters from The Weekend Australian’s contributors and Criterion columnist, bolstered by ideas from the wider market. Take it on board with more than the usual allowance for risk.
PURE PUNTS
Splash the cash
Galaxy Resources (GXY)
A lithium producer with a price performance kindly described as uneven, it once soared from 10c to 80c in 2009 and back to 2.5c, under the weight of a huge $200 million debt burden. Having sold its main lithium carbonate processing asset and renegotiated its debt, the company is looking to soon restart its Ravensthorpe lithium and tantalum mine in a joint venture with General Mining. Liked by Stock Analysis.
BBX Minerals (BBX)
A two-hole wonder that appears to have tasty gold prospects at its Juma East prospect deep in the Amazonian jungle in Brazil. The first hole produced visible gold, which sent shares to 15c before being suspended for a time. Management is ex-Western Mining in Brazil and AngloGold Ashanti people, which offers some confidence. A rocket stock for the brave.
Peel Mining (PEX)
Has copper and gold prospects at Apollo Hill near Leonora in Western Australia and Mallee Bull near Cobar in NSW. A tightly-held stock, which spiked up in October on news of promising copper mineralisation at its 50 per cent-owned Mallee Bull site, only to ease back since.
Highfield Resources (HFR)
Owner of five potash projects near Pamplona in northern Spain. One — Pintanos — has a defined exploration target of more than a billion tonnes at 11.5 per cent potash oxide, in what is seen as an eastern extension of its flagship Muga potash mine now under construction. Given appropriate government approvals, it could move higher. A spec buy by Criterion.
Coventry Resources (CYY)
It has a high grade in-ground copper discovery at Caribou Dome in south central Alaska, but needs more funding to proceed with more extensive drilling. Its share price has been variable, seemingly marked down on each snippet of news. Rated a spec buy by Criterion.
TECH TYROS
Electronic athletes
Catapult Group (CAT)
A big player in wearable technology that lets sporting and athletic types and their managers and coaches know the stats on distance run, heart rate and kilojoules consumed. As a maker and seller of global-positioning and indoor-stadium tracking systems for athletes and elite sports teams, it raised $12 million in its IPO from investors including US billionaire and Dallas Mavericks basketball team owner Mark Cuban. More than 500 elite sports clients have signed on, including gridiron team the Dallas Cowboys, basketball’s San Antonio Spurs and soccer clubs such as AC Milan, Aston Villa and Marseilles. It has interest from soccer clubs in Thailand and China. Its shares have trebled in a year,
but Criterion still calls it a buy.
Cirrus Networks (CNW)
A West Australian-based IT solutions provider that designs, builds and manages IT infrastructure for businesses, with healthcare its preferred field. Has recently won a contract from aged care provider Bethanie Group in WA and has panel status with the WA Department of Finance, which means it can bid for more government work. Rated highly in the Deloitte Australian TechFast 50 group of companies.
Urbanise.com (UBN)
A cloud-based building services delivery platform for the facility management industry. It is designed to connect building operators with their clients, suppliers and the people who live and work in the buildings they manage. After a $20m IPO last year, it has struck 15 new agreements across markets including the UAE, Britain, Europe, Malaysia and Australia. It’s also acquired Mystrata, a strata management administration platform.
Bulletproof (BPF)
Providing end-to-end managed cloud services, Bulletproof is well positioned in a fast-growing sector and aims to capitalise on the trend that more and more enterprises take their business to the cloud. Most of its revenue is of a recurring nature, providing some income stability. Management have a favourable track record in the internet and software industry and are major shareholders in the company. Liked by Wise-owl.
Freelancer (FLN)
Accelerating revenue and rising projects on the website have been major value drivers in 2015 for this staff-outsourcing marketplace. As Freelancer’s business matures, investors want to see sustainable earnings and bottom-line growth. As most of its revenue is derived offshore further depreciation of the Aussie dollar should enhance its revenue profile. It recently raised $10m through an institutional placement at $1.40 a share and flagged that the funds could be used for potential acquisitions. Liked by Wise-owl.
Fastbrick Robotics (FBR)
Promoters of a bricklaying machine that might build a four-bedroom house in two days easily raised $5.75m in a listing in late November. The funds will go to develop the company’s prototype robots into commercial machines, with the first due to be rolled out in Western Australia in 2017. With shares trading at a near-50 per cent premium to the 2c issue price, clearly a lot of people are won over by the prospect of faster building and cost savings. A spec buy according to The Australian’s Criterion columnist.
Electro Optic Systems (EOS)
A tracker of space junk — bits of old rockets and satellites — using ground-based lasers in the ACT and Western Australia, it watches out for damaging collisions between communications satellites. It has a collaboration agreement with US aerospace giant Lockheed Martin. With much chat recently on suggestions of future star wars where the big powers seek to knock out rival spy satellites, any developments in this arena are closely watched. A spec buy in Criterion’s book.
Greencross (GXL)
A consolidator of the fragmented veterinary industry that owns more than 130 vet clinics across Australia and New Zealand. Under takeover offer, but may have more growth to come. A buy in Morningstar’s eyes.
Big Un (BIG)
An Australian media and technology company which manages the Big Review TV broadcast network. Big is enjoying strong sales that might further accelerate with its recent partnership with CDM Direct Communication Services. The company’s capacity to convert its existing sales pipeline into paid memberships should become salient over coming months. Liked by Wise-owl.
Crowd Mobile (CM8)
Crowd Mobile, operator of crowdsourced question and answer mobile apps, is one of the few tech companies on the ASX to generate cashflow. Its principal assets include product distribution capability via 60 mobile phone carriers in 25 countries, and proprietary content production capabilities focused on consumer advice. The Track acquisition is a formational deal that Wise-owl says will add strong earnings growth history and scale, and justify a valuation of 63c a share.
MEDICAL MUSINGS
Growth with ageing
MedAdvisor (MDR)
A cloud-based app that monitors usage of prescription pills and tells you when the next round is due. The app is free to patients, with revenue derived from links to chemists, drug companies and — in future — GPs. It claims to have signed up about a quarter of country’s chemists and wants to have at least half on its books. Rated a spec buy by Criterion.
Oncosil Medical (OSL)
Oncosil Medical seeks better ways to deliver radiation therapy to cancer patient’s tumours. The lead product in development is an implanted medical device that emits radiation into pancreatic and liver tumours for up to three months. Wilson HTM rates it a spec buy with a 35c price target.
Sirtex Medical (SRX)
Sirtex has had another stellar year in 2015 with the company increasing Sirflox unit sales and progressing well with research into further applications of their products. The company remains a ‘‘feel good’’ investment and it’s hard not to see further medical professionals putting the product forward for patients as it receives more acceptance. The scare in March after an initial study update provided an opportunity for value investors but at current levels the company only remains suitable for growth investors. Liked by Lincoln Indicators.
LAGGING LIONS
In time, their day might come
BHP (BHP)
The deal of a lifetime at current prices or walk away in tears? Crushed in the commodity collapse and with a mine disaster in Brazil to deal with, the Big Australian is humbled for now. Charts suggest even $14 a share is possible, especially if the dividend dwindles. Yes, it might rise again, but the question is when, exactly? One for those with faith.
Alumina (AWC)
A low-cost alumina producer with cash costs in the bottom quartile of the cost curve and a discount to fair value that looks attractive. With the alumina industry losing money, and Alumina’s enterprise value less than half the replacement cost of alumina capacity, value is compelling, says Morningstar. The move from long-term contracts to spot alumina pricing, coupled with more balanced supply, should see improved prices and returns, potentially helping the market price of shares to converge with intrinsic value over time. A buy for Morningstar.
GOLD
Soon to glisten again?
Alkane Resources (ALK)
A gold producer generating a $25m cashflow a year, in addition to its key value driver of the world class Dubbo Zirconia Project. Securing offtake or a strategic partner in the aerospace or advanced materials sector would result in a major rerating. Rated a buy at Petra Capital.
Evolution Mining (EVN)
Evolution Mining, the country’s second-largest listed goldminer, looks close to completing its protracted acquisition of smaller rival Phoenix Gold. That may help its share price, which has already doubled in the past 12 months. Company executives have spoken of investing more than $25m next year on exploration.
Independence Group (IGO)
A low-cost gold producer via its 30 per cent interest in the Tropicana project 300km north east of Kalgoorlie. The company is a serious nickel producer at Long Mine, and has zinc and copper production at Jaguar. A strong balance sheet with positive cashflows at current prices across all three commodities. Outside of the majors, it is one of the better defensive miners due to its diversified and quality assets. Liked by StockAnalysis for 2016. Canaccord says it’s ideally positioned to benefit from a recovery in base metal prices.
Gold Road Resources (GOR)
Gold Road Resources offers speculative exposure to the gold mining industry. Has a big land package in the Yarmana region well east of Kalgoorlie, existing resource inventory at Gruyere, and a track record of low discovery costs. Gruyere’s large scale, long life and under-explored surrounds could attract interest from established miners. Liked by StockAnalysis. Wise-owl expects takeover interest to build.
Doray Minerals (DRM)
WA-based junior gold producer with the Andy Well goldmine producing around 80,000 ounces a year. Output is likely to double to 160,000 ounces equivalent with gold and copper production from the Deflector deposit following the merger with Mutiny Gold. The merger diversifies operational risk and revenue streams, with both assets having potential for exploration success and mine life extension. Liked by Patersons.
Resolute Mining (RSG)
New management is the key catalyst to turn the company around. A consistent producer of more than 300,000 ounces of gold a year, with a large resource inventory of about 13 million ounces. It has the ability to deliver leveraged growth from long-life assets, in the eyes of Petra Capital.
St Barbara (SBM)
A transformational turnaround in 2015 has put the mid-tier gold producer back on a stable footing, with strong cashflow generation from Gwalia allowing debt repayment ahead of schedule. Its share price has bolted in the past year, but Petra Capital thinks further upside exists as it has a potential mine life of more than 10 years at Gwalia. Canaccord calls it a standout, based on potential upticks in the gold price and cashflows.
OIL AND GAS
Sagging in surplus
Real Energy
Corporation (RLE)
Real Energy Corporation is an Australian energy company focused on oil and gas exploration in the Cooper-Eromanga Basins. Eastern Australia gas prices have doubled since 2011 and Real Energy is positioned to address a tightening supply landscape. Even though the company is reliant on external capital, recent progress in a gas-sales agreement with Incitec Pivot is a medium-term driver.
Liked by Wise-owl.
FAR (FAR)
This oil and gas explorer has a 15 per cent interest in offshore permits from Senegal in West Africa that produced one of the world’s largest oil discoveries in 2014 at the SNE field. Appraisal work aims to lift resources towards 700 million barrels, which could make FAR shares worth up to 35c, says Stock Analysis.
Woodside Petroleum (WPL)
Woodside has very low net debt, large resources of oil and gas awaiting approval, and has the ability to pick off the best assets or companies from a broad field of projects and assets — much like a kid in a lolly-shop, according to StockAnalysis. Well placed for any upturn in prices.
AWE (AWE)
A low-cost oil and gas producer that is surviving the downturn in prices, AWE has low debts and locked-in revenue from domestic gas sales. Its Waitsia gas discovery north of Perth should come online in late 2016 and underpin a long-lived domestic gas business in Western Australia. It’s well liked by the folk at StockAnalysis.
INDUSTRIALS
Large and loveable
Amcor (AMC)
Paper and packing might not sound sexy, but they deliver reliable earnings as well as growth based on demand for consumer products, particularly in flexible packaging where experience and strong suppliers relationships can benefit innovation and lead to healthy margins.
Goodman Group (GMG)
As the owner and developer of warehousing and warehouse facilities, Goodman stands to benefit from the rise of global demand for industrial property. The company is genuinely global, with operations in sixteen countries that contribute more than half its earnings. Such a foothold allows it to take experience from one market and apply it to another. Morningstar advises investors to accumulate the stock, as it has the most favourable growth outlook, given the importance of large-scale, modern warehouses in efficient distribution chains.
Sydney Airport (SYD)
A low Aussie dollar, more tourists and a safe, green world bode well for all tourism operators and the airport through which they come. For Sydney, rising wealth in China’s middle class could well see a doubling of passengers by 2020, according to Tourism Australia. The company earns money on the arrival of passengers as well as through the leasing of business premises, car parking and retailing activity.
Transurban (TCL)
Owner of almost every major toll road in the country after its purchase of Brisbane’s financially troubled AirportLinkM7 in November. Its revenues have had annual compound growth of 10 per cent in the past decade and look likely to continue for the next decade and probably beyond, on the back of population growth and CPI-indexed tolls. Meanwhile it is diversifying through overseas expansion, and is in a partnership in the US for express lanes in Virginia.
AGRICULTURE
Rising on Asian appetites
Websters (WBA)
Chaired by Chris Corrigan, this Tasmania-based walnut business has made some bold expansion moves into broadacre cropping and cotton and grazing businesses in western and northern NSW. The latter, Bengarang, has the country’s largest water entitlement portfolio of more than 235,000 megalitres, along with more than 40,000 hectares of irrigated cotton country. The water portfolio alone is worth almost $300m. Liked by Patersons.
TFS Corporation (TFC)
Controls the world’s largest ethical and sustainable supply of Indian sandalwood, a $1 billion market with exhausted natural reserves. With harvest volumes scheduled to rise tenfold in the 2015-16, improved earnings and consumer demand could galvanise interest in the stock. Wise-owl expects shareholders to be rewarded in time.
Tassal Group (TGR)
Tassal has performed well since reporting in August 2015 and remains well-placed to benefit from increased salmon consumption in 2016. The business acquisition in 2015 saw the company increase its reach into the seafood category and increase vertical integration in the salmon market. TGR is suitable for value and growth-seeking investors, with a fully franked dividend yield of about 4 per cent. Liked by Lincoln Indicators.
Select Harvest (SHV)
A specialist almond grower aiming to rise on Asian food buyer interest, with ambitious expansion plans that could increase the area of productive orchards by 40 per cent. That’s after it reduces debt through the sale and leaseback of land valued at $200m. A crippling drought in California, the world’s dominant almond-producing region, as well as rising consumer demand for almonds because of their health benefits, has seen Australia’s $500m almond industry boom. Liked by Patersons.
Australian Agricultural Company (AAC)
A shift away from live exports toward packaged meat products and an uptick in prices has prompted a near-doubling of meat sales, a surge in total revenue and the posting of a first-half net profit of $50m. Packaged meat now accounts for 84 per cent of AAC’s revenue, up from 76 per cent a year ago. The company now processes its own cattle through its Livingstone Beef abattoir near Darwin. Patersons has a buy recommendation with a price target of $1.77.
CARS
Buy ’em, love ’em, smash ’em
AP Eagers (APE)
AP Eagers has enjoyed healthy vehicle sales and the successful integration of a number of acquisitions through 2015. As the second-largest dealer operator in Australia, APE should benefit from further industry consolidation and a rosy outlook for new vehicle sales in 2016. The dividend yield sees the company provide investors with an added bonus of income on top of an already stable earnings outlook. Liked by Lincoln Indicators.
Carsales.com (CAR)
The company has had solid growth from its Australian operations while increasing its exposure to the overseas classifieds segments with grass-roots investments through the 2015 financial year. Acquisitions have been lower-margin businesses but the long-term growth story remains for the company as it nurtures its overseas acquisitions and they benefit for Carsales.com’s expertise and experience. Carsales.com pays a fully franked dividend that is approaching market yield. Liked by Lincoln Indicators.
AMA Group (AMA)
The smash-repair industry is itself being bashed into shape, and may well shrink more with the advent of safety features such as computer-triggered braking and driverless vehicles. Neighbourhood panel beaters are merging into slick corporate chains under pressure from insurers such as Suncorp. AMA Group has just acquired the biggest operator, Gemini Accident Repair Centres, in a cash and scrip deal that looks attractive to Criterion as a spec buy.
HOME AND OFFICE
Family and finance
Arena REIT (ARF)
Arena combines an attractive portfolio of high-quality childcare and healthcare assets and is trading on an attractive yield of 6.4 per cent. In addition, the group possesses a growth pipeline which Lincoln Indicators expects will continue to drive increased distributions moving forward. ARF is suitable at current levels for income-seeking investors looking for an above-market dividend yield.
Servcorp (SRV)
Servcorp has been able to maintain an excellent track record of floor rollouts and earnings growth that shows no signs of slowing down. North American operations remain challenging. However, this has really only been a minor speed bump and should potentially become profitable in the next 12 to 18 months. This stock might be more suitable to growth investors at current levels but Lincoln Indicators wonders whether it will be a takeover target in 2016.
CURRENCY PLAYS
Winners from a falling $A
Henderson Group (HGG)
A Britain-based funds manager that benefits from solid inflows and can say that most of its underlying funds beat their benchmarks. The company may also gain from a lower Australian dollar compared to the British pound in 2016. It already provides a small dividend to investors. Lincoln Indicators thinks that at current levels the stock would suit growth investors who want exposure to overseas markets while still investing in a locally listed company.
Ramsay Health Care (RHC)
Contributions from the new facilities in Australia, Generale de Sante and Medipsy in France and the continued strong admissions in the British hospitals will support its growth. It is now the largest private hospital operator in France. Ramsay has announced a foray into China to become the first big international hospital operator to establish operations in the country, where it should benefit from the large population and growing demand for better healthcare from an emerging middle class. Its share price makes it ideal for growth-and value-seeking investors, in the eyes of Lincoln Indicators.
CSL (CSL)
It trades at a 6 per cent discount to Morningstar’s $106 fair value estimate, due to relatively subdued growth in its immunoglobulin products and less enthusiasm for the prospects of Privigen and Hizentra, the intravenous antibody products used to boost the body’s natural defences against infection.
Morningstar suggests integration of the Novartis influenza vaccine business, renamed Seqirus, and the upcoming launch of several new recombinant coagulation products, coupled with the steady progress in the broad research and development pipeline “bode well for earnings growth and hence narrowing of the share price discount to our fair value over the medium term”.
Sonic (SHL)
The company stands to benefit as we all grow older. It is one of the world’s largest medical diagnostics companies, and a provider of laboratory and radiology services to medical practitioners and hospitals. Sonic has acquired heavily overseas and now derives half its revenues abroad. Healthcare companies are well known as defensive stocks for their ability to earn through cycles, because whether the economy is good or bad, people still require basic medical services. Sonic has also proven its ability to make small accretive purchases.
Brambles (BXB)
Brambles is trading at a 9 per cent discount to Morningstar’s $12.00 fair valuation, as investors appear to overlook the growth potential in its pallets business. In the next four years, Brambles will allocate $1.5 billion of growth capital expenditure to new pallet offerings (nestable pallets, wheeled units, cardboard layer pallets), which Morningstar expects will further expand Brambles’ customer proposition and widen its competitive moat. We also envisage potential expansion into adjacent supply chains, such as home and hardware and pharmaceuticals, market segments that could double CHEP’s addressable market.
