Hot stock picks for 2013
Stockbrokers' stated optimism for the year ahead on local and global sharemarkets is subject to a pretty big proviso: no more global financial crises please.
The catch-phrases of the past few years - the "credit crunch", "the GFC", "euro woes", the debt ceiling - have settled and equities markets could be looking at a second year without catastrophe.
It's not a lofty goal, but JB Were investment strategy group adviser Bernard Doyle says investors can take heart from relative stability, even if growth in their returns isn't spectacular.
"It won't be a blockbuster year for growth but it could be a year where for consecutive years... you haven't had some extreme bouts of risk events or worry about like a European collapse or markets teetering on the abyss again.
"If we get two years in a row where markets aren't concerned about existential threats - threats to the financial system - that will be the biggest achievement."
But there is already a problem on the horizon. The powerhouse United States economy is running out of financial road and heading for a "fiscal cliff".
At the bottom of that particular canyon lies Greek-style austerity measures which would equate to more than 5 per cent of the United States' GDP and lead to an almost certain recession.
However, the American political divide would have to grow to Grand Canyon proportions for a disagreement on government budget policy to push the country into such serious economic repercussions.
On the plus side, China has managed to manoeuvre its economic levers appropriately to avoid the mistakes of the Western economies, said MSL Capital Markets' Peter Elenio.
"Chinese authorities worked so hard to try and take the air out of their economy, to try and learn from Western mistakes, including everything from trying to keep inflation down and making sure that banks didn't lend too much.
"They do actually have the ability to turn the tap on again and I think we're seeing signs of that now."
However Doyle said the New Zealand sharemarket had actually benefited from the recent global stability concerns, as investors looked for off-the-radar equities with high yields, which New Zealand companies specialise in.
Investors were happy to buy cheap then, but will be looking for tangible earnings growth from those companies in the new year, he warned.
"It won't be a 20 per cent [return] year, but we could have a 10 to 15 per cent year quite possibly."
What follows are market leaders' top picks for 2013.
FIRST NZ CAPITAL, ROB BODE, HEAD OF RESEARCH
1. Diligent Board Member Services (DIL): At the intersection of two of the most important mega-trends in computing, namely "software as a service" and the iPad. In 2013 we believe Diligent will demonstrate its ability to generate substantial free cashflow while maintaining high growth rates at the top line.
2. Summerset Group (SUM): Underpinned by ageing population, which will only amplify in coming years as baby-boomers start to retire. We see a busy year in 2013 as Summerset proves that it can achieve much higher build rates across multiple villages.
3. PGG Wrightson (PGW): After an extensive period of restructuring, the outlook for PGW appears to be improving finally. Our enthusiasm is due to growth in rural merchandise sales and anticipated recovery in Australian seed sales, partially offset by weaker livestock revenue and real estate commission. Combined with an improving debt position, we expect the company to resume dividend payments in 2013.
4. Sky Television (SKT): Expected to be a solid performer in the year ahead as focus turns to earnings growth resuming in FY14 following a flat FY13 result. While it is a maturing business model, the recent special dividend highlights SKT's strong cashflow generation.
5. Kathmandu (KMD): Continues to enjoy decent same-store sales growth, highlighting ongoing strength in its sector, which should translate into higher earnings now that new systems and distribution centres have been bedded down. KMD share price to earnings multiple (10 times) is still undemanding, and with good execution could exceed current earnings estimates.
MACQUARIE PRIVATE WEALTH, BRAD GORDON, SENIOR INVESTMENT ADVISER
1. Goodman Fielder (GFF): With a dividend yield in excess of 4.5 and 6 per cent growth, GFF could be priced at up to a 40 per cent premium to market price to earnings ratio [pe] multiples.
2. Oceania Gold (OGC): We forecast gold production reaching 320,000 ounces in 2013 and 350,000-plus ounces by 2014, up from 230,000 in 2012. At the same time, we expect cash costs to fall almost 40 per cent to average below $650 per ounce once [Philippines-based gold copper project] Didipio is in full production. We continue to believe that the significant production growth will be the catalyst leading to a re-rating for the stock.
3. Pumpkin Patch (PPL): with FY13 shaping up as a year of consolidation, PPL appears well positioned to deliver strong medium-term earnings-per-share [EPS] growth, enjoy the flexibility of not being handicapped by out-of-the-money hedges, rebuild the Pumpkin Patch brand, expand Charlie & Me, reduce working capital commitments and pay an appealing dividend.
4. Ryman Healthcare (RYM): has a unique needs-based model (ie aged-care-heavy), and remains the market leader in a sector with both favourable economics and attractive long-term growth driven by demographics.
5. Restaurant Brands (RBD): offers an appealing blend of solid dividend and share-price growth as it leverages its core capabilities, firstly with the introduction of Carl's Jr, and potentially in the future with other, complementary brands.
JB WERE [NZ], BERNARD DOYLE, INVESTMENT STRATEGY GROUP
1. Fletcher Building (FBU): The stock price has improved a long way from $6 to above $8. We know we're in a housing recovery, not just in Christchurch but also Auckland. The Australian housing market could be on the cusp of recovery. Earnings growth forecast is 15 per cent in 2013, 30 per cent in 2014.
2. Infratil (IFT): The underlying businesses are attractive, but they're not being recognised by the market. We have been quite impressed by earnings growth coming out of some of the underlying businesses - Energy Australia and Z Energy. That makes the stock quite attractive.
3. SkyCity (SKC): The stock price has lagged behind others around it that have moved strongly higher. We think there's valuation support for the company. There are potential catalysts for growth with the Auckland convention centre and potential for expansion of its Australian operations, including $375m investment in Adelaide. It's languished a little bit but we like the quality of the business, we're happy to be patient.
4. Guiness Peat Group (GPG): We still see the intrinsic value of the underlying assets as discounted, and as the company continues to wind up its investments, the gap between underlying value and the market's pricing will narrow. The stock has the most emotional baggage of any in the NZ market. There are a lot of disappointed investors, rightly so. To own that stock, you'd have to be happy to own Coats, its biggest underlying business, and so most likely the one you will be left with.
5. New Zealand Oil & Gas (NZOG): The management of cash resources of the company has improved markedly, and it's now paying an impressive yield. There's good discipline around its exploration plans. We like having a little bit of oil in the mix, anyway, because if I was looking into 2013 and asking what could go badly wrong, there's still Iran sitting out there with nuclear ambitions.
FORSYTH BARR, ROB MERCER, HEAD OF RESEARCH
1. Mainfreight (MFT): The firm has set out to methodically build a global freight logistics business and its acquisition of Wim Bosman for € 110 million has given MFT a solid footprint into Europe. MFT has a high marginal return on equity through leveraging organic growth from its existing network and earnings growth outpacing the market and its peers. The executive team is proactive and has proven to be highly responsive to changes in market conditions, and it has substantial global growth prospects.
2. PGG Wrightson (PGW): This company has made progress in improving the underlying operating performances of its core rural-services businesses. Its proprietary seed business remains in a strong position with a competitive advantage in its significant research and development facilities. It is focused on reducing debt through the monetisation of its loan portfolio and targeting working capital. Assuming no further drastic climatic condition issues in Australia and New Zealand, we believe PGW is well positioned to achieve solid earnings growth over the medium term.
3. Ryman (RYM): Compelling demographics mean this business continues to deliver a high-quality product that is enjoying increased demand. It has the scale, in-house expertise and development pipeline to capitalise on this demand and is a recognised market leader.
4. SkyCity (SKC): is very well placed for medium-term operational upside from improvements to its Auckland casino and the underlying economic conditions, but the operating environment remains subdued. Encouraging signs at the key Auckland property over the full-year 2012, in particular for the Auckland gaming machines and international business. A strong generator of free cashflow, a sound balance sheet and potential further leverage from the NZ International Convention Centre.
5. Skellerup (SKL): Its model is proactive, seeking to drive operational improvements and the pursuit of new product development in close association with customers.
PETER ELENIO, MSL CAPITAL MARKETS, FINANCIAL ADVISER
1. A2 Corporation (ATM): has experienced strong revenue growth in 2012 with growing appreciation of the health benefits of its products. We expect the ambitious growth strategy and investment over the last two years in expanding into the UK and other key markets will start to show results in the coming year. We anticipate that A2 will be included in the NZX 50 during the next year attracting greater investor interest.
2. Diligent Board Member Services (DIL): One of the real growth stocks of the last three years, it has a global leading position in the provision of software portal services to major corporates. Continues to benefit from margin expansion and increasing compliance requirements imposed by regulatory authorities. Sales penetration in Europe and Asia is expected to drive revenue growth. Diligent is also developing a dividend policy.
3. Skellerup (SKL): Strong dividend yield and focused management has led us to believe that this stock will continue to benefit from greater institutional interest.
4. NZX: 2013 looks very encouraging for listing fees and other revenue streams that NZX should benefit from. The Government's plans for the partial sell-down of some of the state-owned assets and the pipeline of other expected IPOs should drive improved performance. The focus of the new management team on forming strong relationships with all market participants is expected to see benefits.
5. Tower (TWR): Continues to perform well and margin expansion is expected to continue with a lower level of claims in a number of its divisions. The sale of GPG's stake could create the prospect of corporate activity.
Disclosure: Elenio owns shares in Diligent and A2.
Overall Disclaimer: This article represents general information provided by investment advisers who may hold an interest in any equities. It does not constitute investment advice. Should you wish to receive personalised advice please contact an authorised financial adviser.
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