Market watchers select the shares for 1980

Press, 21 February 1980, Page 19

Market watchers select the shares for 1980

• By

ADRIAN BROKKING,

commercial editor .

.R. A. Jarden and Company, whose market views were discussed here yesterday, recommend the shares of three large and six smaller companies, > Canterbury Frozen Meat.— ; “Unlike the other listed freezing companies; Canterbury Frozen Meat, which dwns and operates four works does not export meat on its own account. Livestock processed by the Company is sold to Borthwicks, which carries the trading risk on overseas sales. Consequently C.F.M.’s earnings are derived from . processing and the trading of animal by-products. “Because of the Government’s livestock retention and minimum price scjiemSs, throughput, particularly sheep and lambs, is expected to increase over the next few seasons. As a result the Company should achieve greater utilsation of its works. In addition by product markets remain firm and the Company is benefiting from increased export tax incentives on non-meat sales. Reflecting a combination of increased throughput, firm by-product markets and higher export tax incentives, we are forecasting an increase in net profit of 25 per cent to $4.1 M for the August 1980 year.

■VIn its 1979 Annual Report C.F.M. disclosed that on a replacement cost basis it has a fully diluted net asset backing of $9.11 per share. The current share price is a substantial discount on this figure. In addition, as a result of the anticipated capital profit of $1.49M on the sale of NCF Kaiapoi. C.F.M. Should pay tax-free dividends for the next year and ahalf. ' '“Given its sound earnings prospects, tax-free dividend capacity and substantial discount on asset backing, C.F.M. is confidently recommended at current levels. Rothmans Industries;:— has over 70 per ‘cent of the domestic cig-, .Jette market. In spite of ■strong opposition from lHealth and. Government (sources cigarette consumption has remained stat’ic recent years. This opposition has in fact benefited Rothmans because advertising restrictions reduce the .■company’s costs and limit •'the opportunity-■for the companies to increase their market share. ‘ /’“More importantly, how- ' ‘ever. Rothmans continue to •diversify away from tobacco. ,; The company’ has a 79.6 per .cent interest in Corbans •Wines, the third largest New ’Zealand w'ine company (behind ’Montana and McWil? Mams). Following a loss last year Corbans should make a substantial ’ contribution to ; group earnings in the current year. i’. “In addition to tobacco dnd wine Rothmans’ main ■’■subsidiaries are: Comput■fpnics. Ltd: a computer management and data processing i;company. New Zealand -Eaminaions, Ltd: a manufacturer of metal foil and ’jJa’per laminates for the to/fecco industry and laminates “used for protective wrapping /for a bariety of consumer lndustrial Elec•tronics and Automation. Ltd: ,a specialist in the devel■opment of high technology electronic control, monitoring equipment, and automat’.ic vending machines. Paros, “Ltd: New Zealand’s largest umbrella manufacturer. Ken’wood Properties, Ltd (74 per /cent owned): a property in-.-vestment and development .■•company based in the Coro•limandel. is-. “On the strength of much /improved earnings from Cor•tbans we forecast a 15 per ’/cent increase in net profit • /(to 56.7 M) for the june 1980 ■ (year and a dividend of 9.5 c ') (compared to 8.75 c in 1979). /The full yeans dividend • ,should be paid tax-free. “Since its formation in ’•■1971 Rothmans has had one ;jof the better earnings ‘/records of the major tcpm-:i;-panies. Given its sound ‘‘learnings prospects, its involvement in the growing

wine industry and sufficient tax-free reserves to cover the current year’s dividend, the stock is due for a market re-rating. Consequently it is recommended at current levels.”

Tasman Pulp and Paper.— “In our September market letter we strongly recommended several companies in the forestry sector — Carter Holt, Fletcher Holdings, N.Z. Forest Products and Tasman Pulp and Paper. The share price of the first three companies is now above ‘.he September level, Fletchers recording the largest gain with a gross return of 16.7 per cent, tax free, over the four months. “We continue to recommend the sector for medium to longer term growth. However because of its relatively disappointing share price performance since September, Tasman appears to have the best upside potential in the sector over the short term.

. "On an earnings basis Tasman should have done better than any of the other forestry companies since September. Newsprint remains in short supply on world markets and prices continue to rise whereas the price of most other paper products had flattened out. In addition Tasman has the highest export to total sales ratio so its . position , s is strengthened by the continuing depreciation of the N.Z. dollar.

“The company announced a net profit of SB.9M for the. six months to September 30 compared to a loss of $6.3M for 'the previous corresponding period. We are forecasting an even better second half, $12.1M, giving a total net profit of $21.0M or 51.0 c per share for the full year. Our dividend forecast has been increased from 12.0 to 15.0 cents, giving a healthy cover of 3.4 times. “We reiterate that because of its relatively narrow mix of activities, comparatively high dependence on overseas markets and greater vulnerability to industrial disputes in the past, Tasman is a higher risk investment than others in' the industry. Nevertheless we regard the shares as having very good short term upside potential. An alternative to direct investment in Tasman is to acquire shares in Fletcher Holdings, which owns 54 per cent of Tasman. This course offers the benefits of an indirect stake in Tasman as well as the lower risk inherent in a much wider spread of business. Additionally, Fletchers offer a

slightly higher prospective dividend yield (7.96 per cent against 6.58 per cent) and have sufficient tax-free reserves to pay several years’ dividend tax free, whereas Tasman has tax-free reserves' of only 5.5 c per share.

“In addition to these three stocks, we regard the following smaller companies as having better than average short-term upside potential: Alcan at 170 c; City Realties at 31c; Fountain at 175 c; McKechnie at 172 c; M. O’Brien at 80c; Wilkins and Davies at 185 c.

“Alcan significantly increased its aluminium exports in the December 1979 year. With world markets remaining in tight supply a further • increase in overseas sales can be expected this year, leading to a much improved profit performance. No tax-free reserves exist.

“We expect City Realities to double its net profit in the June 1980 year because of a significant restructuring of the company’s property portfolio in 1979. This will also produce benefits beyond the current year. The company has about five years of tax-free reserves at the current dividend rate.

“Fountain is one of the few New Zealand companies to have geared itself up for the expected growth in mi c r o-electronics applications. Given the established nature of the company’s traditional operations (principally audio equipment), the low prospective price-earnings multiple, and the company’s future growth prospects, the share is undervalued at current levels. The company has minimal tax-free reserves. “McKechnies are also benefiting from the tight supply on world aluminium markets, and export prospects are most encouraging. With three years’ tax-free reserves the stock looks particularly attractive at current levels. “M. O’Brien is the New Zealand agent’ for Adidas sports shoes. With the upsurge in interest in running leading to a significant increase in the company’s sales, we are forecasting a 60 per cent increase in net profit for the June 1980 year. Tax-free reserves are minimal. “In 1977 and 1978 Wilkins and Davies lost about SI.OM each year on its Mangere Bridge contract. The company is now completely free of this co-tract and in the March 1979 year had a profit recovery of 120 per cent. We expect this trend to continue in the current year and are forecasting a further 110 per cent increase in earnings. This year’s final dividend, forecast at 12c a share, should be wholly taxfree. After this payment the company's tax-free reserves will be virtually exhausted.”

This is the sixth in a series of articles which review the selections by 11 market observers of the shares to watch for 1980. The first two articles appeared on Thursday and Friday two weeks ago, with the selections of the sharebrokers Hamilton Hindin ?.nd Greene, Egden Wignail, and Renouf and Company. The third article was published on Wednesday last week and reviewed the recommendations of Lawrence, Millton and Howarth, and of Jordan, Sandman, Smythe and Company. The fourth appeared last Saturday, with the selections of Chamberlain, McKie and French, and J. S. and S. M. Satterthwaite Yesterday’s article, the fifth, dealt with the recommendations of Sturge, Wilson, and O’Malley, and R. A. Jarden and Company, whose review is continued today.