Four attractive stock buys

Chief Investment Officer and founder of Aitken Investment Management
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Here are four stocks that are currently attractive. I’ll be returning to my full commentary next Thursday.

National Australia Bank (NAB) – Buy

NAB remains our top major bank pick. While we expect the bank to maintain a minimum 15% return in equity (ROE), despite higher liquidity and elevated funding costs, the upside is even more significant once capital is returned from the eventual sale of its UK business (estimated 1% ROE and 3% earnings per share (EPS). Regardless, NAB’s competitive advantage lies within its domestic retail and business banks and particularly on the revenue side.

We have lowered NAB’s price target by around 2% to $27.40 (previously $28.00) as a result of changes to our net interest margin (NIM) forecast. The market remains uneasy about NAB’s NIM outlook given its dependence on offshore wholesale funding and higher rollover requirements in 2013. We expect NAB’s NIM to remain reasonably resilient and decline by only four basis points in 2012 and by six to seven basis points in 2013. Factoring in these outcomes, we have reduced cash earnings by 2% across the forecast horizon.

We continue to rate NAB a Buy on the strength of its core Australian banking operations and with management delivering on all the key strategic objectives to date including de-risking the business model. We continue to rank NAB ahead of its peers given a better earnings growth profile.

  • 12-month target price: $27.40
  • Wednesday’s close: $24.20

Gindalbie Metals (GBG) – Buy

Gindalbie’s December quarter report suggests its Karara magnetite project remains on track to make its first trial shipment in the September quarter. The infrastructure is well progressed and should be available in the first half this year. Karara provides the attractions of a large-scale operation, economies of scale and long mine life. The project remains underfunded by $150-200 million at current exchange rates, but this should be covered by additional debt if required and the report suggests discussions have been held with China Development Bank on the matter. Following the recent rights issue, the project’s debt to equity ratio is now 54:46 compared to the originally approved 70:30 ratio, leaving additional debt capacity to cover both this shortfall, and some further capex over-run.

Gindalbie is trading below the recent rights issue price of $0.67, presumably due to concerns that a further delay pushes out first production another quarter, and could eventually result in another capex over-run. Our 12-month price target is $1.33 a share, which gives an 80% weighting to the Stage two expansion to 15Mtpa, although there is the potential to get to 16Mtpa. That price target has decreased from $1.35 to $1.33 because we have lowered our expected contribution from hematite in fiscal 2012 and 2013.

  • 12-month target price: $1.33
  • Wednesday’s close: $0.63

Grange Resources (GRR) – Buy

Grange Resources produces iron ore pellets at its Savage River operation, in north-western Tasmania. There is potential to increase production through debottlenecking. The company is also planning to develop a 10Mtpa magnetite concentrate project at Southdown near Albany in Western Australia and an associated pellet plant in Malaysia, both in a joint venture with Sojitz (70% GRR:30% Sojitz). Construction is due to commence in 2012 and production in 2014.

Our valuation is already diluted for an anticipated raising of $500 million at 50¢ in 2012 to fund the Southdown project, with the balance of funds expected to come from cash and debt. We have assumed that Grange raises equity to cover its share of the capex not already covered by cash. However other funding options include selling a stake of Savage or Southdown. Despite the dilution we assume, there is still upside to our risk-weighted valuation and we maintain our Buy rating. In addition, the stock now offers 7.2% yield, making it one of the highest yielding resource stocks.

  • 12-month target price: $0.91
  • Wednesday’s close: $0.595

Paladin Energy Ltd (PDN) – Buy

Paladin’s performance in the market this year has been disappointing. Fukushima accounted for a large part of the downfall, which was exacerbated by the debt funding of projects and acquisitions, slow production ramp-up at Kayelekera and continued net cash outflows leading to a weakened balance sheet. However, Paladin is guiding for a 33% increase in production in fiscal 2012 and is very well positioned for growth over the long-term with large uranium resources across its projects.

Production in the last quarter of 2011 was up 47% from the previous quarter, which is a solid result, and provides investors with much-needed relief. Our production guidance for fiscal 2012 has been downgraded to 7.1 to 7.4mlb (prev. 7.4 to 7.9mlb), following unscheduled shutdowns at its Kayelekera Mine due to localised ground movement, and scheduled ramp-up of Stage three at Langer Heinrich Mine. In order to meet our estimate, Paladin will need to average 2.2mlb per quarter for the next two quarters. This is possible, provided it continues to ramp-up and operate at nameplate. Paladin represents good value.

  • 12-month target price: $3.10
  • Wednesday’s close: $1.78

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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