Telstra Corporation: Buy
While Telstra (ASX:TLS) may be used as a funding vehicle by some to add risk to their portfolios in the coming weeks, we feel that isn’t wise, and that Telstra remains standout buying at around the $3 level.
Here are five key reasons to buy stock here in size:
1) We feel the national broadband network (NBN) deal is worth at least $12.5 billion to Telstra rather than the $11 billion post-tax net present value that Telstra has been using.
2) We see limited risks to Telstra from a change in government in terms of changes to the NBN. The NBN has already pre-committed to around $17 billion of spending and the more they spend earlier, the harder it will be to unwind the NBN deal for any new Liberal government.
3) We feel the $22 billion in nominal pre-tax cash flows by 2021 will allow the 28c dividend to be maintained, but Telstra would also have $1.5 billion per annum in excess free cash flow, and hence could buy back 4% of its shares per annum.
4) About $9 billion of the $11 billion in NBN payments are likely to be assessable income which will help franking of dividends longer term. There is a possibility of a longer term dividend per share of 40c post the NBN deal, which would imply a 13% yield on the current stock price. Not many analysts out there are talking dividend growth with TLS and that could be a big key potential positive once we get NBN certainty.
5) We feel TLS here with a price to earnings ratio of 10.5x 2012 numbers and a 9.3% yield is cheap, and it certainly doesn’t have the earnings risk of many of the domestic Australian cyclical stocks if you are worried about earnings downgrades in Australia. TLS is a buy with a $3.45 target.
National Australia Bank: Strong Buy
The Australian bank sector has suffered in line with its global peer group for “a crime they didn’t commit,” with National Australia Bank (ASX:NAB) the usual target for any EU-related bank selling.
Bank stocks worldwide have fallen as hedge funds continue to target the sector with massive global financial sell programs aimed at profiting from the fear and collateral damage surrounding the European debt crisis.
Over the last two weeks, NAB’s share price has fallen nearly 10% on EU-related concerns and media reports that it’s poised to have a major rights issue to fund the Lloyd’s acquisition. This excessive share price pullback has opened up an investment opportunity with the market seemingly having priced in all the uncertainties of the world in one blow. We believe this is unwarranted and the risks (eg European contagion scenarios adversely impacting funding and asset quality, and NAB directly buying Lloyds’ branches) are overstated.
For the record, NAB remains the clear leader in its core Australian market in terms of productivity and efficiency and has sufficient market share momentum and value levers to build and sustain earnings growth. We believe NAB has one of the strongest revenue generating capabilities in the sector.
As a result, we believe NAB represents outstanding value with a fiscal year 2012 price-to-earnings ratio of just 8.8x and a dividend yield of 7.8%. Our 12 month price target is $28.60, which implies a total return of 28%.
Fortescue Metals: Buy
It was interesting to see more merger and acquisition action on Monday in the emerging iron ore space with African based Sundance Resources (ASX:SDL) who we have a buy on, getting a cash bid from a Chinese major shareholder, Hanlong Mining.
When you see a Chinese party buying this company ahead of the $4-5 billion of capital expenditure required for building a new rail line and port, it gives you confidence in the long-term iron ore price remaining elevated. There is no way any Chinese investor would be bidding for Sundance if they thought iron ore prices were coming back to $80 bucks a tonne anytime soon.
Also, take into account that spot iron ore prices have remained above $170 per tonne even during a Chinese slowdown and global worries regarding European debt, and you have to ask what iron ore prices could be if the Chinese economy gets moving again, and steel prices within China start moving higher?
Our number one large cap growth stock pick remains Fortescue Metals (ASX:FMG) and we continue to push FMG with a ‘buy’ and $9.58 target (+50% upside from here) and we believe FMG is well on its way towards 155 million tonne per annum of production longer term.
When sitting in on the FMG conference call on Friday, it was pretty obvious that every analyst was obsessed with the increased costs; which rose to $53 per tonne for the period. While analysts all nit-pick regarding costs, if you look at our longer term profile we have FMG earning a net profit after tax of $6.2 billion in fiscal 2014; its going to be a very big company this one!
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