2009 - May/June

Charles Leyland

Founder and managing director

Leyland Private Asset Management

SONIC HEALTHCARE (SHL)

Sonic Healthcare provides pathology and radiology services in Australia and around the world. The company led the consolidation of the medical diagnostics sector in Australia in the 1990s and has continued to expand via acquisition into Asia, Europe and the US. The domestic strategy is to retain cost leadership through the reinvestment of capital into new technology while the international strategy has been to add bolt on acquisitions to form beachhead investment into Europe and the US. These international facilities typically have surplus capacity. Sonic has managed to make good acquisitions at fair prices whilst keeping debt at manageable levels. Sonic is currently increasing their presence in Europe and the USA – leveraging off existing operations and making full use of current excess capacity. The company reported NPAT up 20.5 per cent to $136.51m for the half-year ended 31 December 2008. Revenue from ordinary activities was $1.44bn, up 27.7 per cent from the same period last year. Diluted EPS was 38.8 cents compared to 34.7 cents last year. Net operating cash flow was $187.69m compared to $174.05m last year.

FLEXIGROUP (FXL)

Flexigroup provides retail finance at point-of-sale under various brand names including Flexi rent, EzyWay, Flexi way and Certegy Ezipay. The company distributes its finance operations in high-profile stores such as Harvey Norman and Noel Leeming, and primarily provides finance for medium or larger size purchases.In the past 24 months, Flexigroup has also undertaken a strategy to diversify their operations into areas such as personal finance and travel finance through larger outlets such as Flight Centre. Flexigroup has also been taking advantage of recent world events and have put their relatively strong balance sheet to good use.

Angus Geddes

Founder and chief executive   
Fat Prophets

WESFARMERS (WES)

The once mighty industrial conglomerate fell from grace last year following a top-of-the-market purchase of Coles Supermarkets. Investors correctly judged that Wesfarmers had paid too much for the retailer and having financed the purchase largely with debt, the stock price was trashed. Collapsing commodity markets, which impacted the company’s coal operations, did not help matters either. But as often happens, investors became too pessimistic and the stock traded below what we considered to be fair value. From a long term perspective we believe the stock is still cheap. A successful turnaround of Coles should create substantial value and the company’s other operations.

INDUSTREA (IDL)

Industrea is an extremely profitable small company that has slipped under the radar in the recent downturn. Industrea provides services and equipment to the global mining industry, specifically to the thermal coal industry. Counting the world’s major coal producers as its customers, the company also sells its productivity enhancing equipment into China via its Chinese based distributor. Industrea recently announced a $20 million contract to China’s Shenhua Energy, one of the world’s largest coal miners. Sentiment has knocked the share price down to levels we consider to be very cheap, and while there are risks attached, we believe the value argument is compelling.

MUNDO MINERALS (MUN)

This small Brazilian-based gold miner suffered a few start-up issues at its Engenho gold project last year and fickle investors deserted the stock. To management’s credit though, the issues have been resolved and Mundo has emerged in strong shape.

Keith Nielsen

Founder and chief executive

The Inside Trader

SONIC HEALTHCARE (SHL)

Sonic Healthcare is an international medical diagnostics company, offering extensive laboratory medicine/pathology and radiology services to the medical community. The company employs over 20,000 people in Australia, New Zealand, the United Kingdom, Germany, Switzerland and the USA. Being a large medical diagnostics business, they are well positioned to take advantage of the increased business due to the aging population. 16 brokers have a BUY recommendation on this stock and have just increased it this month indicating that they believe it is undervalued. This one is worth a look for a long-term investment. It’s currently paying 4.8 per cent dividend yield.

ROC OIL (ROC)

The oil price is low, but it won’t stay that way forever. Roc Oil is one of Australia’s leading oil and gas companies and has recently completed a merger with Anzon Energy Limited (AEL) in September 2008 and an off-market takeover of Anzon Australia Limited (AZA) in October 2008. This takeover increased ROC’s 2P reserves by approximately 50 per cent to 47 MMBOE (including best estimate gas and condensate Contingent Resources) and is expected to provide production growth beyond 2009. The share price has been hammered recently but there are some encouraging signs of a recovery starting to appear though.
Directors have also been buying and buyer demand has been increasing recently. Worth a look if you want cheap access to the oil and gas sector.

SERVICE STREAM LTD (SSM)

Here’s a speculator that has many of the
boxes ticked. It has directors buying into it, buying pressure has been increasing significantly and two analysts have a buy recommendation on it. It’s also trading at a low P/E ratio of below 4.