Source: Wealth Creator Magazine Sep/Oct 2006

Fairfax Flagships

Stable of mastheads:
The Sydney Morning Herald, The Age, The Sun-Herald, The AFR

Magazine titles:
Business Review Weekly, Asset CFO, Smart Investor
These mastheads and magazines provide the foundation to FXJ's earnings and are attractive to a possible acquirer.

Stable of growing Internet based classified portals including:
mycareer.com.au, domain.com.au, drive.com.au, rsvp.com.au, tradingroom.com.au, stayz.com.au
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Top investments: CSL, Fosters, Resource Pacific ...

Source: Wealth Creator Magazine Sep/Oct 2006

The top investments for 2006/07

There're no real surprises when looking at what stocks will be hot in the 2006/07 financial year.

CSL Limited

CSL is the world's second largest supplier of blood plasma and related products, such as IVIG. IVIG is used to treat a wide range of ailments from anti-immune diseases to Hemophilia and Alzheimer's disease. Its current net profit margin of 24% is impressive; and this margin should continue to improve as CSL commences production of IVIG in the preferred liquid form rather than its current powder form.

CSL is not inexpensive at 20 times 2007 consensus earning forecast. However, the same analysts are predicting continued 25% growth in earnings for CSL, which makes it an attractive investment with a price earnings to growth multiple of 0.8 times. Additionally, the share price does not take into account the extraordinary reasearch and development capabilities CSL possesses. The most recent outcome of its R&D commitment is the formal Federal Drug Administration approval of the preventative cervical cancer drug, Gardisal. CSL will distribute Gardisal in Australia and have appointed Merck to distribute Gardisal outside of Australia in return for an ongoing 5-7% royalty.

Resource Pacific

Resource Pacific Limited is a very exciting coal mining prospect for investors who wish to invest in a high risk/high return business. DCF valuations for RSP are in the range of $2.30-$3.30 and forecast price earnings are 5.6 x (2006) and 2.3 x (2007); at a current price of $1.10 the potential upside is significant.

RSP's main asset is the Newpac No. 1 Colliery in the Hunter Valley region of New South Wales. The Colliery is forecast to produce over 4 million tonnes of semi-soft coking coal per annum at a projected cost of $36 per tonne. The forecast mine life is at least 20 years.

The major risks for RSP are unforeseen mining problems and falling coal prices. Due to prior above ground operations there is a wealth of geographic data, significantly reducing the risk of unexpected problems below ground. Our forecast figures assume a long-term price for soft coking to be between A$55-60/tonne. However, the demand for coal has continued to increase from Asia and particularly China, with China and India forecast to be the number one consumer of coal by 2025.

Metcash Limited

Metcash is Australia's third largest supplier of food, groceries and liquor. Woolworths is number one, followed by Coles. Metcash's business consists of three divisions: IGA Distribution with an estimated national market share of 18.5% (Source: AC Nielsen). Its second division, Australian Liquor Marketers (ALM) supplies packaged liquor to 1820 stores across Australia. Revenue for ALM rose 11.6% in the last 12 months, and EBIT is 17.6%.

Metcash's third division, Campbells Cash & Carry supplies fast moving consumables to petrol and convenience stores such as 7-Eleven. During the last 12 months Campbells Cash & Carry's revenue increased by 15.8% and EBIT by 22.5%.

Metcash's business has superior margins and sales growth to Woolworths and Coles. And yet, at its current share price, Metcash can be bought at a relative discount.

Fairfax

FXJ is a good value business with strong underlying earnings, strong balance sheet and quality management. The upside in FXJ's valuation lies in their undervalued Internet assets.

FXJ is currently trading on a price earnings of 16 x and provides a yield of 4.6% fully franked, which in normal circumstances would be about fair value for this company. However, we believe that FXJ deserves a premium due to:

1. Stable of Flagship mastheads:

The Sydney Morning Herald, The Age, The Sun-Herald, The AFR

2. Magazine titles:

Business Review Weekly, Asset CFO, Smart Investor
These mastheads and magazines provide the foundation to FXJ's earnings and are attractive to a possible acquirer.

3. Stable of growing Internet based classified portals including:

mycareer.com.au, domain.com.au, drive.com.au, rsvp.com.au, tradingroom.com.au, stayz.com.au

Relative to stand alone Internet portals these assets are undervalued by the market.

With new management, good quality earnings stream, solid balance sheet, undervalued internet assets and a wide open share register we believe that the FXJ story stacks up well.

Fosters Group Limited

We believe Fosters is a classic cyclical play as they leverage off their existing brand and distribution, lower costs, sell off non-core assets and restructure their sales force.

We like FGL for the following reasons:

1. Defensive earnings from Carlton United Brewery

2. Upside potential as wine industry improves
3. Undervalued distribution capabilities

Fosters provides a defensive earnings stream from their CUB operations and is undertaking some timely restructuring to gain maximum leverage to an upturn in the wine cycle. Restructuring includes:

1. Sale of Shanghai Brewery
2. Sale of European branding
3. Sale of non-core wine assets inherited from SRP
4. Restructuring of management and sale lines.

FGL is trading at a price earnings multiple of 15.6 x 2006 earnings, which we believe is reasonable considering their defensive earnings, reduced gearing and upside potential as the cycle improves.

The key risk for FGL is that the wine cycle takes longer than expected to improve. FGL wine division is in the fortunate position of having FGL's balance sheet behind it - a luxury which many small operators are not afforded.

 

Metcash Facts


Metcash's third division, Campbells Cash & Carry supplies fast moving consumables to petrol and convenience stores such as 7-Eleven.

During the last 12 months Campbells Cash & Carry's revenue increased by 15.8% and EBIT by 22.5%.

Metcash's business has superior margins and sales growth to Woolworths and Coles. And yet, at its current share price, Metcash can be bought at a relative discount.