Stock Review : Incitec Pivot (IPL) for growth in your portfolio

I received an email from a reader regarding a brokers recent analysis of Incitec Pivot (IPL) and whether they should buy the stock. The broker has a buy on the stock with a share price target of $190.48 - and I have to concur with the recommendation, though I think the stock will go over $200 in the next few months. Based on the broker review and my research here is a review of the stock. Even though the absolute share price is high, I am considering this stock given the global boom in fertilizer companies – similar companies in the US have risen almost 100% this year as compared to IPL 50% rise.

IPL's 1H08 result significantly exceeded analyst forecasts. However, the broad themes were in line with expectations - strong earnings growth on the back of rising fertiliser prices, improved seasonal conditions, cost savings (above guidance) and a solid balance sheet, which remains well positioned for acquisitions. It is important to note that the first half is always IPL's seasonally smaller half with fertiliser application for the winter cereal crops in April/May/June and for cotton in August/September. As expected not a lot news was released on the Dyno Nobel (DXL) acquisition. However IPL intends to make a decision on Moranbah prior to September and the synergy benefits update will be in November. BUY maintained.

• IPL reported a 1H08 NPAT excluding significant items of A$171.1m, up 245% on the pcp (A$49.6m), which was above the forecast of A$143.1m. Reported NPAT of A$169.8m included significant items of -A$1.3m (after tax) due to business restructuring.
  


• EBITDA increased to A$269.0m, up 163% on the pcp. EBITDA generated by IPL’s base business was A$136.0m, up 156%, reflecting rising fertiliser prices, growth in Fertiliser Trading and improved seasonal conditions. EBIT of A$250m was up 198% on the pcp (A$83.9m). This was above forecast of A$214.5m. EBIT margins increased to 33.4% from 15.4% the pcp.
  


• The Board declared a 204cps fully franked interim dividend, compared to forecast of 191cps and 69cps the pcp. This equates to a payout ratio of 60% which is in line with IPL’s recently revised policy of 55-65%.
  


• Sales revenue increased 38% to A$749.3m on the back of a 5% increase in sales volumes to 1.373mt.
  


• IPL's Business Efficiency Program (Tardis II) delivered A$28.2m before tax in the 1H08. This was in fact, IPL's full year target. This takes the total efficiency achieved by the program to A$143.1m.
  


• IPL's balance sheet remains strong with gearing (debt/(debt + equity)) at 51.8% (falls in 2H after winter cropping sales), compared to 50.5% the pcp and A$88.9m in cash (A$49.3m the pcp). Management should be commended on keeping working capital at 2007 levels despite the step change in fertiliser prices (A$180m impact).
  


• Cashflow comments – operating cash inflow of A$21.0m compared to an outflow of A$53.2m the pcp. Capex fell to A$24.2m, from A$53.1m the pcp.

Outlook - IPL didn't specifically upgrade guidance however it did say that if you assume second half DAP price of US$1,100/t then the average DAP price for IPL would be US$910/t in FY08. This price would see IPL report an FY08 EBIT of A$850m compared to previous guidance of A$700-730m previously. It is important to note that rainfall between Anzac Day and the Queen's Birthday remains a key driver of IPL’s domestic sales.

However we stress that IPL is no longer just an East coast rainfall story as the number one driver of earnings is the rising price of fertiliser, a global commodity. A number of growth opportunities including DXL, Aceh and UCG ammonia plant, potentially Moranbah and debottlenecking and plant expansion are on the go. We recommend the stock as a BUY.

More news on IPL at Reuters

Centro (CNP) and Insurance Australia Group

Two stocks I have recently talked about had some newsworthy information today that I thought I would briefly talk about in this post.

Centro (CNP) – Decision time

Following my previous posts on this stock, it has been very volatile and I’m sure a lot of day traders have made and lost a lot of money on it. With D-day now approaching (Wednesday) Centro must get approval from the banks to extend its $4.2 billion debt repayment, or face receivership. There are a number of potential suitors lining up to buy parts of or the whole group, but the key question for existing shareholders is at what price. Also, it is more than likely the banks will consider extending the due date for the debt if there are some serious offers on the table. However, I think after Wednesday the Centro share price will stabilise based on the offer details being made publicity available in the media. This will put a firm floor on the stock price and should reduce the overall volatility.

In a recent note to clients, Macquarie Equities said it had assumed the banks would provide Centro with a further extension, but warned that valuation of the group was "sensitive" to movements in asset values: "We believe the most appropriate valuation [for the overall group] is 0c to 50c per share, as asset values are likely to decline further."

Insurance Australia Group (IAG) – Lower forecast makes a merger/takeover with QBE more likely.

In my recent post on this topic I had a strong position for buying QBE and feel justified given IAG’s reduced forecast. This was due to higher borrowing costs and east coast storm claims which will reduce its insurance margin. The merger now looks more likely given IAG's weakened position. Buying QBE is still the way to profit from this merger in the longer term.

Buy into QBE

With the recent proposed and rejected merger/takeover the game is on between Insurance Australia Group (IAG) and QBE. The first offer was a salvo by QBE to see the reaction of investors and regulators. It was never meant to be the final offer and I think they will pay more to takeover QBE. I have written a number of times on both stocks and my preference is still QBE. I say this despite owning IAG shares, which have had a nice rise over the last week. IAG's stock closed at $4.38 yesterday compared with the $3.99 value of QBE's stock and cash takeover offer. So the market clearly expects a higher offer. I wouldn't be surprised if other local and overseas suitors are re-running the numbers over IAG, now that QBE has made its interest in the stock official.

Here's what the analysts are saying:

- QBE could pay as much as A$5 a share for Insurance Australia, Credit Suisse Group analyst Arjan van Veen said in a note to clients today. Citigroup Inc.'s Nigel Pittaway estimated a price of A$4.50, and Ryan Fisher at Goldman Sachs JBWere Pty said an offer in the ``mid-A$4s'' was possible.

- Merrill Lynch, meanwhile, believes QBE will come back with another bid and could offer up to $5.10 per IAG share and still make the deal cash earnings break-even.

- According to broker Credit Suisse, QBE's offer is greater than four times IAG's net tangible asset (NTA) value compared to recent QBE transactions at 1.5 to 1.75 times NTA.

- Analysts are unsure if the mega-merger will eventuate, with some musing that QBE, with its conservative approach to valuing targets, could find cheaper buys elsewhere. With or without IAG, analysts agreed with the assertion that QBE still has a decent pipeline of offshore deal opportunities.

- Goldman Sachs JBWere (GSJBW) believes that while QBE has room to increase its offer, it is unlikely to stump up enough capital to satisfy the IAG board, which is adamant IAG's shares are undervalued in a tough market.

What the companies are saying:

- IAG chairman James Strong acknowledged on Tuesday the merits of a tie-up between the two insurers, but only at the right price.

- In a sign the price might never be right, QBE indicated that it would not deviate from its usual deal requirement of achieving earnings accretion in year one.

How to profit from this merger

For short term investors the best way to make some money from this merger is to buy IAG shares. There is between 10-20% upside based on the average analyst recommendation. QBE's offer of $4, provides the floor for the stock, so at most you will lost 10% if QBE pulls out of the
merger/takeover tomorrow.

For longer term investors, like me, invest in QBE. It is a quality company that has taken a hit of late due to the global credit crisis. It is far better run than IAG from all reports. If it takes over/merges with IAG it will likely take some time to realize the synergies from the merger, but once it does it will probably add another $5 - $10 to the stock price in the medium term. Even if the takeover doesn't go ahead, QBE will find other options for growth and I see the share price going back to $30 by next year (assuming no major natural or man made catastrophes).

The rise of the US markets overnight should buoy both stock prices today, but stay tuned as there is a way to go with this deal.

Top Income and Dividend Stocks

High yield cash savings accounts in Australia (like ING Direct, Bank West) are currently providing an 8% or so pre-tax return. Not bad when you consider that the stock market is down more than 20% this year. Why would you even think about investing in the stock market, when getting an 8% return is so easy and risk free? Well, because the after tax returns of stocks are going to be much higher than the cash savings account over the medium to long term. A stock provides two sources of return – capital growth and more importantly in this climate, dividend income. I agree that the capital growth aspect is pretty lousy at the moment, but there are some solid dividend paying stocks to look for that pay a better than 8% return over the next couple of years. Also, if you include franking credits from dividend payments, the dividend income can be substantially higher when compared to the equivalent after tax return from high yield savings account. An 8% pre-tax return on a high yield cash account is equivalent to 5% to 6% on an after tax basis. Whereas, an 8% return on a 100% fully franked dividend is equal to an after tax return of between 12% to 15%, depending on your tax rate. Which do you think is better now?

So what are these dividend stocks that pay more than 8%? Well, from Aegis Equity Research, here is a list of the highest paying fully franked and unfranked/partially franked dividend paying stocks. Franked or partially franked dividends provide franking credits (i.e. the tax the company has already paid) which you can use to offset your regular income provided you are an Australian resident. Unfranked dividends don’t have those franking credits. This could be for reasons that include, but not limited to, the company earnings are overseas or they did not pay taxes (due to how they account for their profits). Also for non-residents, like me, these can be better investments as I cannot access the franking credits and they tend to offer higher yields to offset the franking credit tax benefits.

From the list (click on list to enlarge), you can see plenty of stocks from the Macquarie Group(MQG) and Babcock and Brown (BNB) stable of investment vehicles. They have created these "stocks" to invest in a particular types of industry or assets. For example, Babcock and Brown wind partners (BBW) invests in wind energy generation assets and Macquarie Airport (MAP) invests in airports. These type of stocks tend to have a stable cash flow and thanks to legal accounting loopholes they are able to provide good tax-deferred returns. Due to the fact they are highly leveraged, they have taken a big hit to their prices from the credit crisis and their dividend yields have gone up because the actual dividend amounts have not beet cut. Macquarie and BNB managed investment vehicles are pretty well capitalized and have the implicit backing of their parent companies, so their share prices should eventually recover, which means current prices provide good entry points.

Overall, the stocks I like from the above lists are:

Suncorp Metway (SUN), Commonwealth bank (CBA) because these two financial companies are among the best of breed in their financial sectors. Apart from dividend growth they have got strong potential for capital growth in the medium term. I like Tabcorp (TAH) and Telstra (TLS) for their defensive nature and should hold up when the times get tough. For the unfranked or partially franked top stocks, I like Babcock and Brown Power (BBP), SP Ausnet (SPN), Ascianco Group (AIO), Macquarie Communication Group (MCG) and Babcock and Brown wind partners (BBW). I would stay away from the retail and consumer stocks like Pacific Brands (PBG) and Wattyl (WYL) because I think consumer spending will fall significantly when the economy starts heading south. Look my upcoming post “Is Australia entering a recession?” for more on my views on the tough times I think are in store.

Most of the companies in the above lists attract investors through their higher than average dividend yields. So they will be reluctant to cut dividends in fear of losing investor support and will instead focus on cost cutting measures to keep payouts at current levels.

Eventually, the share market will bottom out and begin its climb up. The appreciating share prices will then boost your capital gains, which combined with the current dividend yields make share investing a much more profitable (especially when you factor in tax) venture over the medium to long term than leaving your money in cash accounts.

Related Posts:

Fallen share prices drive dividend yields up
Stock Review : JB Hi-Fi (JBH)
Top Australian Dividend Stocks

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Update on Centro (CNP) - Up 60% since my review 2 weeks ago

Centro Properties Group (CNP) jumped 71% yesterday on news from the Australian Financial Review (AFR) that it was believed to have received six offers, including from private equity firm Blackstone Group, Citadel Investment Group, Macquarie Group Ltd (MQG) and investment management group Lighthouse Partners. The offers were at up to around A$0.90 a share, the paper said.

Responding to a query from the stock exchange, Centro said in a statement it was unaware of any reason for the sharp move in its shares. It said it remained in talks with a number of parties and lender groups in relation to its recapitalization process, but the talks remained incomplete. "At this time, there is no certainty or assurance that these discussions will lead to a transaction, what form such transaction may take, or what value might arise out of a transaction, if any," it added

I had done a detailed review of the stock a few weeks ago, when it was at $A0.35. My final comment was "....the stock is worth a punt for the risk-loving investor and could have significant upside". Recent market volatility and the hit on my portfolio has been me much more risk averse and so I had not taken a position in the stock and unfortunately missed out on the gain. Was this mistake? Should I get in now? Read on.

Is it too late too get into the stock now?

If the rumors are true that offers for the stock are coming in at $0.90, then yes it would be great to buy the stock now as there is almost 80% upside. However what worried me was that the stock went up to $0.65 (by midday) and then fell 20% to close at $0.50c. Most of the gains yesterday were driven by speculation and further stock rises/falls in the next few days will be driven by the same forces. There is a good chance the stock will rise again tomorrow, given the rumor news is being reported in the AFR - a very reputable newspaper. So if you still want to get on the speculative bandwagon, and missed the earlier ride, then now would be the time to jump on. However, as the old saying goes - easy come, easy go. Any bad news will crush the stock price even more swiftly than the rise yesterday.

Am I going to buy some more? No. I was too risk averse when the stock was 0.35c, and I am not going to get in now with so much speculation driving the stock. I am tempted to have a punt though and if I had the cash to burn I would throw in a few dollars (at worst I can write it off as a capital loss if things go pear shaped). Overall though, I think there are far better and more stable stocks out there worth pursuing.

Related Posts:

- Reuters article covering recent news on the stock. My previous article is referenced at the end of the article!
- Recent Centro (CNP) articles at Finance ViewPoint

Market Volatility

Here is an insightful quote from Thomas Friedman in a recent New York Times speech...

"When we were young kids growing up in America , we were
Told to eat our vegetables at dinner and not leave them.
Mothers said, think of the starving children in India and finish the dinner.'

And now I tell my children:
'Finish your homework. Think of the children in India
Who would make you starve, if you don't.'?"

With that, here is the latest installement of Dale Gillham's weekly market report:

Given that the volatility in our market has continued to unfold in recent months, many are beginning to question whether the share market is really a good investment. However, as many of you would know with every pull back there are always opportunities that present when the volatility settles. Over the past few months many of the top shares on our market have fallen as much as 30% to 50% in price and while this presents some great opportunities for those who are patient, the question that a lot of investors are asking is when is it time to buy? While I believe there is still some more volatility to come, I expect it to settle in the not too distant future and when it does it will reward those who are patient.

So what can we expect in the market?

In my last report I indicated that if the market fell through 5222 points that it could fall to around 4800 points before rising in the next bull-run. Last week the market fell to 5130.10 points and while it closed higher at 5182 points for the week, the market was still displaying signs of weakness. You will remember in my last report I indicated that the market should rise for at least one to two weeks, and although this was delayed, it looks as though this is occurring now.

While the market has been trading for 13 weeks during 2008, it looks as though this week will be only the second week for the year in which it will close higher than it opened. Whilst this is encouraging, it is not a sign that the down move is over although the strength of the market this week is indicating that the buyers are keen. Given that the market has not risen for more than two weeks since October 2007, I would like to see it trade up for at least two more weeks before I start to change my outlook.

That said I do expect the market will continue to rise over the next one to two weeks before it pulls back once again. I believe the market will bottom out in the not too distant future, and when it does it will reward those who are patient. Remember, the share market is a medium to long term investment therefore as I indicated above, I would recommend sitting back and waiting until the market finds a direction before before deciding to invest.

Dale Gillham is chief analyst of share investment company Wealth Within

Stock Roundup - BHP, RIO, Babcock and Brown (BNB), Worley Pasrons (WOR) and Centro (CNP)

One stock that I have written about a number of times is Babcock and Brown (BNB) - Australia's second largest investment bank behind Macquarie Bank (MQG). I own this stock (bought @ $27) and even thought it is trading around $15, I am still holding on to it because I believe it is a solid company, well financed and a good long term growth stock. It has been caught up in the global maelstrom of the credit crisis and because it's model uses a lot of debt to fund projects (which is repaid via the steady stream of income these projects generate). I really do believe it is going to be a $40 - $50 stock in 3-5 years time. This was demonstrated by recent news that 25 banks have backed increasing Babcock debt facility by 19 percent to A$2.8 billion. The firm said the renewal, foreshadowed in its 2007 results, reinforced the strength and flexibility of its balance sheet.

``That 20 basis point increase in cost looks to be a pretty good result for them given the tension in markets is clearly very extreme,'' said Adam Donaldson, head of debt research at Commonwealth Bank of Australia in Sydney. ``The ability to lock in funding for a minimal cost......is a major positive.'' The increased cost of funding its debt facility has been offset by a reduction in the cost of drawing on credit in the U.S. and Europe, where benchmark lending rates have dropped. I still think BNB will have some volatile times ahead and is actively trying to restructure or sell a number of the funds and trusts it manages. So any sustained appreciation in the share price won't start till later in the year. So either put it on your watch lists or hold on to what you have (like me) and enjoy the ride.

Onto other company news, what is happening with the BHP and Rio Tinto (RIO) merger? Well, RIO has basically rejected BHPs revised offers. saying a merger does not increase shareholder value. Personally, I think that this merger will not go ahead and if it does, it will take a long time to play out with BHP having to end up paying a lot more than planned. If you want to benefit from this potential transaction, buy RIO shares.

Worley Parsons Ltd., (WOR) Australia's largest engineering company, has long been one of the stocks on my buying watch lists. I just haven't found the right time to get into it. Either it rose too much, or with the credit crisis fell too fast. However, it has continued winning contracts and the underlying business is strong. JP Morgan reaffirmed its ``overweight'' rating on the stock, which enjoyed a 10% share price rise this week. JPMorgan said the company was ``well placed'' to deliver strong earnings growth for at least the next few years. ``The business is highly cash generative and seems likely to continue to deploy capital to strategic acquisitions to complement its strong underlying organic growth,'' the March 26 note said. ``We believe the current price to be an excellent opportunity for investors to get exposure to a high-quality, long-duration growth stock.'' At $34 the stock has dropped about 40% from its high's. I am going to be watching it closely over the next few weeks and look to buy if it drops below $30.

Centro (CNP), previously a ASX 50 stock and now a speculative play I reviewed a couple of weeks ago, has now got more time to repay monies owed to the syndicate of Australian banks behind the embattled group's banking facility. They will extend the debt facility until September 30, contrary to speculation that they might pull the plug when it expires on April 30. At 0.25c it looks an even better "punt" now - providing you believe it will make it through the debt ridden mess it is in now.

Finally, the Australian dollar advanced to the highest levels in a week, reversing part of last weeks steep falls, as rising prices of metals the nation exports boosted the outlook for economic growth. The local dollar is headed for a quarterly gain as traders raised bets the US Federal Reserve will keep cutting interest rates, increasing the appeal of Australia's bonds. ``Metals prices are up so that's supporting the Australian dollar,'' said Richard Grace, chief currency strategist at Commonwealth Bank of Australia, the nation's second-largest. ``It's difficult to be bearish on the Australian dollar while the U.S. dollar continues to soften.''

Recovery Stocks worth looking into

From the latest Aegis equity newsletter, here are the stocks that they think have potential to recover (potential buys). I have covered two of them on this site before - Centro Property group(CNP), Babcock and Brown (BNB), which I would still say are risky for now. BNB is one that I do own and like for the longer term. Do you fancy any from the list?

Click on the picture to expand.

Per some of my previous posts, I am still staying away from buying right now. However, I always am on the lookout for quality stocks that could be great buys when the markets stabilizes in a few months.

Centro - Worth a Punt @ 0.35 cents?

One of my readers emailed me asking "What are my thoughts on Centro shares (CNP) which have a had big fall of late....and is it good value at $0.35c?". I had been reading about the plunge in Centro stock, an Australian property trust which invests in and manages retail properties, but not really paying much attention as I don't own its shares and the property management sector has not been one of the areas I have been following. However, armed with the question and after doing some research, here is what I found.

At 35 cents the shares could present a good, albeit very risky, buying opportunity. The low share price (the stock was trading close to $10 a year ago) and potential developments could present a good entry point now. However, I reiterate, this is a very risky investment and you could just as easily make significant losses. So read this article to get my views, but do your own homework as well.

First some background on Centro and how it got to this stage -

Yesterday Centro Properties Group announced a $1 billion-plus loss in the first half of this year, wiping $100 million of its already diminished market value and making it more difficult for the company to refinance its multibillion-dollar debt obligations. Its shares have tumbled more than 92 percent since December, valuing the company at A$380 million. Centro, which has funds under management of more than $26.6 billion, had made a profit of $157.276 million in the previous corresponding half. The turnaround in fortunes made Centro one of Australia's biggest casualties of the global credit crunch

Centro, which in addition to being second- biggest manager of retail property in Australia, is the fifth-largest shopping mall owner in the United States, controlling more than 800 shopping malls in all. It became heavily indebted after it made a series of aggressive and highly leveraged acquisitions in the U.S. market over the past two years. Its 674 U.S. properties account for 62% of its total portfolio by value under management. It owns 128 shopping centers in Australia and New Zealand.

The main reason for the loss was the impairments to its U.S. properties where the company had to write down $278 million worth of direct U.S. property investments and $578 million of its investment in the U.S.-based New Plan Excel Realty Trust. Centro failed to attract investors quickly enough to buy the New Plan properties off its books before the debt came due. In contrast, rental income grew by 10 per cent in a virtually fully occupied Australian portfolio. Australian sales were more than $10.5 billion, underpinned by improving supermarket and specialty sales growth, which together make up more that 70 per cent of Centro's total portfolio sales.

Centro is trying to refinance $3.9 billion of its own maturing short-term debt by April 30, but remains under pressure to raise fresh capital through asset sales or an equity injection. It has initiated a strategic review and opened up its data room for interested parties. There is speculation that Australian property company Mirvac Group, US-based private equity firm Blackstone Group, the Malaysia's Mulpha International and General Electric may bid for a controlling stake in Centro. Other bidders are also likely to bid for Centro as well as its various interests. Formal bids are expected within weeks

Centro Chief Executive Officer Glenn Rufrano said the company's operations and business model were sound. "The current issue facing the company is one of capitalization. Our review is focused on recapitalizing the Centro balance sheet." He is "convinced" the US portfolio will increase in value over time.

``It's a very daunting task given that the outlook for the U.S. economy is grim,'' said Winston Sammut, managing director of Maxim Asset Management Ltd. in Sydney. ``I'm leaning toward the plug not being pulled on Centro on the basis that the banks would prefer a solution to be found rather than them take total control.''

In Conclusion

The biggest risk with this stock is that there could be further write-downs or creditors may not extend the loan payback period which means the company could go into receivership or forced to sell its profitable Australian fund and assets, and you'll end up with almost nothing for your shares. However, if you are willing to take some risk, I think you could make some money in the short term - particularly if potential buyers inject cash into the company. I would only put in between $2000 - $3000 , which you could easily double (or lose) in a few months. Here's what I think the stock has going for in the near term which could lead to some significant share price appreciation:

1. It has a number of global and well-funded buyers interested in its assets, which means that external investors see value in the company. If one of these buyers take a stake in the company it will reassure a lot of people about the company's future and confidence it will be able to meet its upcoming debt obligations.

2. It's Australian and NZ (ANZ) operations are going well and are profitable. Write-downs are on the US side only. So if they get extra funding and manage their US exposure they should still be making decent profits on the ANZ operations. In time, if the US recovers, they should return to strong growth given the good quality of their asset base.

3. US retail sales are starting to show early signs of recovery and with further US interest rate cuts on the way, this could be a positive for the retail sector and for companies like Centro which manage and purchase various retail sites/shopping malls.

So there you have it - my view on the stock. In answer to my readers question - the stock is worth a punt for the risk-loving investor and could have significant upside.However if the credit markets get worse, especially in Australia, then all bets are off. I would also say take profits when/if the stock goes up by more than 50% - which it could easily do if the funding issues are resolved. Good luck!

Sell IAG and get into QBE – Signs of Poor Management

Firstly, I must disclose that I own IAG shares and am not a happy shareholder. Secondly, I don't think I will own them this time next week. Why you may ask? Well, apart from their underperformance over the last couple of years, management was woeful at their latest Annual General Meeting. They have downgraded future revenue forecasts, failed in execution of acquisition plans, blamed market/weather conditions and on top of that are giving senior management hefty raises. All bad signs and time to get of the company. By contrast, QBE has grown in value without management excuses. I would rather put my money there.

I think that Management performance/track record is an important factor when evaluating companies. Poor management is a strong sign that things are not going well and until there are changes, it is unlikely things will get better anytime soon.

Here are some excerpts from various media sources confirming my negative view on the stock.

From The Australian

INSURANCE Australia Group chairman James Strong was yesterday forced to defend his chief executive, Michael Hawker, after the company's disappointing performance in the 2006-07 financial year. "The board has very clearly indicated its continuing confidence in Michael Hawker," Mr Strong said after a tense three-hour annual meeting in Sydney yesterday. "We've had some hitches in some areas and had some cycles and events go against us but that does not mean that you suddenly somersault and abruptly change the chief executive."

The tone of the meeting was set when shareholders criticized the board's decision to put its resolution on the financial statement and reports last. But the main areas of contention between dissident shareholders and directors was the company's disappointing 2007 results, the slide in the share price and a resolution to increase non-executive directors' fees.

One shareholder said: "I bought shares at $5.50 in the January 2007 issue and I've lost 18.5 per cent of that in 10 months." He questioned how the directors could be seeking a pay rise - 81.5 per cent in two years - in a year of underperformance. "I hope the directors are proud of what they have done because I don't see anything to be pleased with," he said.

Mr Strong replied: "I think ... your comments are taken on the chin. We take your criticism because it has not been a good year." He said that management was doing everything possible to improve performance and shareholder value.

IAG received a protest vote of 12.73 per cent against its remuneration report and 9.06 per cent against the increase in non-executive fees. Mr Strong acknowledged the protest vote and said the jury was still out on whether the non-binding vote on the remuneration report was useful. "I think people are still making their mind up about it," he said.

Mr Hawker told shareholders "it's fair to say our financial performance during 2007 was disappointing" due to two severe weather storms in Australia and Britain and various market cycles. Later, he defended IAG's decision to put a ceiling on its commercial lines business, saying it was a "brave move" but "the right business decision to make".

From the SMH:

A BARRAGE of criticism from a small but vocal group of retail shareholders yesterday greeted the embattled board of Insurance Australia Group after its directors accepted that its latest profit result had disappointed investors. The chief executive, Michael Hawker, and chairman, James Strong, bore the brunt of the hostile comments as several speakers among the near 400-strong audience lambasted the company for its recent poor performance. A second successive fall in net annual profits, from $759 million to $552 million, led to IAG's shares suffering an equally sharp drop in value since August, albeit

Top Australian stocks by PEG ratio - Which ones to buy.

One of the criteria I use to select stocks is the PEG ratio. Once I have looked at the stocks related macro and economic factors, I like to look at some the fundamentals of the the stock and the PEG ratio is one of the best fundamental valuation indicators. While the PEG is an important ratio, it is only as good as the underlying forecasts for earnings growth so do not use it in isolation, but more as a tool to help your overall analysis.

So what is a PEG ratio? Simply put, the PEG ratio compares a stock's price/earnings ("P/E") ratio to its expected EPS growth rate. That is, are the company's earnings growing faster or slower than the markets perception (consensus analyst forecasts).

- If the PEG ratio is equal to one, it means that the market is pricing the stock to fully reflect the stock's EPS growth.
- If the PEG ratio is greater than one, it indicates that the stock is possibly overvalued or that the market expects future EPS growth to be greater than what is currently in the analysts consensus number. Growth stocks typically have a PEG ratio greater than one because investors are willing to pay more for a stock that is expected to grow rapidly (otherwise known as "growth at any price"). It could also be that the earnings forecasts have been lowered while the stock price remains relatively stable for other reasons.
- If the PEG ratio is less than one, it is a sign of a possibly undervalued stock or that the market does not expect the company to achieve the earnings growth that is reflected in the analyst estimates. Value stocks usually have a PEG ratio less than one because the stock's earnings expectations have risen and the market has not yet recognized the growth potential.

So, all else being equal, to find good value stocks (i.e.better return/lower risk over the long term), look at the PEG ratio which has a value of LESS THAN ONE. As of September 30 2007, here are the Australian stocks with the lowest PEG ratios. Some of these have been star performers already, but look like they could run further. This list should provide a good starting point to further investigate these stocks.

Using other factors and the above list, these are the stocks I would recommend buying. Please do your own research first.

AWE - It is a growing (undervalued) oil exploration and production company. Is also a good takeover target

BBW - See my post on this here.

UGL - Good pipeline of projects. I will be reviewing this company shortly in an upcoming post.

JBH - Exposure to the electronic retail market, which should benefit from consumer spending in a buoyant economy.

SEK - Seek Ltd. All those jobs to fill.


Disclosure - The author does not own any of the above stocks when this post was published. Though this is most likely to change soon.

Some new links added

I have added some new RSS feeds and links to my site recently and hopefully you will find them interesting and useful.

RSS Feeds - Added 3 feeds from some decent financial news sources (AIR, ABC news and Share Cafe). You can find these on the right pane if you scroll to the bottom. They display the latest 5 articles from these sources in one place

Personal Finance - Found 2 new sites which have some good information on Australian personal finance products : Money Manager and ASIC financial tips

Superannuation information : Some links to good Superannuation reference sites. There are many people better qualified than me to talk about super, so I am just pointing you in the direction of the sites that I think have the most relevant information.

You can subscribe to this blog by clicking the links on top of the right hand pane or here.

Forbes 2000 List and the Top Aussie companies on it

Just saw the recent release of Forbes 2000 global companies (I had an earlier post with Fortune's List).

For a solid and safe portfolio (especially in these turbulent times) I would make my stock selection from the Australian companies on the list. If you are interested in investing overseas, this is also a good place to being your research.

The full list can be found at : Forbes 2000 List

An interesting point to note is that NAB was ranked higher than BHP. This is interesting, but is based on the 4 measures used -- sales, market value, assets and profits. Also, it shows the quality of Aussie banks from a worldwide perspective given that they make up 4 of the 5 Top Aussie companies.

I did get a response that I was only focusing on safe stocks. Well, I have invested in penny stocks and while I have made some money, overall it is a much sounder investment to focus on the top 200. Apart from sleeping easier, the long term returns are the same, so why take the extra risk. I have only got about 10% of my portfolio in these "risky" stocks as I think they do have a place, but they should only make a small part of the portfolio. Use the above list to pick the stocks for the majority of your portfolio.