INVESTOR PICKS: WILSON HTM

The ASX responded positively when Julia Gillard became Prime Minister, but no matter what happens at home there will always be global flare-ups that affect prices. The European Union will unlikely allow its struggling economies to hit the wall, but with so much volatility it makes sense to buy shares with solid fundamentals. Wilson HTM investment adviser Mark Connors tells Brisbane Business News about three Queensland companies that fit the bill, with upward price movements on the cards.

Bow Energy (BOW)
Market Cap: $352m
Issued Shares: 298.6m
12-month high-low: $1.58 - $0.77
12-month target price: $2.15

From its exploration program to date, this Brisbane-based commercial oil and gas explorer has achieved independently certified net reserves of 114 2P and 2360 3P (petajoules), increasing its calendar year end-2010 and 2011 reserve targets significantly, and has stated that it is fully funded to deliver these targets.

The 2011 3P (6200 3P) target represents sufficient gas to supply a 4 mtpa (million tonnes per annum) liquefied natural gas (LNG) train for over 25 years, should the gas be economically recoverable. This is materially significant with respect to the proposed Gladstone LNG industry and will be of interest to those LNG project proponents who are seeking gas supply for expansion of proposed projects.

Bow is progressing multiple commercialisation options, while the development of the 30mW Blackwater power station is also underway and will provide the opportunity to monetise gas that would otherwise be flared. Domestic gas supply and demand from LNG projects will also be targeted.

The increase in targeted reserves is a positive sign of the potential within the company’s tenements, and we continue to believe that significant share price re-rating will be dependent upon demonstration of commerciality of the reserves. We have a ‘buy’ recommendation and a 12-month target of $2.15 per share. Further upside could be expected through the proposed new MRRT.

Retail Food Group (RFG)
Market Cap: $280m
Issued Shares: 106m
12-month high-low: $3.09 - $1.36
12-month target price: $3.60

This Gold Coast-based retail food brand manager and franchiser has a strong record of success with acquisitions and we would expect more are likely. It holds the intellectual property rights to Donut King, Bb’s café franchise systems, Michel’s Patisserie, Brumby’s Bakeries, Big Dad’s Pies and DCM Coffee and Donuts, operating a franchise model with more than 1000 stores across Australia, New Zealand and China.

RFG has solid underlying earnings and earnings growth remains positive, despite currently weak retail conditions and lack of shopping centre development. These weak conditions do pose a risk though, as well as higher interest rates and how the integration of acquisitions goes, including systems, franchisees and suppliers.

Our target price is $3.60 which is based on a FY11 estimated price/earnings multiple of 12.3x.

Suncorp-Metway (SUN)
Market Cap: $10.789b
Issued Shares: 1,28b
12-month high-low: $5.79 -$9.42
12-month target price: $11

This Brisbane-based banking, insurance, wealth management and financial services provider has appeal on three main fronts – transformation under a new CEO, bank leverage to the improving economy and surplus capital generation. With Patrick Snowball alleviating 1H10 forecast rebasing concerns in virtually every interaction with the market since he arrived, and conditions clearly improving for Suncorp’s stressed asset exposures, we feel downside risk has moderated sufficiently to argue a more positive case.

Our price target of $11 is based on a blend of our price/earnings-based sum-of-parts valuation and our discounted cash flow valuation. Our PE-based valuation incorporates discounts for the bank and the general insurer versus its peers, given the higher risk profile of the business.

Key risks include general insurance margin pressure from increased competition and a higher bad debt charge in the banking business.