Red Sheds win brokers' nod for 2004

By PAUL PANCKHURST

One of the sharemarket's walking wounded, The Warehouse, is the company most fancied by sharebrokers for the year ahead.

Six of 10 sharebroking firms in the Herald's survey included the discount retailer in their top-five tips.

The share price of The Warehouse plummeted after problems in Australia, where the company acquired the Silly Sollys and Clint's Crazy Bargains chains in 2000.

However, by the end of the year, brokers thought the company was priced at a level that wrote off the Australian operation.

That meant investors were effectively buying a strong New Zealand business, with the potential for big gains if - or, in some views, when - the Australian business came right.

The second- most-picked stock - tipped by four firms - is Telecom, the company on the brink of transforming into a yield story. A big rise in dividend is expected to be announced in the company's half-year results report next month.

Forsyth Barr research head Rob Mercer said Telecom offered "reasonable medium-term growth in earnings", driven by modest revenue gains and lower interest costs.

It also had a strong core New Zealand operation, and the dividend hike would draw in investors, lending support to the share price.

After a bumper year for returns last year - 60 per cent of the stocks in the top 50 returned more than 20 per cent - brokers expect winners to be tougher to pick this year.

At First NZ Capital, research head Rob Bode said his firm's picks - Guinness Peat Group, Freightways, Mainfreight, The Warehouse and NGC Holdings - were more "defensive" than last year's stars.

Bode favoured companies with earnings that would be resilient while the New Zealand dollar stayed strong, and would not come unstuck from interest rate hikes.

"And, as always, we look for companies whose valuations do not look over-extended."

Transport and logistics company Mainfreight and power generator Contact Energy are popular, each picked by three firms.

Brokers believe Mainfreight will derive gains from last year's purchase of an 80 per cent stake in Owens Group and Contact is picked to benefit from higher prices and the early rundown of the Maui gas field.

Brokers' comments on the next most popular stocks - two votes each - included:

* Sky City Entertainment: "Consistently surprises on the upside"; "a core portfolio holding".

* Freightways was described as having a track record of revenue and earnings growth and the potential to beat earnings estimates by boosting margins and market share.

* Auckland International Airport: "Favourable earnings growth outlook (for example, tourism growth, airline competition)".

* Turners Auctions: "Growth initiatives, such as providing greater finance alternatives for customers".

* Tower: "Remains in play. Yes, there is a lot of restructuring to be done; GPG's management experience will assist".

* GPG was described as a high-quality, proven investment company; a decline in the New Zealand dollar would boost the value of its overseas assets.

* NGC was described as well-priced; "still under-valued after its capital return"; "greater certainty on future gas-contracting arrangements is expected".

Twenty stocks are each tipped by a single broker.

They are: 42 Below, Carter Holt Harvey, CDL Hotels, Fisher & Paykel Appliances, Fisher & Paykel Healthcare, Fletcher Challenge Forests, Hirequip, Infratil, Lion Nathan, NZ Oil & Gas, Powerco, Promina, Provenco, Restaurant Brands, RMG, Skellmax, Sky Network Television, Taylors Group, Tourism Holdings, and Waste Management.

The three firms whose picks have the least cross-over with their peers are UBS, Macquarie and Direct Broking.

One of UBS's novel picks is Restaurant Brands, the fast-food operator that struggled last year.

Macquarie is the only firm to go for the two big forestry stocks, Carter Holt Harvey and Fletcher Challenge Forests. Macquarie Equities investment director Arthur Lim said the attractions of Carter Holt included the likely benefit to shareholders of a "fundamental shift" in company strategy.

The company was selling the tissue division and could also sell the forestry estate, he said.

Macquarie liked Fletcher Forests for pending returns to shareholders from the sale of forestry assets and the strength of the residual processing and distribution business, which could become a takeover target.

Direct Broking's Brett Wilkinson said the firm chose growth stocks that, because of their risks, would be a small part of the usual portfolio.

Direct was the organising broker for the float of 42 Below, the vodka maker whose shares plummeted on listing. It is standing by its man.

"This is a five-year growth story - it is hard to find another stock on the New Zealand market that has potential to grow sales like 42 Below," said Wilkinson.

Forsyth Barr's tips for last year were the best performers, returning 50.2 per cent, compared to the market's 24.5 per cent for the period.

For a five-stock portfolio in a bull market, the trick was not to be dragged back by one bad choice, said Mercer. "It's what you don't have."

Forsyth Barr's portfolio included Hellaby Holdings' 82 per cent return and also did not feature any share that went backwards.

Rival broking firms were pulled back by the likes of Air New Zealand (-11.5 per cent), Restaurant Brands (-11.8 per cent), Michael Hill International (-15.6 per cent) and The Warehouse (-24 per cent).