Amcom Telecommunications Limited (AMM) is a fiber-based telecommunication service provider. AMM has three key business segments; Fibre, Business Services and Amnet.

The Fibre division provides a comprehensive range of high speed products to blue chip corporate clients, government agencies and other telecommunication providers through its own extensive fibre network in all main capital cities across Australia.

Business services offers voice services, data centre management and managed IT services. The Amnet division supplies a variety of communication products with the principal focus being broadband services.

1H13 Results

AMM has an extremely good track record when it comes to growing its earnings, and its 1H13 result was no different. The company recorded an underlying net profit of $10 million, a 20% increase on 1H12. The

Revenue over the year jumped 43% to $136 million, with the November 2011 acquisition of L7 solutions contributing $36.5 million. The uplift in earnings was due to strong organic sales growth from the group’s core data networks and expanded hosted and cloud services offerings.

The group is also showing the ability to increase its recurring revenue base, with the annuity streams of the business at $97 million at 31 December 2012, up from $90 million at June 2012.

AMM also paid an interim dividend of 2 cents a share, a 11% jump on the previous interim payment.

L7 Solutions and the Fibre business

The group acquired L7 Solutions in November of 2011, but is still unlocking many of the synergy benefits that it promised upon acquiring. FY13 will mark the first full year of L7 being integrated within the AMM business, and we expect further opportunities to emerge, especially as group moves into the cloud services space.

The group is expanding its Fibre network, and as it grows, economies of scale will seep through, as shown below by the decreasing capital expenditure per $1 of revenue created.

Outlook

At the release of its 1H results, the company reiterated its FY13 underlying earnings guidance of at least 20% growth. We believe this forecast is achievable considering the company’s history of growing earnings by well over 20% year-on-year over the last 10 years.

As the company grows, its economies of scale benefits will begin to show in all areas, as it has already in the fibre division.

Given the group’s relatively small market share we believe that a combination of organic growth and acquisition based growth (L7 Solutions) will hold the company in good stead in the coming years.

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Forge Group Limited (FGE) identified as a share to buy is a multidisciplinary Engineering, Procurement, and Construction (EPC) service provider. The group, with over 1,700 employees delivers end-to-end EPC turnkey solutions to the power and infrastructure, minerals and resources, and oil and gas sectors in Australasia and Africa.

FGE services some of Australia’s and the world’s most reputable mining and energy companies such as BHP Billiton, Rio Tinto, Fortescue Metals Group, Woodside, Chevron, MCC and AngloGold Ashanti.

The group has four divisions, branded as follows:

 
1H13 Results

FGE’s results for the first half of the financial year were impressive. Revenue was $502.9 million for 1H13, up a staggering 123% when compared to the prior corresponding period.

Net profit for the half was $49 million, a massive 60% increase on the 1H12. Much of the above was helped by the acquisition of Forge Group Power (formerly CTEC), which it acquired in early 2012 for $38.6 million.

FGE balance sheet is also in a very healthy position, with a net cash position of $161.9 million at the 31 December 2012, up from $81.8 million at the same time in 2011.

Cash flow from operations was very solid, almost tripling to $79 million from $28 in 1H12. The group also increased its interim dividend by 60% to 10 cents a share.

Growth driven by Power

The above shows steady revenue growth up until the 2H12, after that revenue exploded due to the acquisition of Forge Group Power (formerly CTEC). As of 23 January 2013, the group had an order book of $1.04 billion, $462 million of which was secured in the December half.

The order book includes such projects as: power stations for mining giants Rio Tinto and BHP; an ore processing facility for Fortescue Metals; and Navy Fleet Maintenance for the Australian Navy.

Outlook

FGE’s 1H13 results were spectacular and its outlook appears to be promising, with a range of projects on the go. The company’s should be able to continue leverage its current relationships with mining majors BHP, Rio Tinto and Fortescue into new contracts in the future.

Interestingly 82% of the new contacts secured in the 1H13 were for the power division, which we see as a good move. While many other mining service contractors are fighting over the more common capital expenditure projects, FGE has recently been positioning itself in the less competitive power solution business.

We believe that groups position as a power provided coupled with its strong balance sheet will continue to see the company growth its earnings and as a by-product its share price.

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The Reject Shop (TRS) is a discount variety retail company, targeting Australian consumers through low price points, bargain-purchasing and convenient shopping locations. As of 30 June 2012, TRS had 239 stores in Australia, with plans to open another 40 in FY13.

At these stores the company offers a wide variety of general consumer merchandise, with a focus on everyday needs, such as toiletries, cosmetics, homewares, personal care products, hardware, basic furniture, household cleaning products, kitchenware, confectionery and snack food.

The company has two key advantages that many of its mid-to-upper market rivals don’t – a strong AUD benefits earnings due to lower import costs, whilst the substitute nature of its products can appeal to cost-conscious consumers.

Consumer environment

The environment in which TRS and all retailers have been operating has been challenging to say the least, but there are signs that some of these challengers area abating.

The latest reading of the Westpac Consumer Sentiment survey showed the index rising 0.6%, to 100.6 – its third consecutive month above the 100 level.

A reading above 100 indicates that more consumers are optimistic about the economy than pessimistic. Unfortunately the increase in consumer confidence has not translated into an increase in retail sales, which declined 0.2% in the month of December.

Oddly enough the release of the poor retail sales saw the sector move higher, as the market took the view the numbers add to the likelihood of further cash rate cuts.

FY12 results

TRS’s FY12 results were a big improvement on what was a disappointing FY11. The company grew its net profit by 35.6% on-year, to $21.9 million.

The addition of 18 new stores over the year helped sales climb 9.9%, to $555.3 million. An increase in stores was not the only reason for the jump in sales; comparable store sales grew 0.5% over the year, with a 3.2% jump in the second half.

We believe that the 2H12 momentum will continue into TRS’s 1H13 results, which are scheduled to be released on 20 February 2013.

Outlook

TRS’s FY12 results were impressive on several fronts. Besides from the strong store sales growth the group was able to reduce its debt by $16.9 million in FY12, while increasing free cash flow from $1 million in FY11 to $25.2 million in FY12.

Another notable item in TRS’s results was that gross margins rose from 38.9% in FY11, to 44.1% in FY12, likely a combination of a strong Aussie dollar and a reduction in shipping costs.

While retail sales numbers are an important indicator for the retail space, the substitute nature of TRS’s products can appeal to cost-conscious consumers, thus giving the company the ability to grow its sales in a weak environment.

Overall we believe that the aforementioned healthy balance sheet, strong comparable sales growth and expansion of gross margin will continue to drive TRSs earnings and in turn push its share price higher in the near-term.

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Karoon Gas Australia (KAR) is an energy exploration company and is a member of the S&P ASX200. The company is focused on identifying, exploring and developing acreage that is highly prospective for oil and gas.

KAR currently has four focus areas – the Browse Basin (Western Australia), the Santos Basin (Brazil), Tumbes Basin (Peru) and the Maranon Basin (Peru).

Santos Basin

KAR has a 100% equity interest in five oil blocks in the Santos Basin, offshore Santa Catarina in Brazil.

The Basin has a history of oil discoveries, and importantly, KAR anticipates that new fields within its acreage can quickly be brought to production due to relatively shallow water depths and their proximity to existing infrastructure.

Recently KAR announced that it had reached a farmout agreement with Pacific Rubiales Energy (PRE) for the Santos Basin. The agreement was for 35% equity of its 100% interest in four offshore exploration blocks, with options for a fifth.

KAR will receive $40 million in cash and PRE has agreed to pay for the first US$70 million of the costs for each of the first two wells in KAR’s upcoming 3-well Santos Basin exploration program.

PRE will also share its 35% of the costs and KAR will remain the operator.

Browse Basin

KAR’s Browse Basin drilling campaign holds long-term promise for the group. It owns 40% of the project with the remainder being owned by joint venture

KAR will begin drilling at the Browse Basin in Western Australia in the coming weeks. The drilling will begin at the Boreas-1 well, the first of up to an eight well exploration and appraisal project.

Outlook

KAR is an exciting oil and gas explorer, with several promising drilling campaigns about to get underway.

In particular, drilling at the first well, Kangaroo 1, at the Santos basin will commence in November this year and will take anywhere between 60 to 80 days. The company is also beginning drilling at the Boreas-1 well, which has some very promising targets.

Overall we think the company has plenty of near-term catalysts on the horizon with the aforementioned drilling projects likely to drive KAR’s share price.

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TPG Telecom Limited (TPM) wholesales bandwidth and other telecommunications services.

The company also delivers a full range of telecommunications products and services to home and business consumers through its retail operations.

Its network infrastructure includes fixed line, fibre and wireless services connecting voice customers with call collection areas throughout Australia and data and internet customers with more than 350 exchange areas.

FY12 results

Last week TPM reported their FY12 results, which showed an EBITDA of $261.4 million, a 12% growth on the prior year. The result was slightly ahead of its upgraded EBITDA guidance of between $250 million and $260 million.

TPM posted a net profit of $91.0 million, a 16% rise on prior corresponding period. The result was hurt by a pre-flagged $23 million one-off tax expense relating to a change in taxation legislation.

Normalised NPAT (which excludes one-off expenses) jumped 46% to $114.2 million. Total revenue over the period lifted 15% to $663.1 million.

Nextgen

Late last month Leighton Holdings announced that it is exploring the sale of its telecom assets, in an effort to reduce balance sheet pressures.

It is believed that Nextgen Networks, which specialises in high performance, premium data services for corporate, government and carrier markets, is on the chopping block.

TPM is reportedly interested in the assets which are expected to fetch anywhere between $500 million and $800 million. We think that the business would be a perfect strategic fit for TPM and could provide some synergy benefits with its current infrastructure.

Given that Nextgen has forecasted for a CY13 EBITDA of $125 million we believe that TPG would be able to acquire the asset completely through debt, given earnings would more than cover the extra debt liabilities.

A capital raising is also a possibility, but given the likely earnings accretive nature of the purchase we can’t see a raising being completed at a steep discount.

Outlook

TPM has been a consistent performer over the last few years, growing earnings in what could only be described as a weak consumer environment.

The group has forecasted EBITDA growth of over 6% for FY13, which we feel is conservative. TPM has a history of conservative estimates with only 6% EBITDA growth forecasted for FY12 and 12% achieved.

The possibility of the purchase of Nextgen is also appealing, given the likely favorable terms TPM would be able to achieve due to Leighton’s need to relieve balance sheet pressures. Overall we think TPM has the capacity for continued growth and this is likely to be reflected in its share price.

NIB Holdings (NHF) is a health insurance company, providing affordable health cover to almost 880,000 people nationwide.

Established over 50 years ago, with premium revenue of more than $1 billion in 2012, NHF is Australia’s fifth largest health fund and the only ASX-listed health insurer.

The company offers a wide range of policies suitable for customers across the board, but its focus on the youth market has helped it to achieve the fastest growth amongst the major players in the sector.

FY12 Results

NHF’s FY12 results continued to show the growth that we have come to expect from the company, as the below demonstrates.

Premium revenue over FY12 grew 11.5% to $1.12 billion.

Net underwriting profit was $70.7 million, which was a 15% increase on the prior corresponding years. EPS was 14.8 cents per share, which was a jump of 8% on the prior years.

Impressively, return on equity climbing 31.5% over 2012, to 21.7%. The group also has a healthy balance sheet, with no debt and operating cash flow increasing 52.4% to $134.6 million.

Strategy for growth

NHF has solid policy growth of 4.7%, which was well above the average industry growth rate of 3.7%.

The company’s growth has been driven by its focus on people under the age of 40, but has been slowly expanding its base and looking to increase in the following areas:

• Over 55s
• Corporate market
• Western Australian market
• International workers and students

We believe that increased investment on the above mentioned areas will be of benefit to NHF going forward. The company also has room for expansion, with no debt and $134.6 million in operating cash flow generated over FY 2012.

Outlook

NHF’s core health insurance business saw all of its key metrics improve in FY12, with policy subscriber growth complemented by a successful implementation of a price increase.

We think the company is in a great financial position to grow its earnings either via acquisition or organic investment. Given the current falling interest rate environment we could see another movement back into income stocks such as NHF – with a current dividend yield of 5.5%.

We think the NHF’s earnings growth potential and solid dividend yield will continue to deliver gains for its share price.

WorleyParsons (ASX:WOR) provides professional engineering and management services to the energy, resource and complex process industries.

It offers a broad range of services, from feasibility studies to design and project services, and is exposed to a number of sectors.

The group is a leader in its industry and has established long-term relationships with a number of blue-chip companies.

Despite facing obstacles in FY11, WOR was able to grow its profit and revenue, with the Hydrocarbons business driving the result.

Moreover, WorleyParsons is ideally placed for the future, as the lure of high energy prices is likely to drive demand for its services from the bigger oil companies.

Hyper about Hydrocarbons

The majority of WOR’s earnings are in the Hydrocarbons (oil and gas) division.  WOR’s leverage to the energy market is a key attraction, particularly as demand for oil and gas is expected to strengthen due to emerging market growth.

The oil supply/demand imbalance (dwindling oil supplies vs. growing energy demand) is only expected to worsen due to this growth.

The lure of energy price appreciation is likely to encourage oil companies to ramp up capex spending, which puts WorleyParsons in an ideal position to accelerate its contract win rate.

WOR has had a positive start to 2012, winning two major contracts in January.  The first was a US$115 million contract with ExxonMobil, and the second was a US$180 million contract with Chevron (split with a 50/50 JV partner).

LNG is the future

The big oil companies have recognised that the world is moving towards more unconventional sources of energy such as LNG.

There are a number of massive projects being undertaken throughout Australia, and WOR has had a hand in some of the key ones such as Pluto and Wheatstone.

WOR’s experience in developing LNG projects, coupled with the established relationships it has with its blue-chip clients, makes it ideally placed to benefit from this increased focus on alternative energy.

Outlook

As the global growth engine continues to shift from developed economies to the developing regions, there will be increased demand for commodities.

As mining companies look to meet this demand, there is going to be a significant increase in capex activities over the coming years.

This will strengthen the market for WOR’s services, providing it with plenty of growth opportunities, especially in the hydrocarbons space.

WOR is in a sound financial position and is expected to continue the positive earnings momentum into FY12.

Based on one year forward earnings, WOR is trading at a more than 50% premium to the industry average.

Whilst this may appear to suggest the company is overvalued, we feel the premium is justified when considering WOR’s relatively stronger growth prospects, cash flow generation and a five-year average return on equity of over 20%.

The long-term relationships WorleyParsons has fostered with its blue-chip clients is likely to yield considerable benefits for the company, particularly as miners look to capitalise on rising commodity prices as well as the world’s shift to alternative energy sources.

We believe that WOR is poised for growth, and is defiantly a stock to watch for 2012.

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James Hardie Industries (ASX:JHX) is a leading international building materials group that produces a wide range of fibre cement building materials used in the exterior and interior of residential and commercial buildings.

The company is also the largest seller of home siding (imitation wood) in the US, and produces fibre cement in the US, Australia, New Zealand and the Philippines.

Approximately 80% of JHX’s sales come from the housing industry, and the majority of this exposure is via the US housing market.

Although the US property crash has been a millstone on JHX, recent evidence suggests the market may have turned the corner.

JHX focus on efficiency and market share gains has placed it in an advantageous position to benefit from increased US housing activity.

US housing recovery

Although the US housing sector has been in a well established decline for much of the past five years, recent evidence is pointing to a long-awaited recovery.

Among the relevant housing indicators for James Hardie are housing starts and building permits.

Housing starts measure the number of new monthly building constructions, whilst building permits are more of a leading indicator in that they measure the number of new monthly residential building permits.

Since May 2011, both these indicators have been steadily rising in a sign Americans are beginning to take advantage of the country’s record low interest rates.

Furthermore, we see this momentum continuing due to the slowly strengthening US jobs market and the Federal Reserve’s pledge to maintain low interest rates until the end of 2014.

Operating results

In late November, JHX reported a 1Q12 net operating profit of US$41.2 million, which was double its result in 1Q11.

Despite reporting low demand, James Hardie was able to achieve its profit on the back of operational improvements such as a reduction in fixed costs, as well as an increased share of the fibre cement market.

This increased market share, positions JHX well in the event of an acceleration of the US housing recovery.

Outlook

JHX forecast FY12 net operating profit of US$126 – US$140 million.  Although management was cautious about the outlook for US housing, recent data points to a noticeable pickup in this industry.

With US employment inching higher, housing affordability high and the Fed committed to a record low interest rate environment, there are enough incentives to drive continued improvement in residential construction activity.

We at the Australian Stock Report believe that a focus on cost control and increasing market share has placed JHX in a strong position to leverage off any US housing recovery.

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QR National (ASX:QRN) is Australia’s largest rail freight operator and the world’s largest rail transporter of coal from mine to port for export markets.

QRN is a provider of specialist rail engineering, construction and maintenance services in Australia, operating a network of five terminals and more than 40 depots across five states.

The company not only transports minerals but agricultural goods, and is a significant transporter of grain.

Since being privatised by the Queensland government in November 2010, QRN has been a stock to watch with a large percentage of retail shareholders.

QRN has faced some major headwinds since listing, principally the early-2011 flooding and cyclone in that state.

However, the company proved its resilience by managing to record a healthy FY11 underlying profit despite the impact to coal volumes from the floods.

The expansion into the WA and NSW markets also positions the company well for future growth.

Profit shines despite floods

QRN delivered an FY11 net profit of $349.5 million, which compared to a $36.8 million loss a year earlier when it was still owned by the Queensland government.

QR National faced a number of difficulties last year due to the Queensland floods, yet still managed an 11% lift in revenue and a 35% rise in underlying EBIT.

The growth in earnings was achieved due to the company’s focus on cost management and better revenue quality (more customer-focussed contracts).

With a net gearing ratio of less than 10% at the end of FY11, QRN’s balance sheet was in strong enough shape financially to pursue growth initiatives.

Volumes down, but significant growth potential

The Queensland floods had a big impact on QRN’s coal haulage volumes, and the company is yet to fully recover from the damage.

The slow recovery in Queensland coal volumes necessitates an ongoing focus on cost initiatives as well as pursuing new growth opportunities.

The company has recognised the importance of that second point, and is looking to expand its presence in the NSW Hunter Valley coal region and WA’s lucrative iron ore market.

QRN recently signed an iron ore haulage contract with the Karara Iron Ore Project, which is expected to deliver $900 million in additional revenue over the next ten years.

That is not say QRN has forgotten its core Queensland market.  Asciano and QRN recently signed a multi-year deal with Rio Tinto to haul millions of tonnes of coal from its Queensland mines.

Importantly, this deal will leverage QRN’s $1.1 billion project to expand the Goonyella-Abbot Point rail network link.

Outlook

QRN’s management has thus far proven its ability to grow earnings in periods of turbulence.

A focus on improving operational efficiency paid dividends for the company in FY11, and given the slow recovery in Queensland coal haulage, we would look for similar diligence this year.

Along with cost initiatives, QRN is positioning itself for growth via the Goonyella-Abbot Point project and its expansion into the WA and NSW mining industries.

In our view, the positive momentum will translate into more near-term growth for QRN.

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Nexus Energy (ASX:NXS) is small cap emerging oil and gas producer, with operations focused on the Gippsland Basin, offshore Victoria and the Browse Basin, offshore Western Australia.

In 2009, NXS transitioned from explorer to producer with the start-up of the Longtom gas project.

The Longtom project was plagued by production problems in late 2010 due to the detection of mercury in its gas.  However those issues have since been resolved and the project has been delivering record production of late.

A lot of interest currently surrounds NXS’s 85% stake in the Crux liquids project (15% Osaka Gas-owned), which is Shell-operated and has a reserve estimate of around 75 million barrels of oil.

With liquefied natural gas (LNG) seeing global demand as an alternative fuel source, NXS and its peers are in good standing owing to the LNG boom and recovering commodities market.

The company is in the midst of securing financing for its share of Crux’s development, and a final investment decision (FID) is expected by the end of the year.

The Crux of the matter

Nexus is looking to commercialise the Crux project, but before a FID can be reached, it must secure financing.  The group is currently trying to obtain up to US$1 billion in financing, with the lenders currently conducting due diligence.

Encouragingly, NXS has also identified a potential JV partner for the project, and is expecting a binding proposal in the next few weeks.

NXS’ proposed 35% sell-down of its equity stake in the project, combined with the potential US$1 billion in debt financing, are signs that the group is on track achieve the FID by the proposed target date.

The economics of the project have already been confirmed under varying capex and schedule sensitivities.  Construction of the project is expected to total around $1.78 billion.

Therefore, achieving FID by the target date will help alleviate concerns over NXS’ ability to fund the project’s developments costs.

Whilst the stock has rallied ahead of the FID, we believe the market has yet to fully price in the huge revenue potential of the project (assuming a positive FID).

The Longtom and short of it

In late October, NXS reported Longtom gas production of 6.4 petajoules (PJ), which was 7.4% higher than the previous quarter.

Saleable gas production totaled 6.2 PJ, which was up 6.7% on June quarter output. This drove revenue up from $27 million to $29 million in the same period.

The increase in Longtom output has continued the turnaround in this asset, which faced production issues early in the financial year due to mercury detection in the delivered gas.

The installation of mercury removal equipment has so far allowed Nexus Energy to meet gas nominations under its contract with customer, Santos.

Future growth will come from the exploration of Longtom South, which is a prospect located 4km south of Longtom.

Given the proximity of the two fields, it wouldn’t cost NXS as much to develop Longtom South. If gas is ultimately discovered, it will provide another source of cash flow, thus increasing the company’s value.

Outlook

NXS has had a fantastic turnaround in the past few months, as anticipation builds ahead of its proposed FID by the end of the year.

The company is in the midst of securing financing for the project and is also in negotiations to sell down part of its stake.

That’s not to say either of these will definitely happen, as there is always the chance of NXS failing to obtain the required funding.

However, NXS hasn’t indicated any issues with the FID process thus far.  Therefore we believe the potential payoff from taking a position in Nexus Energy is worth the risk.

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