Top NZ stocks for 2009

By KRIS HALL - The Dominion Post | Tuesday, 06 January 2009

Investment, according to Warren Buffett, is all about the long haul, not the quick buck. Fundamental to his success is an ethos that there are few outstanding companies worth investing in  time is required digging them out.

Once a potential gem has been unearthed and a stake acquired he is reluctant to sell, opting for a long-term approach as a means of accumulating wealth. As he once put it: never buy a stock unless you would be happy if the stock exchange closed down for the next 10 years.

Of course, in a year when share prices have been hammered and with the New Zealand benchmark index down some 35 per cent few investors will have followed in Mr Buffett's footsteps, choosing instead to dump stock and head for the exit.

But brokers are optimistic regarding the market's prospects for 2009. For investors willing to brave the sharemarket there are opportunities aplenty to sweep up cut-price, discounted stocks, they say.

``We are cognisant of the fact that markets are likely to turn well before we see tangible improvements in the real economy,'' said ABN Amro Craigs head of research Mark Lister.

``We see the middle of 2009 as having the best chance of a sustainable uplift, given that early 2009 is likely to be dominated by disappointing earnings reports, dividend cuts and potential capital raisings.''

ABN Amro Craigs, like its rival brokerages, continues to focus on strong, transparent companies with dominant market positions and sustainable dividends, with strong management teams and robust balance sheets.

There are some clear winners among the companies brokers have tipped to perform strongest during 2009, with Contact Energy, Sky TV and Fisher & Paykel Healthcare all vying for top spot.

Described by chief executive John Fellet as ``recession resistant'', New Zealand's sole pay tv operator Sky TV was singled out by half of brokers for its strong defensive growth attributes, despite the obvious benefits of a higher kiwi dollar.

Forsyth Barr says Sky's outlook is attractive because of its competitive advantage in bidding for content and its ability to use its content to increase  earnings through subscriber revenue, advertising, multi-room connections, the MySky personal video recorder and the complementary upsidentsG that exists nte from owning Prime TV.

Although Sky TV will struggle to acquire and hold on to subscribers during the downturn, ASB Securities says the market has priced in an overly pessimistic scenario.

The election of National to government will also allay some general concerns over the possible regulation of access to content, says ASB.

First NZ Capital head of research Rob Bode is more upbeat. ``This is a high quality asset with a sound balance sheet, and strong cash flows. Relative to the rest of the market this is one of the safer options and will provide some diversification benefits versus our more cyclical inclusions.''

Equal in the selection stakes to Sky TV is medical equipment maker Fisher & Paykel Healthcare, which steals top stock honours for the fourth consecutive year based on brokers' assumptions that the healthcare sector is among the most resilient to economic downturn.

ABN Amro Craigs likes the healthcare sector because it is non-discretionary and ``should hold up reasonably well through the weak global conditions''. Also in Healthcare's favour is the swing in exchange rates with the export intensive company lapping up the lower kiwi dollar.

``Although existing currency hedges will create a drag on earnings for the remainder of the 2009 fiscal year, Healthcare will be able to take advantage of the lower dollar in the 2010 fiscal year,'' said ASB Securities.

``Earnings will catch up with the underlying revenue growth the company has tried to achieve, and we expect 2010 earnings to be more than triple 2008.''

Also backed for a solid performance in 2009 is top two stock Contact Energy. Hamilton Hindin Greene research analyst Bruce Mathieson spells out why: ``Demand for electricity inelastic, no new energy providers coming to market, defensive stock.''

Brokers apply a similar line of defensive thinking to Vector. Both ABN Amro Craigs and ASB Securities talk up Vector's defensive regulated earnings, secure and predictable cash flows and attractive dividend yield with sustainability.

Retirement village provider Ryman Healthcare suffered at the hands of waning market sentiment and the negativity circling the property market in 2008, its price down 34 per cent for the year.

But Forsyth Barr's Rob Mercer says the company continues to deliver a quality product enjoying increased demand and it has the scale, in-house expertise and track record to capitalise.

``It has compelling demographics in its favour and is a market leader in a relatively young industry. The current weakness is an opportunity for investors with a longer time frame to acquire an interest in a leading New Zealand-focused success story with a solid growth profile.''

Guinness Peat Group's price more than halved in 2008 from $1.90 to a year low of 89c in November, but brokers maintain its long-term track record warrants a vastly improved share price.

First NZ Capital described the stock as ``extremely cheap'' and expects mounting pressure will be placed on GPG to close the deep discount to fair value and clarify its planned substantial release in value in 2010.

The firm says the company is trading at in excess of a 40 per cent discount to valuation and has a sizeable net cash position on its balance sheet.

Forsyth Barr has stamped the stock with its ``buy'' recommendation based on the substantial discount and the attractiveness of GPG's offshore asset base as a hedge against further falls in the New Zealand dollar.

Ongoing challenges with the faltering construction and property sectors will place Fletcher Building's earnings under pressure in 2009, though further downgrades have already been factored into the share price.

``By late 2009, we expect the market will be looking forward to a recovery in 2010 and will begin to re-rate FBU accordingly,'' said First NZ Capital's Rob Bode. ``In the meantime, Fletcher has a 12 per cent yield to satiate, which as interest rates continue to fall away, looks more and more appealing.''

Retailers The Warehouse and Michael Hill get a mention despite the tough outlook with the former expected to benefit from a general trade down among consumers, but one of 2008's best performers until the commodity slump took hold NZ Oil & Gas features only on Hamilton Hindin Greene's list.

Undervalued at its current price the company's good exploration prospects in the Tui oil field are expected to underscore opportunities such as the Pike River coal mine reaching full production and the arrival to market of the Kupe field.

Disclosure statements are available on request from brokers.

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THEIR PICKS:

Hamilton Hindin Greene:

Contact Energy

Goodman Property Trust

New Zealand Oil & Gas

Nuplex

Westpac Banking Corp

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Forsyth Barr:

ING Medical Properties

Ryman Healthcare

Sky Network TV

Fletcher Building

Guinness Peat Group

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ABN Amro Craigs:

Fisher & Paykel Healthcare

Port of Tauranga

Ryman Healthcare

Vector

TrustPower

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First NZ Capital:

Fletcher Building

SkyCity Entertainment

Guinness Peat Group

The Warehouse

Sky Network TV

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ASB Securities:

Fisher & Paykel Healthcare

Mainfreight

Vector

Sky Network TV

Contact Energy

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ABN Amro:

Auckland Airport

Contact Energy

Fisher & Paykel Healthcare

Delegats

Michael Hill