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Boral the pick in building sector

WITH interest rates likely to rise to around 5 per cent by mid-year, investors should remain biased toward selecting cyclically– specifically stocks which do not yet fully reflect cyclical growth upside in valuations.

The diversified resources and building materials sectors are the preferred exposure in this respect, with recent retracement of both Rio Tinto and BHP Billiton offering a favourable entry opportunity. Within the building sector, Boral would be the preferred pick.

In addition, and despite rising bond yields, banks also offer relative investment appeal from a value and risk perspective, and key picks in this sector are CBA, Suncorp Metway and Macquarie Bank.

Local stocks to watch

Woodside Petroleum remains a key pick within the oil and gas sector, offering excellent long-term growth potential. Not only was Woodside’s recent result solid, the full-year dividend of 70 cents/share (fully franked) was better than expected, and noted analysts within the sector have begun to revise up forward estimates.

Woodside has disclosed its internal oil production target for 2002 and is expecting a modest increase over 2001. Further catalysts to share price growth include the recent up tick in the oil price, as well as news on the Chinese LNG tender decision, which is expected by the third quarter of 2002. Woodside is one of three short-listed parties for this potentially industry-changing technology.

Wesfarmers recently reported an excellent result. Both Hardware and Landmark Rural generated a positive surprise, and the integration of Howard Smith remains on track to deliver synergies of around $40m in 2002 and $60m in 2003.

While core earnings growth is likely to slow on the existing business model, a reduction in gearing levels should provide considerable scope for future acquisition. Given management’s existing track record, the market is likely to extrapolate significant earnings upside potential into any such development.

Foodland also recently reported a strong result, with the strength in food retail in WA giving credibility to the opportunity for the group in Queensland. The profit margin achieved by the group is notably higher than that of its competitors.

Notwithstanding the rise in the share price in recent weeks, the potential for upgrades, a clear growth profile and increasing credibility of management is expected to lift the rating even further.

AlintaGas has firmly established its position as a pre-eminent small cap utility. AlintaGas’ recent strong result was achieved mainly due to an increase in revenue, cost reduction, high LPG prices and better volumes extracted from Wesfarmers’ LPG plant.

AlintaGas, currently trading at about 10 times forecast 2002 earnings, is trading at a substantial discount to its peers, and given its strong earnings per share growth, should trade at par, if not at a premium.

While BankWest’s result was credible, it is difficult to see 14 per cent annualised revenue growth being maintained in the future.

Furthermore, the dilution of increased shares on issue will prevent the achievement of double-digit earnings per share growth in coming periods.

While the current price suggests a degree of takeover premium has been factored in, the relatively high dividend yield offers reasonable appeal in the meantime.

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