Taking Stock ::

Author: Gabriella Hold, Vesna Poljak, Simon Evans and Jo Clarke
Date: 16/02/2007
Words: 669
Source: AFR
Publication: The Financial Review
Section: Market Wrap
Page: 38

DAVID JONES
Retailer overpriced

Brokers argue that David Jones shares are looking expensive following a recent flurry, with the retailer hitting a record high of $4.80 on Tuesday ahead of its buoyant second-quarter sales result of $607 million. DJs has gained about 9 per cent over the past month and about 92 per cent in the past year, but dipped 15? yesterday to finish at $4.65. UBS says the recent outperformance has "stretched the valuation to demanding levels" and kept its "neutral" rating. Citigroup agrees, noting that positive factors such as the company's good management and solid operating environment are already factored into the share price. Goldman Sachs JBWere raised its valuation yesterday by 3 per cent and said the market is pricing in earnings growth well above current guidance.

Gabriella Hold

CHALLENGER INFRA
Meeting the challenge

Challenger Infrastructure Fund raised its distribution forecast this week after its investments produced more cash than expected. Challenger increased its estimate by 12 per cent to 32.1? a unit led by the strength of its Inexus division. Inexus, a provider of gas and electricity connections, is the company's biggest asset. UBS said the unit was the key driver of the result and reaffirmed its "buy" recommendation. Shares of Challenger Infrastructure have gained 23 per cent in the past 12 months and closed at a record high of $3.99 after reporting earnings on February 14. JPMorgan said Inexus had locked in returns as well as predictable, strong growth and could even exceed its sales budget for 2007. It estimates the company is trading at an "attractive" yield of 8.2 per cent.

Vesna Poljak

THE REJECT SHOP
Returns keep rising

The Reject Shop's share price has doubled in less than 12 months and now trades at more than $10. The 18.1 per cent rise in first-half profit to $10.2 million announced on Tuesday reinforced the strong momentum generated by the low-end retailer, although the business must go through a management transition, with former Coles supermarkets boss Gerry Masters to take over from Barry Saunders in the next few months. Comparable store sales growth of 7.8 per cent is impressive and the retailer is opening up to 25 stores each year until 2012. Clime Asset Management, which holds about 7 per cent of the stock, is positive about the disciplined management. Clime director Roger Montgomery said The Reject Shop was improving its returns, with return on equity of 41.8 per cent in 2002-03 forecast to rise to 59.5 per cent in 2006-07.

Simon Evans

SPOTLESS
In a sticky spot

Spotless Group is battling soaring resin prices - a key component of plastic coat hangers, which comprise a large chunk of the company's ailing retailer services division. The division suffered an EBIT slump of 21 per cent in the first half of 2006-07 because it is unable to fully pass on the increases to retailers and manufacturers. The downturn incurred the wrath of stockbrokers. Citigroup said it was "always tempting" to assume the negative macro factors weighing on the Spotless results would abate, but it was sobering to note the company's EPS has been largely flat since 2001. Goldman Sachs JB Were said Spotless's first-half profit was 5 per cent below its expectations because of legal costs associated with a court case, but the trading performance was in line with its predictions.

Simon Evans

PERILYA
On track for more records

The zinc miner's solid interim result of $76.1 million smashed previous profit records and helped it to regain some of the ground lost on falling zinc prices this year. The 10? dividend left Perilya with enough cash to pursue growth options at Potosi and Flinders, which should see it post further record profits next year even if the zinc price continues to slide. And analysts are expecting a similar dividend payout at the full year, resulting in a yield of 4.3 per cent. Perilya is keeping its eyes open for acquisition opportunities, but is concerned to find true value in today's market of highly priced mineral assets. This is one of the most expansionary zinc plays on the market and analysts expect it to perform particularly strongly if the zinc price recovers after the Chinese New Year, as expected.

Jo Clarke

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