A S H A R E B U Y E R ’ S G U I D E T O

107 L E A D I N G A U S T R A L I A N C O M PA N I E S

Top StocksStocks

20082

008

MARTIN ROTH

RO

TH

1 4 t h Y E A R O F P U B L I C A T I O N

Top Stocks is written for every investor who has ever thought, ‘There are more than 2000

companies on the Australian stock exchange — where do I start?’

Now in its 14th year of publication, Top Stocks remains the essential reference for

Australian sharebuyers. In preparing his independent and objective evaluation of

leading companies, popular fi nance author Martin Roth runs the top 500 stocks through

exhaustive selection criteria and subjects each to rigorous analysis. This year’s edition

reveals that despite recent sharemarket instability and subsequent investor uncertainty,

there are still many excellent companies around.

Inside, you’ll fi nd:

• individual analysis of the latest results from 107 top Australian companies

(including 23 new companies, 14 of which have never appeared in previous editions

of Top Stocks)

• comparative sales and profi ts data, and in-depth ratio analysis

• fi ve-year price charts and shareholder return fi gures

• comprehensive research detailing each company’s overall outlook

• 19 tables that rank all of the companies according to fi nancial data.

www.johnwiley.com.au/trade

Based in Melbourne, Martin Roth is an internationally

successful fi nancial journalist and one of Australia’s leading

authors of investment books.

For quick and easy access to vital information and statistics on top

Australian companies, all presented in an easy-to-read format, Top

Stocks 2008 is a must-read. Top

Sto

cks

This information is general in nature and may not be suitable for you. Please consider your own situation before acting on the information. Our 309 positive recommendations made between May 01 and Dec 06 achieved an average annual return of 21.3%, outperforming the Index of 14.3%. Keep in mind past performance isn’t a reliable indicator of future results. Our performance figures are hypothetical and come from the recommendations made by The Intelligent Investor. Transaction costs haven’t been included. We encourage you to think of investing as a long-term pursuit, as stocks can fall and you can lose money on the stockmarket. To read our performance report, go to www.intelligentinvestor.com.au. Published by The Intelligent Investor Publishing Pty Ltd ABN 12 108 915 233. AFSL No. 282288. One offer per household, every 2 years. Surveillance $20-TOPSTOCKS

Visit www.intelligentinvestor.

com.au/topstocks

call 1800 620 414 (Mon–Fri, 9am–5.30pm)

It depends doesn’t it? If the question was being posed by a friend with ‘inside’

information who had a track record of woefully speculative investments, you’d probably run a mile.

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RETURN

A S H A R E B U Y E R ’ S G U I D E T O

107 L E A D I N G A U S T R A L I A N C O M PA N I E S

Top Stocks

2008

MARTIN ROTH

The author and publisher would like to thank Morningstar for permission to include the fi ve-year shareholder return fi gures, and Alan Hull (author of Blue Chip Investing) for generating the fi ve-year share price graphs <www.alanhull.com>.

This fourteenth edition fi rst published 2008 by Wrightbooksan imprint of John Wiley & Sons Australia, Ltd42 McDougall Street, Milton Qld 4064

Offi ce also in Melbourne

First edition published as Top Stocks by Wrightbooks in 1995New edition published annually

Typeset in 10/12 pt ITC Giovanni LT

© Martin Roth 2008

The moral rights of the author have been asserted

ISBN: 9780731407309

All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher at the address above.

Cover design by Rob Cowpe

Cover photos © Photodisc Inc.

All charts © TradeStation Technologies, Inc.

Printed in Australia by McPherson’s Printing Group

10 9 8 7 6 5 4 3 2 1

DisclaimerThe material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specifi c guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based upon the information in this publication.

vii

ContentsPreface ix

Introduction xiv

Part I: the companiesAdelaide Bank Ltd 3Adelaide Brighton Ltd 4Amalgamated Holdings Ltd 5Ansell Ltd 6ANZ Banking Group Ltd 7APN News & Media Ltd 8ARB Corporation Ltd 9Aristocrat Leisure Ltd 10ASX Ltd 11Ausdrill Ltd 12AXA Asia Pacifi c Holdings Ltd 13Bank of Queensland Ltd 14Beach Petroleum Ltd 15Bendigo Bank Ltd 16BHP Billiton Ltd 17Billabong International Ltd 18Blackmores Ltd 19BlueScope Steel Ltd 20Boral Ltd 21Cabcharge Australia Ltd 22Campbell Brothers Ltd 23Candle Australia Ltd 24Coates Hire Ltd 25Cochlear Ltd 26Coffey International Ltd 27Coles Group Ltd 28Commonwealth Bank of Australia 29Computershare Ltd 30Count Financial Ltd 31Crane Group Ltd 32CSL Ltd 33CSR Ltd 34

CVC Ltd 35Devine Ltd 36Downer EDI Ltd 37Equigold NL 38Euroz Ltd 39Fantastic Holdings Ltd 40Fleetwood Corporation Ltd 41Flight Centre Ltd 42Foster’s Group Ltd 43GUD Holdings Ltd 44Gunns Ltd 45GWA International Ltd 46Harvey Norman Holdings Ltd 47Healthscope Ltd 48HGL Ltd 49Hills Industries Ltd 50HPAL Ltd 51Hunter Hall International Ltd 52Infomedia Ltd 53Institute of Drug Technology

Australia Ltd 54Insurance Australia Group Ltd 55IRESS Market Technology Ltd 56Jubilee Mines NL 57K&S Corporation Ltd 58Leighton Holdings Ltd 59Lend Lease Corporation Ltd 60Macarthur Coal Ltd 61Macquarie Bank Ltd 62MaxiTRANS Industries Ltd 63Metcash Ltd 64Mincor Resources NL 65

viii Top Stocks 2008

Contents (cont’d)

Part II: the tablesMarket capitalisation 113A Revenues 114B Year-on-year revenues growth 115C EBIT margin 116D Year-on-year EBIT margin growth 117E After-tax profi t 118F Year-on-year earnings per share G growth 119Return on equity 120H Year-on-year return on equity I growth 121

Debt-to-equity ratio 122J Current ratio 123K Price–earnings ratio 124L Price-to-NTA-per-share ratio 125M Dividend yield 126N Year-on-year dividend growth 127O Five-year share price return 128P Non-interest income to total income 129Q Cost-to-income ratio 129R Return on assets 129S

Monadelphous Group Ltd 66National Australia Bank Ltd 67Oakton Ltd 68OneSteel Ltd 69Orica Ltd 70OrotonGroup Ltd 71Perpetual Ltd 72Port Bouvard Ltd 73Primary Health Care Ltd 74Pro Medicus Ltd 75Programmed Maintenance Services Ltd 76Publishing and Broadcasting Ltd 77Qantas Airways Ltd 78QBE Insurance Group Ltd 79RCR Tomlinson Ltd 80Reece Australia Ltd 81Rio Tinto Ltd 82Salmat 83Santos Ltd 84SDI Ltd 85Select Harvests Ltd 86Seven Network Ltd 87

Sims Group Ltd 88Spotless Group Ltd 89St George Bank Ltd 90STW Communications Group Ltd 91Suncorp-Metway Ltd 92Sunland Group Ltd 93Tabcorp Holdings Ltd 94Tasmanian Perpetual Trustees Ltd 95Technology One Ltd 96Transfi eld Services Ltd 97Treasury Group Ltd 98Troy Resources NL 99Trust Company Ltd 100United Group Ltd 101UXC Ltd 102Wattyl Ltd 103Westpac Banking Corporation 104WHK Group Ltd 105Wide Bay Australia Ltd 106Woodside Petroleum Ltd 107Woolworths Ltd 108WorleyParsons Ltd 109

ix

A recent magazine advertisement for a leading funds manager claimed that investors and analysts usually focus on just the top 50 companies. However, according to the ad, this particular manager’s small companies fund was different: it sought ‘hidden gems before they take off’, from among all the 500 stocks of the All Ordinaries index. Concealed among the smaller companies, said the ad, ‘is a handful of future leaders that often remain undiscovered until their big growth opportunity has passed’.

One of the attractions of Top Stocks is that, right from the very fi rst edition, it has selected its companies from the 500 biggest stocks. Many ‘hidden gems’ have appeared in these pages well before their ‘big growth opportunity’.

In addition, because of the strict selection criteria for Top Stocks, all these small companies have already been in profi t and have been paying dividends for fi ve years before they make it into the book, and they had to display a sound level of profi tability with modest debt.

The classic example is the Perth engineering company Monadelphous, which fi rst appeared in Top Stocks 1999, at a share price (adjusted for a subsequent share split) of $0.66. In this edition of the book it is priced at $13.49.

Of course, not every small stock in Top Stocks does well. Some appear in one or two editions of the book only. A lot of blossoming small companies get taken over and effectively disappear. And even the most successful stocks seldom see their share price appreciate in a straight line.

Yet investors seeking out ‘hidden gems’ might fi nd it most benefi cial to study and follow some of the small companies that appear in Top Stocks.

Here are half-a-dozen examples of other high-fl ying stocks that have appeared in Top Stocks well before they hit the radar screens of most small investors. Remember that, along with superb share-price appreciation they have all also paid regular dividends.

Preface

x Top Stocks 2008

Campbell Brothers, now enjoying booming profi ts from its laboratory business, (appeared in the very fi rst edition of the book (though it has not appeared in every edition) — when its main business was making soap — with a share price of $3.70. Recently it was $26.14.

Caravan and mobile home manufacturer Fleetwood made its debut in ( Top Stocks 2000 with a share price of $1.60. Now it is $9.40.

Funds manager and trustee company Perpetual fi rst appeared in ( Top Stocks 1997 on a share price of $7.10. It is now $75.61.

IT consultant Oakton initially appeared in ( Top Stocks 2006, when its shares were at

$1.89. Now they are $5.26.

Plumbing supplies company Reece Australia grew large enough to make it into ( Top

Stocks 2001 when the shares were (adjusted) $3.62. They have since climbed to $27.50.

Who is Top Stocks written for?

Top Stocks is written for every investor who has ever wondered, ‘There are now more than 2000 companies on the stock exchange — where do I start?’

These investors know that there are many excellent companies out there — companies that seem to prosper through good times and bad — but they are just not sure which ones they are, apart from some obvious names.

For whatever may be happening in the market, the fact remains that there are plenty of good, solid companies with excellent long-term records of regular dividends and capital growth. They may not double or triple in price within the space of months. But so long as a company’s business continues to fl ourish its shares should certainly come to represent good value.

This book is for investors seeking out these stocks.

It is not a how-to book. It does not give step-by-step instructions to ‘winning’ in the stock market. Rather, it is an independent and objective evaluation of leading companies, based on rigid criteria, with the intention of yielding a large selection of stocks that can become the starting point for investors wishing to do their own research.

A large amount of information is presented on each company, and another key feature of the book is that the data is presented in a common format, to allow readers to make easy comparisons between companies.

It is necessarily a conservative book. All stocks must have been listed for fi ve years even to be considered for inclusion (which is why earlier editions missed the dotcom boom entirely). It is especially suited for those seeking out value stocks for longer term investment.

Yet, perhaps ironically, the book is also increasingly being used by short-term traders seeking a goodly selection of fi nancially sound and reliable companies whose shares they can trade.

In addition, there are many regular readers, who buy the book each year, and to them in particular I express my thanks.

Top Stocks 2008 xi

What are the entry criteria?

The criteria for inclusion in Top Stocks are strict:

All companies must be included in the All Ordinaries index, which comprises (Australia’s 500 largest stocks (out of more than 2000). The reason for excluding smaller companies is that there is often little investor information available on many of them and some are so thinly traded as to be almost illiquid. In fact, the 500 All Ordinaries companies comprise, by market capitalisation, around 98% of the entire market. (Six companies — HGL, Institute of Drug Technology Australia, MaxiTRANS, OrotonGroup, Pro Medicus and SDI — are no longer in the All Ordinaries index, but appeared in Top Stocks 2007, so for continuity purposes remain in this latest edition of the book.)

It was necessary that all companies be publicly listed since at least the end of 2002, and (have a fi ve-year record of profi ts and dividend payouts.

All companies were required to post a return-on-equity ratio of at least 10% in their (latest fi nancial year.

No company should have a debt-to-equity ratio of more than 70%. (

It must be stressed that share price performance is NOT one of the criteria for inclusion (in this book. The purpose is to select companies with good profi ts and a strong balance sheet. These may not offer the spectacular share-price returns of a biotech start-up, but they should also present far less risk. To use an Olympics analogy, the stocks in this book are more like marathon runners than sprinters. They should last the distance, providing solid — if un-fl ashy — performance over the long term.

There are several notable exclusions. Listed managed investments — as defi ned by the (ASX — are out, as these mainly buy other shares or investments. Examples are Australian Foundation Investment Company and all the property trusts. (An exception has been made for private equity funds.)

A further exclusion are the foreign stocks listed on the Australian Securities Exchange. (There is sometimes a lack of information available about such companies. In addition, their stock prices tend to move on events and trends in their home countries, making it diffi cult at times for local investors to follow them.

Australian International Financial Reporting Standards

New international reporting rules, known as the Australian International Financial Reporting Standards (AIFRS), were introduced for Australian companies from 2005. It has led to some changes in the manner in which companies present their accounts. I discussed this in the last edition of Top Stocks.

One of the changes was that companies were obliged to treat separately their discontinued businesses — that is, those parts of their operations that they had sold or shut down or de-merged, or in which, for some other reason, they were no longer involved. In other words, these discontinued operations were — for the most part — not included in the companies’ annual profi t and loss fi gures, but were, instead, reported in the accounts as a separate item (except for a fi nal ‘profi t for the year’ fi gure in the accounts that includes both continuing and discontinued operations).

xii Top Stocks 2008

For most companies this new rule has no relevance. Most companies — certainly most of those that appear in Top Stocks — are trying to build their operations, not close them down. But some companies do, for various reasons, dispose of businesses. Examples in the present book are Infomedia, which has sold its business systems division, and Transfi eld Services, which spun off its infrastructure assets into a new managed fund.

In Top Stocks 2007 — still adjusting to all the new AIFRS changes — I followed the new reporting method, and did not include in my tables the profi ts or losses on discontinued operations for those companies (there were only a few of them) that had disposed of businesses during the year.

However, I have now decided that it makes more sense to include discontinued businesses in the tables. When these businesses were still part of the company’s regular operations, their profi ts (or, sometimes, losses) were ‘owned’ by the shareholders.

So for this edition of Top Stocks I have added back to the company’s sales and profi t fi gures its sales and profi ts from its discontinued operations.

Changes to this edition

A total of 25 companies from Top Stocks 2007 have been omitted from this new edition.

Six have been acquired and delisted:

Colorado Group (

Magna Pacifi c (Holdings) (

OAMPS (

Nine companies from Top Stocks 2007 were excluded because they had debt-to-equity ratios that rose higher than 70%:

Alesco Corporation (

Brambles Industries (

Corporate Express Australia (

David Jones (

Gazal Corporation (

A further 10 companies had return-on-equity fi gures that fell below 10%:

Adcorp Australia (

CMI (

Commander Communications (

Fairfax Media (

Housewares International (

Rebel Sport (

Rinker Group (

Rural Press. (

Great Southern Plantations (

Skilled Group (

Sonic Healthcare (

Wesfarmers. (

Kingsgate Consolidated (

National Can Industries (

Objective Corporation (

Origin Energy (

Rock Building Society. (

Top Stocks 2008 xiii

There are 23 new companies in this book (although nine of them have appeared in earlier editions of the book, but were not in Top Stocks 2007). The companies are:

Ansell (

APN News & Media (

Aristocrat Leisure (

BlueScope Steel (

Coffey International (

Devine (

Equigold (

Euroz (

Foster’s Group (

Healthscope (

Insurance Australia Group (

Mincor Resources (

Companies that have not appeared in any previous edition of Top Stocks.

Companies in every edition of Top Stocks

Fully 10 companies have appeared in every edition of Top Stocks. (Wesfarmers had also been in every edition, but was eliminated from Top Stocks 2008 as its debt-to-equity level soared out of the range for inclusion). The companies are:

Australia and New Zealand (Banking Group

Commonwealth Bank of Australia (

CSR (

Harvey Norman Holdings (

Hills Industries (

Once again it is my hope that Top Stocks 2008 will serve you well.

Martin RothMelbourne

September 2007

Port Bouvard (

Qantas Airways (

RCR Tomlinson (

Salmat (

Spotless Group (

Sunland Group (

Transfi eld Services (

UXC (

Wattyl (

Woolworths (

WorleyParsons ( .

National Australia Bank (

QBE Insurance Group (

Santos (

Suncorp-Metway (

Westpac Banking Corporation. (

xiv

Introduction

The 107 companies in this book have been placed as much as possible into a common format, for ease of comparison. Please study the following explanations in order to get as much as possible from the large amount of data.

Each page begins with a brief introduction to the company and its activities. Then follow the highlights of its latest business results. For the majority of the companies these are their June 2007 results, which were issued during July and August 2007. Finally, there is a section on the outlook for the company, sometimes including comment on the performance of the shares.

Tables

The tables have been made as concise as possible, though they repay careful study, as they contain large amounts of information. Note that the tables for the banks have been arranged a little differently from the others; details of these are later in this introduction.

At the top of each page is a small table with the following data:

Share price

This is the closing price on 4 September 2007. Also included are the 12-month high and low prices, as of the same date.

Market capitalisation

This is the size of the company, as determined by the stock market. It is the share price (again, as of 4 September 2007) multiplied by the number of shares in issue. All companies in this book must be in the All Ordinaries index, which comprises Australia’s 500 largest stocks, as measured by market capitalisation.