For best results, go for broker

The easy gains from the booming market saw many investors switch to do-it-yourself, online discount brokers. But with the sharemarket sharply down from its 2007 highs and some experts forecasting a sustained period of weak performance, full-service brokers might start to appeal again.

According to the Australian Security Exchange's 2006 Australian Share Ownership Study, released in the middle of last year, of those investors who had bought or sold shares in the previous two years, 38 per cent had used an online discount broker, and a further 15 per cent had arranged a transaction with a discount broking house via phone, while 37 per cent had used a full-service broker.

By comparison, the 2004 survey found that, of investors who had bought or sold shares in the previous two years, just 22 per cent had used an online discount broker, 6 per cent had used a telephone discount broker and 31 per cent had used a full-service broker. (Other methods included buying directly through a prospectus or buying through an accountant or financial planner.)

An ASX spokesman says at present, online broking accounts for about 21 per cent of all trades by volume and for 8.5 per cent by value.

Online brokers deny they are seeing any loss in business - but full-service brokers are ready to tout their wares.

At the least, a sustained period of market decline or drift could change habits.

"A rising tide of the last 4 1/2 years has covered up a lot of ills and convinced a lot of investors they can do it themselves," says Marcus Padley, author of stockmarket newsletter Marcus Today. "It has also convinced a lot of investors that the people in the advice industry don't know what they are doing.

"You can hand someone the hammer and nails, and they can hammer bits of wood together but they cannot build a house. In the same way, the online market has handed people the tools but it has not handed them the know-how."

Michael Heffernan, senior client adviser and strategist with Austock Securities, notes fees for full-service brokers have fallen: "In the old days, 10 or 12 years ago, clients used to have to pay 2 per cent or more in broking commission for a trade. It isn't that any more."

He says 1.5 per cent would probably be on the high side now, with many full-service brokers charging about 1 per cent, depending on the size of the trade. Yet online giant Commsec has fees starting at $19.95 for a trade of less than $10,000.

"If you are paying 1 per cent, it is a small price for a full-service broker," Heffernan says. "It is a bagatelle when you consider the whole market has dropped more than 20 per cent in the past couple of months. The banks have dropped 30 per cent-plus.

"If you had been advised the market was looking turbulent, that you'd have to watch things for at least several months, you might have sold some of your holdings, based on that advice.

"A full-service broker is invaluable, not only for the advice and the access to research but also for the ability to talk to somebody, which is just so important."

But online brokers believe they can hold their own, even in a volatile market.

"I haven't seen any evidence to support the theory that clients are moving over to full-service brokers," says Matt Comyn, managing director of Commsec. "If anything, I have been surprised that trading volumes have remained as high as they have, given the market uncertainty and given that this is a really difficult time to be in the market and picking what the direction is. Volatility is pretty high and there seem to be shocks coming out more often than not.

"We have an advisory arm which we do not heavily promote but which we do offer to clients. We have representation at most of the capital cities if they want to have a face-to-face conversation.

"Obviously there is a different fee structure attached to that, though we find that once clients have started paying $19.95 for a trade they find it difficult to go back to paying $100."

John Daley, managing director at discount broker E*trade, says the same considerations apply whether the market is up or down: "The key advice, whether it is from a full-service broker or from an online broker, is going to be the same. Protect your portfolio, diversify it, have a long-term strategy and do your homework on the things that you are going to invest in - those are the right pieces of advice whether the market is up or down. Particularly for clients of online brokers, there are several advantages in a down market.

"First, you as a customer have direct access in being able to see what your portfolio is in real time and being able to track it in real time. Second, we are providing you directly with online research from a number of different sources.

"In a down market the cost of the brokerage becomes even more important. It starts to make a significant difference to the percentage expected at return."

Daley says if you are someone who has the ability to make your own decisions, supported by the kind of research that is available from an online broker "then we would suggest that that is true whether the market is up or whether it is down".

"The same kind of basic principles will apply concerning diversifying your portfolio, tracking it, taking the long-term view and then minimising the transaction costs," he says.

WHY IT PAYS TO GET TO KNOW YOUR BROKER

The ASX website (www.asx.com.au) provides a list of full-service and discount brokers by region.

Marcus Padley, author of the Marcus Today daily sharemarket newsletter, says trust is essential.

"A full-service broking relationship only ever builds in the same way any relationship builds. It starts with brokers providing you with a basic service. Then you can move on to information and research. Finally, the last thing you will get is money-making information. But you will only get that when you yourself have bothered to build a relationship."

He says investors and brokers with similar profiles work best.

"It's important to find a match-up so you can get along and build respect rather than build expectation and demand."

There's a track winding back ... to your portfolio

We might all love our sunburnt country with its rugged mountain ranges and sweeping plains but these cherished geographic features pose just as many problems today as they did when the early settlers attempted to explore what lay beyond Botany Bay.

The rich mining areas of larger and less populated states - Western Australia and Queensland - are central to Australia's dominant position in the production of base and precious metals.

Similarly our fruits, grains and cattle industries are essential to our growth but are long distances from domestic markets and the port facilities required to tap into global markets.

The key to unlocking the true value that abounds in a country rich in natural resources - both above and below the ground - is an efficient transport system. Companies that operate in this sector can provide a good source of investment income.

Generally, the outlook appears bright for businesses that manufacture, distribute, maintain and service transport infrastructure and vehicles.

Australia has several listed companies that provide products and services for road, rail and water transport.

We analyse five companies that have large corporate clients and a significant proportion of revenue derived from government and semi-government authorities.

Despite the recent sell-off in some of their shares, their earnings predictability is relatively high, suggesting that there may be some cheap opportunities in this sector worth targeting.

AUSTAL

Between 2003 and 2007, boat manufacturer Austal's share price increased from 50cents to $4.

A key driver of Austal's success during this period was its fast ferry business, with the majority of sales to overseas markets such as Hong Kong, Hawaii and the Middle East.

The company was a success even without the strong sharemarket conditions and the awarding of multimillion-dollar contracts by the Australian and US navies.

Its vessels are used mainly for commuter transport; there is high demand from the tourism industry as larger and faster vessels maximise the income derived from coastal attractions and six-star retreats.

But investor confidence has been dented by uncertainty surrounding the US Navy's Littoral Combat Ship program and Austal's position as primary provider of some structural components to the program.

Consequently, analysts have revised their earnings estimates for the next two years.

Austal's investors are forecasted to pay $11 per dollar of earnings for the company - that is, a price-earnings ratio, or multiple, of 11 relative to its recent trading range. That ratio, which is low compared to the market's overall ratio of about 15, suggests that any downside has been factored in.

And the possibility of further fast ferry contracts may be a catalyst for a share price revival.

Such contracts may arise as water transport becomes an alternative in Australia, with relatively congestion-free rivers and harbours providing access to high-density, inner-city business precincts.

Ferries already operate in east coast capital cities and are strongly promoted in Western Australia where, this month in Perth, tickets to a Celine Dion concert, and West Coast Eagles' and the Western Force's games came with free ferry travel to and from the venues.

Transperth operates the government-owned ferry service and, given Perth's significant population growth, a decision to upgrade the service would not surprise.

Austal is a Western Australian-based company with its manufacturing facilities in Henderson, just south of Perth, and would be a frontrunner to benefit from any upgrade.

In Brisbane, recently elected Lord Mayor Campbell Newman made a pre-election promise to expand the CityCat fleet from 11 to 19.

Austal is Australia's only ASX-listed ferry manufacturer in an industry where there is limited competition and as a global supplier of fast ferries, it would have a competitive edge in tendering for the supply of ferries throughout Australia.

BRADKEN

Bradken provides maintenance and refurbishment services to the resources and freight rail industries and designs and manufactures freight wagons and trolleys, and draw-gear components.

It has 80 years of experience in the design and manufacture of freight trolleys (bogies) and, consequently, it has a large share of the bogie and freight wagon market in Australia.

The company's freight wagons are used to transport iron ore, coal and grain - all commodities that have a strong outlook.

In the six months to December 2007, Bradken's rail business accounted for more than $110million of group sales, representing about 30percent of the company's first half 2007-08 revenue.

There was a slight improvement in its profit margin, ahead of the company's other four divisions.

During the period, Bradken's share price halved after management announced a profit downgrade due to the below-expectations performance and cost blow-outs of its power and cement division.

There is no doubt that the subsequent fall in Bradken's share price from $15 to $6 was an over-reaction, exacerbated by weak sharemarket conditions.

Management's revised guidance still indicated earnings per share growth of 15percent in 2007-08, and consensus forecasts pointed to growth of 20percent. Given that the company's price-earnings ratio is about 12.5 relative to 2007-08 guidance, there could be a recovery in its share price, thanks mainly to its rail division.

Significant price increases for coal and iron ore suggest that production increases are likely. Improvements in alleviating port congestion should also result in larger volumes of coal being transported.

Meanwhile, the construction of new rail infrastructure at emerging iron ore production sites are another positive sign for companies such as Bradken.

In March, Macmahon Holdings awarded contracts to the value of $42million for the construction of rail infrastructure in Western Australia's Pilbara.

And in New South Wales, Whitehaven Coal's success in the Narrabri region has prompted it to increase its coal-carrying rail capacity from 11million tonnes to 15million tonnes a year in the short term, increasing to 25million tonnes a year in the medium term.

Whitehaven's existing rail agreements are with Pacific National, a group that uses a fleet of 2350 wagons and 100 locomotives to transport more than 80million tonnes of coal a year.

The Federal Government is considering an inland rail link that would provide access to the Port of Brisbane.

Such a link would help to relieve port congestion and transport limitations in New South Wales, benefit coal and other industries and result in an expansion in the rail fleets of operators such as Pacific National and service providers such as Bradken.

COOTE INDUSTRIAL

Within 12 months of technical and logistical solutions provider Coote Industrial listing on the ASX in December 2006, the company's share price hit $3, a premium of 200percent to its float price of $1.

But despite the fact that Coote exceeded prospectus forecasts and has since paved the way for a very strong 2007-08 performance, investors have abandoned the company.

Coote's share price is hovering in the vicinity of $1, which is difficult to justify given that net profit for 2007-08 is expected to be more than double that achieved in 2006-07.

Indeed, Coote's fundamentals speak for themselves.

The company's P/E ratio relative to 2007-08 consensus earnings forecasts is less than six and a yield of about 10percent is on offer based on Coote's recent trading range and dividend estimates for 2007-08.

Coote is leveraged to the transport boom in many ways. When the company listed on the ASX it was a diversified engineering logistics and manufacturing business.

Its engineering division includes Hedemora Diesel, a long-standing provider of premium diesel engines for locomotives, cargo vessels, ferries and naval defence vessels such as submarines.

Coote's engineering division is complemented by PC Diesel, a contractor to large resources companies involved in land-based and marine exploration and production activities. The engineering division performed well in 2006-07, accounting for more than 60percent of sales, but Coote has focused on expanding its rail services business since listing on the ASX.

Two important acquisitions, South Spur Rail Services and Gemco Rail, are expected to contribute revenues of more than $150million in 2007-08 and to account for more than half of management's forecasted profit of $19million.

Coote's customers include Pacific National, Australian Railroad Group and the Australian Rail and Track Corporation.

Inspection maintenance and repair revenues account for a significant proportion of Coote's income, providing the company with improved earnings visibility.

MAXITRANS INDUSTRIES

Maxitrans Industries manufactures and distributes large trailer and tipper bodies used in the transport of bulk goods.

The company's trailers are used to transport fresh produce, food and beverages, building and construction materials as well as a range of natural resources.

The drought has stifled demand for Maxitrans trailers used to transport agricultural goods, but management says it is already seeing a positive impact from recent rains.

Compounding Maxitrans' problems over the past two years has been the less than smooth integration of some of the acquisitions it made in 2003 and 2004.

But the company has resolved these issues and is poised to achieve a record profit in 2007-08.

The company's half-year profit of $7.7million, representing earnings per share of 4.5cents, puts it in good shape to achieve analysts' recently upgraded full-year earnings per share consensus forecasts of 9.1cents.

This reflects a P/E ratio of approximately seven based on Maxitrans' recent trading range - a dividend yield of more than 8percent is also on offer.

The increased output of trailer brands Maxi-Cube, Freighter, Lusty EMS, Hamelex White and Peki all featured in Maxitrans' turnaround in the past six months.

The positive trend is expected to continue as improved efficiencies and an increased manufacturing capacity meet a surge in the company's order books.

UNITED GROUP

United Group is a big player in the transport industry.

Its rail business encompasses Goninan, a long-standing designer and manufacturer of rail rolling stock and Alstom, a specialist in providing engineering, maintenance and electrical systems.

United has also established important alliances with GE Transportation and Mitsubishi Electric that have provided it with the expertise and capacity to take on large projects.

United and its alliance partners have delivered more than 500 rail cars for use in the inner and outer suburban areas of Sydney.

The company's rail division has provided various types of rail locomotives and cars for use in Victoria and Western Australia, and manufactured more than 200 locomotives for Pacific National, Queensland Rail and Pilbara Rail.

In the first six months of 2007-08 the division achieved revenues of more than $500million, resulting in a 154percent increase in earnings before interest and tax to $36.3million.

During the same period, management announced the receipt of more than $500million in new orders for resources-related activities.

These included locomotives as well as coal and iron ore wagons for key customers such as Queensland Rail, Rio Tinto and BHP Billiton.

As at December 31, the rail division's order book was more than $1.7billion, up from $1.4billion in the previous corresponding period - an increase of nearly 20percent.

United's management has strengthened its rail transport business in Hong Kong and entered India's freight market.

The company has felt the full impact of the market downturn with its share price halving from almost $22 to less than $11 between November 2007 and February 2008.

The company's property services interests in the United States would be creating some level of doubt among investors.

Consequently, it may be United's traditional rail business that provides a much-needed lift.

A BETTER WAY TO MOVE PEOPLE

NEW roads, tunnels and bridges are part of the strategy to improve city, regional and rural transport, but there is a growing emphasis on the need to improve public transport. This is particularly apparent in capital cities where commuting by car is becoming increasingly untenable. More buses, an expanded rail network and new trains are either in the pipeline or on the drawing boards. The increased use of fast ferries, a common form of transport overseas, is also seen as a practical measure, as most capital cities in Australia have river access to the central business district.

New road and rail networks are being developed to meet the needs of rapid population growth in regional areas such as eastern coastal areas and the booming south-western corner of Western Australia. Development of the Pilbara in Western Australia and the coal mining regions of the Bowen Basin in Queensland and Narrabri in New South Wales has triggered extensive improvements in transport infrastructure.

There is also growing demand for improved road and rail bulk haulage networks and an expansion of truck and train fleets. This will include new locomotives, carriages and wagons.

The mining boom will account for much of the transport development but improved seasonal conditions and drought relief are expected to boost sales of trucks and trailers. In February, the managing director of Maxitrans Industries, a manufacturer and distributor of road transport trailers, suggested that recent rains should create increased demand for the company's products.