Elio D’Amato, CEO of Lincoln, provides his top ASX stock picks for January 2010 as mentioned on Sky Business on 22 December 2009. Elio identifies those well-managed, undervalued companies with strong growth prospects using Lincoln’s Financial Health methodology.

1. ASG Group Limited (ASZ)

ASZ provides technology applications and business systems integration to government agencies and private companies nationally. Its Managed Services segment has been the key as it has long-term and locked-in contracted revenues with low risk profile. Another factor is ASZ’s focus on areas of non-discretionary and recurrent spending. This strategy has been successful for the company as shown by an impressive asset bank of contracted revenue.

The outlook for ASZ appears to be promising. This is largely due to an asset bank of contracted revenue worth over $500 million based on work to be undertaken within the next four years. The company has provided EBITDA guidance for the first half of FY10 of at least $10 million, up 11 per cent from the previous corresponding period.

Furthermore, management reiterated that there remains a significant volume of qualified opportunities in its chosen markets (now worth over $600 million), many of which are for very significant multi-year contracts.

ASZ also boasts of a strong balance sheet that makes it well positioned for organic and acquisitive growth in FY10 and beyond. With a strong historical performance and a positive outlook, ASZ is an attractive investment option.

2. Cellestis Limited (CST)

CST is a biotechnology company that has developed a method for detecting cell mediated immune responses using whole blood samples, primarily for tuberculosis diagnosis. The method, called QuantiFERON, has two product lines -- CMI and TB Gold -- and is applicable to other diseases, such as HIV, where cellular immunity is important. QuantiFERON also has possible applications in autoimmune diseases, cancer and infectious diseases, the company says.

Revenues came to $35.872 million in the year to June and pre-tax profits were $9.522 million. Earnings per share in the year to June was 8.45cps, up 388.44% on the year before. ROA growth was also strong, at 32.18% for the year and it is perhaps therefore of no surprise that the stock has delivered a 91.2% return, including its first two dividends, since 18 December last year.

CST is in a strong financial position and has strong cashflows and an ample cash position. It is interesting to compare current values for this now profitable company to where it was trading when it was indeed more of a start-up. In early 2006, CST hit a peak above $4.60 per share.

Although capped at $316.339 million, CST isn't followed by the brokers however and no consensus target is available, nor forward earnings figures. Nevertheless Lincoln retain a $3.87 valuation on the stock, implying further upside of 14.89%. Our view is based on the company expanding their sales force and their R&D budget. CST’s new major logistics centre and office in the USA and an expanded office and service capability in Germany may also help sales growth. The combination of these measures should result in another record result for the company.

3. Carnarvon Petroleum Limited (CVN)

CVN is an oil and gas exploration and production company with prospects in Australia, Thailand and recently Indonesia. The company has been focusing on exploration and has benefited from significant oil finds in Thailand as a result. Notably, recent production results from these Thailand joint venture operations have exceeded expectations.

The future looks promising for CVN, with a number of their wells expected to produce in 2010 and 2011. This should be reflected in a significant ramp up in medium and long term production levels in what is likely to be favourable oil markets.

The company's exploration tenements in the Petchabun Basin, Thailand are technically complex due to the fractured volcanic and sandstone reservoirs. Impressively, the company’s exploration and development successes in these areas are a testament to their technical capabilities. However, the exploration focus has had some impact on the company’s production levels which continue to rise but at a decelerated rate. CVN represents an opportunity for risk tolerant, long term growth seeking investors looking for exposure to the oil sector.

4. Equinox Minerals Limited (EQN)

EQN is a mining company, primarily focused on the Lumwana open cut copper project in Zambia. This mine is in its ramp up phase, and both profitability and cashflows are continuously improving. Lumwana is a world class copper mine with a long mine life and significant uranium mineralisation and production ramp up results have been promising with first quarter production improving total material movement by 44% compared to the previous quarter.

Production volume and profit margins are expected to continue to improve in 2010 with the mine’s development. Rising production capacity is conveniently timed with a likely resurgence in mineral prices (copper) in 2010 and the emergence of emissions trading potentially boosting demand for nuclear energy (uranium). EQN has significant growth potential and may be suitable for risk tolerant investors seeking exposure to copper and uranium,

5. Energy Resources of Australia (ERA)

ERA provides 10% of the world’s uranium production, but RIO has a 68.4% stake in the company. The company mainly produces though its Ranger mine in the Northern Territory but is also involved in the Jabiluka project. Demand for uranium and increasing production has strongly driven profit growth for the company in 2009.

Whilst the majority of the company’s contracts are denominated in USD and currency movements have been unfavourable, increased global demand for uranium should sustain the company’s profit growth. Introduction of emissions trading globally coupled with the development of nuclear power plants in Russia and China will drive long term demand for nuclear energy. Similarly, the end of ‘Megatons to Megawatts’ nuclear disarmament in Russia in 2013 will also constrain supply, driving up long term prices. ERA represents a solid large cap growth company with exposure to nuclear power, which is arguably the most viable ‘green’ power going forward.

6. IMF (Australia) Limited (IMF)

IMF provides funding of legal claims over $2 million and is a major source of litigation funding in Australia. Whilst earnings from the business can be lumpy and difficult to estimate, the company’s high cash balance and low gearing ensures the company retains its ‘Strong’ Financial Health rating.

Whilst the local economic environment is in recovery and as such less likely to provide a broad pool of litigation claims that IMF can select from, we expect the company to still perform strongly given the time required to settle these matters. With caseloads extending over the next three years, base earnings should continue improve.

This will be boosted by the company’s plans to increase its portfolio by $2 billion through growth overseas where the economic environment is less stable, with similar Common Law jurisdictions being the primary focus. IMF has significant upside potential, but it will be dependent on the company’s growth success in foreign markets. Given the nature of its business, its ability to benefit from down cycles could be useful addition to portfolios seeking diversification.

7. McMillan Shakespeare Limited (MMS)

MMS is a provider of independent salary packaging services in Australia. MMS has capitalised on the growing popularity of outsourcing certain human resource related functions, such as salary packaging, fleet management and performance management to enable companies to focus on their core businesses.

MMS suffered from weak sentiment last year on fears that rising unemployment and the global downturn in the car industry would put pressure on earnings. However, this quickly changed after FY09 results showed that the company can grow even under difficult conditions due to its high exposure to non-cyclical sectors such as Healthcare.

Given the company’s resilience to economic downturns, the outlook for MMS is positive now that the Australian economy is showing signs of strengthening. Management remains optimistic having retained all major contracts in the Healthcare sector and seeing continued growth in salary packaging through increased participation rates and new business. New benefits are under development and are expected to boost future earnings. Consensus analyst forecasts expect the company to achieve EPS in FY10 of around 20.00 cents per share and the company currently offers a fully franked dividend yield of 4.96%.

8. Reckon Limited (RKN)

RKN develops, localises, distributes and provides after-sales technical support for users of its accounting software products in Australia, New Zealand and the UK. The company’s brands include QuickBooks, Quicken, ReckonElite and APS. The company weathered the challenging retail environment by pursuing its strategies of building on organic growth, expanding product and service offerings to existing clients and growing by acquisition.

The outlook for RKN is positive with management expecting 50 per cent revenue growth for FY09 which they feel would cement the company’s position as a leader in practice management, accounting and financial management software and services. This will be underpinned by continued organic growth and contributions from the Corporate Services and BillBack businesses. Consensus analyst forecasts expect the company to achieve full year EPS of around 10.00 cents, an increase of 18.34 per cent. With strong fundamentals and good growth prospects, RKN is an investment option worth considering.

9. Super Cheap Auto Group Limited (SUL)

SUL is primarily a discount automotive parts retailer but also owns outdoor goods chain BCF (Boating, Camping and Fishing) and bicycle retailer Goldcross Cycles. A returnee to the Stock Doctor Star Stocks portfolio, SUL has a 'Strong' Financial Health rating and a growing business model. Earnings per share grew 23.81 per cent in the year to June and are forecast to increase a further 24.67 per cent in the year to June 2010 and 12.57 per cent the year after.

Annualised return on assets came in at 9.57 per cent in FY09 with adjusted pre-tax profits of $41.89 million on revenues of $829.29 million. SUL paid two fully-franked dividends in FY09 totalling 18 cents per share, with a total of 22 cents forecast in FY10 and 24.9 cents in FY11. Its current trading price to Lincoln's $6.30 per share valuation is another plus.

SUL’s car parts division has performed well despite higher fuel prices and automotive sector worries and the business of BCF has been vindicated somewhat by the decision for private equity firm Archer Capital to float Kathmandu Holdings (KMD), which also sells camping gear as well as brand-name adventure clothing.

As in the previous year, BCF is seen to benefit from the growing number of Australian families taking low cost recreational vacations instead of travelling overseas or spending time in coastal apartments. Goldcross Cycles however remains the 'dark horse' in the SUL portfolio. Whilst sales improvements have been notable, this small division is still loss-making and management will need to implement a successful business model for it before contemplating expansion plans. Overall however SUL has good exposure to a trend by the Australian consumer to economise travel and leisure spending, whether that’s through a cheaper muffler, a cheaper camping holiday or a workday commute on two wheels.

10. Thorn Group Limited (TGA)

TGA traditionally operates within the Australian electrical and household appliances rental market for both commercial and retail customers (radio rentals). This business produces a consistent stream of earnings and cashflows. TGA’s traditional long term rental contracts business will provide the company a stable base of earnings to build upon.

Growth from this division will be in the form of new stores and increased product ranges but is expected to benefit from the general growth in demand for electronics particularly flat panel display screens. Future growth initiatives include ‘Cash First’ which provides unsecured personal loans and ‘Big Brown Box’ an online electronic goods discount retailer. TGA is a sound business with low gearing, moderate growth potential (consensus forecast 13.3 cps a 39.71% growth for the year) and a reasonable dividend yield of 4.8% fully franked.