The early domestic reporting season is revealing conflicting signals and trends, with earnings estimates and share price performances in many cases disappointing, but stockbroking analysts are issuing many more recommendation upgrades while already rating more stocks a Buy or equivalent than Neutral or Sell. Clearly, they see value propositions opening up and multiplying while local indices are going through a rough patch.
In the good books
Australia & New Zealand banking group (ANZ) was upgraded to Buy from Neutral by Citi Buy/Hold/Sell: 5/2/1 A June 2015 CET1 capital ratio of 9.3% and the impending sale of Esanda are expected to put the bank in a strong position relative to its peers. The broker maintains its forecast 2016 pay-out ratio at 70% despite the new issue of shares, while expecting that slowing balance sheet growth in Asia remains an option to sustain dividend levels.
BlueScpope Steel (BSL) was upgraded to Outperform from Neutral by Macquarie Buy/Hold/Sell: 7/1/0 Macquarie suspects BlueScope will need to act on the capacity challenges created by Chinese exports. This issue has raised the prospect of closing Port Kembla. As the broker considers closure has an air of inevitability this could be a potential catalyst. Closure of Port Kembla could contribute 25% to FY17 earnings and lower volatility.
Cabcharge Australia (CAB) was upgraded to Buy from Neutral by UBS Buy/Hold/Sell: 2/1/2 The broker expects upcoming FY15 results to show earnings slightly lower than the previous year, although Taxi Payments turnover is forecast to increase by 8%.
Dexus Property Group (DXS) was upgraded to Neutral from Underperform by Credit Suisse Buy/Hold/Sell: 2/2/3 FY15 results were in line with estimates. Guidance of 5.5-6.0% growth into FY16 exceeds forecasts. Credit Suisse upgrades to Neutral from Underperform but suggests the outlook is tempered by a lack of visibility on the distribution coverage.
Echo Entertainment Group (EGP) was upgraded to Neutral from Underperform by Credit Suisse Buy/Hold/Sell: 4/3/0 FY15 results were better than expected with The Star premium mass segment surpassing the broker’s expectations in the second half. Credit Suisse upgrades FY16-18 earnings forecasts by around 3.0%.
Evolution Mining (EVN) was upgrade to Equal-weight from Underweight by Morgan Stanley Buy/Hold/Sell: 4/2/0 As the gold price weakens Morgan Stanley considers the ASX gold miners are better placed thanks to cost cutting and exchange rate considerations. The broker maintains a preference for low-level exposure to the sector.
Fairfax Media (FXJ) was upgraded to Buy from Hold by Deutsche Bank Buy/Hold/Sell: 4/3/0 FY15 results were slightly below the broker’s forecasts. Management has confirmed that FY16 has started strongly for Domain. Deutsche Bank views the growth in Domain positively and Domain online is now 60% of valuation.
Goodman Group (GMG) was upgraded to Neutral from Sell by Citi Buy/Hold/Sell: 3/3/1 FY15 results were in line with consensus forecasts. The broker has cut its FY16 forecast by 1.3% to reflect higher tax costs, but FY17 and FY18 see a slight increase on the back of expected growth.
Independence Group (IGO) was upgraded to Overweight from Equal-weight by Morgan Stanley Buy/Hold/Sell: 6/1/0 As the gold price weakens Morgan Stanley considers the ASX gold miners are better placed thanks to cost cutting and exchange rate considerations. While Independence Group has a diverse production base it offers low gold price leverage and the new corporate debt facility is expected to allay fears over any cash being redirected to Nova, in the broker’s view.
Incitec Pivot (IPL) was upgraded to Buy from Hold by Deutsche Bank Buy/Hold/Sell: 4/1/2 The decline in the share price following Orica’s (ORI) profit warning and asset impairment is excessive, in Deutsche Bank’s view. The factors cited by Orica appeared specific to that company and should be seen in the context of a new CEO re-basing expectations, Deutsche Bank maintains.
Mirvac (MGR) was upgraded to Outperform from Neutral by Credit Suisse Buy/Hold/Sell: 4/1/2 FY15 results were in line with the broker’s estimates. Credit Suisse expects Mirvac will again hit the top of its guidance range in FY16. With the stock offering a prospective 14.7% total return on forecasts the broker upgrades to Outperform from Neutral.
Newcrest Mining (NCM) was upgrade to Equal-weight from Underweight by Morgan Stanley Buy/Hold/Sell: 2/2/4 As the gold price weakens Morgan Stanley considers the ASX gold miners are better placed thanks to cost cutting and exchange rate considerations. The broker maintains a preference for low-level exposure to the sector. Newcrest’s price appears to be factoring in the downside and the broker moves to Equal-weight from Underweight.
REA Group (REA) was upgraded to Neutral from Underperform by Macquarie Buy/Hold/Sell: 6/2/0 REA’s result was solid and in line with the broker’s expectations, although adjusted profit fell short due to amortisation of intangibles. REA is still enjoying healthy growth rates but the pace of growth is slowing. REA maintains a strong earnings outlook as price increases and depth products kick in, but the question is whether the company can perform to the market’s lofty expectations. On a longer term basis, the broker sees the stock as more reasonably valued now.
Ten Network Holdings (TEN) was upgraded to Outperform from Underperform by Credit Suisse Buy/Hold/Sell: 2/2/3 Ratings momentum continues and the company’s share has improved this year after several years of declines. Ten Network has also announced a series of related transaction which would mean Foxtel takes a 14.2% stake. Credit Suisse considers this a potential catalyst, should the deal win regulatory approval, as it will leave the company well funded with a strong strategic shareholder.
Whitehaven Coal (WHC) was upgraded to Neutral from Underperform by Macquarie and Upgrade to Buy from Hold by Deutsche Bank and Upgrade to Buy from Neutral by UBS Buy/Hold/Sell: 5/3/0 Whitehaven’s underlying earnings were in line with Macquarie and Deutsche Bank’s forecasts. Macquarie is confident in the company’s operating credentials, but China is likely to continue to weigh on coal sentiment and pricing. Macquarie sees Whitehaven as low risk and believes the company will continue to deliver on production and costs, but the share price will remain under pressure.
In the not-so-good books
Adelaide Brighton (ABC) was downgraded to Underweight from Neutral by JP Morgan Buy/Hold/Sell: 0/5/3 JP Morgan envisages few prospects for meaningful earnings growth over the coming years, exacerbated by the falling Australian dollar. While the company is considered one of the better managed in the sector, the stock is trading well ahead of valuation and the broker downgrades.
Bendigo and Adelaide Bank (BEN) was downgraded to Neutral from Outperform by Credit Suisse Buy/Hold/Sell: 0/6/2 FY15 results were softer than expected and Credit Suisse downgrades forecasts by 2-3%. The broker is not enthused by the sizeable margin decline and reluctance to re-price investor mortgages.
Flexigroup (FXL) was downgraded to Neutral from Buy by Citi, Neutral from Outperform by Credit Suisse, to Sell from Neutral by UBS Buy/Hold/Sell: 2/2/1 FY15 cash profit was below Citi’s forecasts. Guidance for FY16 is also below expectations and implies minimal organic growth. The pre-release of results and FY16 guidance implies growth below what Credit Suisse was expecting. UBS is concerned about the level of churn in the senior ranks, given the recent departure of the CEO.
JB Hi-Fi (JBH) was downgraded to Neutral from Buy by UBS and to Neutral from Outperform by Macquarie Buy/Hold/Sell: 0/7/1 FY15 results were ahead of UBS’ estimates. JB Hi-Fi now plans to roll out small appliances across its entire store base. UBS observes New Zealand results were soft, affected by competitive pressures. A further small buy-back was announced to neutralise the executive shares. Macquarie says 2H16 will be a lot more challenging given it will compare to a 2H15 which included the iPhone6 launch, the federal budget’s small business incentives and a May RBA rate cut.
Regis Resources (RRL) was downgraded to Underweight from Equal-weight by Morgan Stanley Buy/Hold/Sell: 5/2/1 As the stock is up 14% over the past four weeks and now implies 5.0% downside to the revised target – to $1.20 from $1.30 – Morgan Stanley moves to Underweight from Equal-weight.
STW Communications Group (SGN) was downgraded to Neutral from Outperform by Credit Suisse Buy/Hold/Sell: 0/4/0 STW’s weak FY15 results were disappointing to the broker. Credit Suisse believes the stock is cheap, but any catalyst for growth seems a long way off.
FNArena tabulates the views of eight major Australian and international stock brokers: BA-Merrill Lynch, CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie and UBS.
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