A significant event last week was the government’s MYEFO (mid-year economic fiscal outlook), which surprised stock analysts by including onerous proposals to slash funding for healthcare diagnostics, and to a lesser extent, to reel in aged care subsidies.
The proposals were surprising given there is a separate Medicare review still underway, which poses further downside risk.
Hiding among the miners in this week’s rating downgrades were a number of healthcare stocks impacted by the changes.
The other highlight of last week was a decision by management at troubled Slater & Gordon to “walk away”, as analysts put it, from previous profit guidance. Such a move does not instill any confidence, and leads analysts to increase their risk premiums and downgrade their forecasts and ratings.
Any good news? Well the biggest target price increase of the week was reserved for an unwavering Domino’s Pizza, which yet again blew away talk of overvaluation by announcing another acquisition deal and significantly lifting profit guidance.
In the good books
BHP Billiton BHP) Upgrade to Outperform from Neutral by Credit Suisse B/H/S: 4/3/1
The fall in commodity prices has been so precipitous, Credit Suisse suggests, that a supply-side response must be imminent in the broker’s view. Bulks still offer downside risk, but base metals are further progressed towards supply-side adjustment. Alumina and aluminium nevertheless remain challenged, Credit Suisse believes.
BHP’s earnings impact (ex energy) is not as significant as peers, but the broker suggests the company must rebase its dividend by half, in order to hold debt levels steady. However as this is already priced in by the market, Credit Suisse upgrades the stock.
Domino’s Pizza Enterprises (DMP) Upgrade to Neutral from Sell by UBS B/H/S: 2/4/0
The company has bought Joey’s Pizza in Germany for $69 million. This is the number one pizza chain in Germany by store count. The company has upgraded earnings guidance to be 30% higher on fiscal 2015.
UBS believes the latest acquisition reflects an excellent business and upgrades forecasts by 2.0% and 8.0% for fiscal 2016 and fiscal 2017 respectively.
The broker believes, in the context of its growth rate, that the stock’s price/earnings ratio is defendable and upgrades the business.
Independence Group NL (IGO) Upgrade to Buy from Neutral by Citi and Upgrade to Outperform from Neutral by Credit Suisse B/H/S: 6/1/0
Independence Group’s optimisation study for the Nova project has delivered material improvements and a 16% cost reduction through lower contractor rates and lower energy costs, Citi notes. More ore will now be mined at a faster pace and higher grade ore will be processed earlier in the mine plan.
Citi has upgraded its production forecasts, and thus, 2017 earnings.
The fall in commodity prices has been so precipitous, Credit Suisse suggests, that a supply-side response must be imminent in the broker’s view. Bulks still offer downside risk, but base metals are further progressed towards supply-side adjustment. Alumina and aluminium nevertheless remain challenged, Credit Suisse believes.
The broker has significantly lowered nickel price forecasts, but made little change to copper and gold. Nova is ramping up faster than assumed and costs are falling, and Independence’ debt is easily manageable in Credit Suisse’ view.
JB Hi-Fi (JBH) Upgrade to Neutral from Sell by Citi B/H/S: 1/7/0
Noting that a large proportion of Dick Smith’s (DSH) excess inventory is private label, Citi does not expect the troubled retailer’s discounting to have too much of an impact on JB Hi-Fi revenues in the run-up to Christmas.
While there will be no new iPhone to boost sales this year, JB’s recent share price fall is sufficient to price in sales growth fears in the broker’s view. Citi therefore upgrades the business.
Suncorp Group Limited (SUN) Upgrade to Overweight from Neutral by JP Morgan B/H/S: 2/5/1
The broker suspects claims trends will unwind and margin pressures ease in coming months and the steep falls in the stock post the trading update present a buying opportunity.
In the not-so-good books
BC Iron Limited (BCI) Downgrade to Underperform from Outperform by Macquarie B/H/S: 0/2/1
BC Iron has announced the temporary closure of the Nullagine joint venture (BCI 75%) because of depressed iron ore prices. Exports will cease in January. Macquarie suspects the closure will be permanent.
The broker observes the company has done a good job in cutting costs, but this has not been enough. The company’s fortunes are now envisaged to be in the hands of Mineral Resources (MIN), given current weakness in prices could result in Iron Valley being at risk of closure.
Caltex Australia (CTX) Downgrade to Neutral from Buy by Citi B/H/S: 2/5/0
With Caltex’ 2015 refining profit guidance coming in 4% above consensus, Citi has lifted its earnings forecasts accordingly.
However given the strong run-up in the share price, the broker pulls back to Neutral.
The company’s focus on business optimisation should lead to M&A (mergers and acquisitions) and excess capital returns, Citi suggests. M&A can’t be forecast and the broker warns special dividends may not be as high as the market is currently anticipating.
Capitol Health Limited (CAJ) Downgrade to Neutral from Outperform by Credit Suisse B/H/S: 0/2/0
Credit Suisse has analysed the impact of the MYEFO (mid-year economic forecast outlook) proposals regarding bulk billing, noting Capitol is largely a bulk-bill provider. Reductions in MRI (magnetic resonance imaging) subsidies lead the broker to calculate a potential 35-45% hit to the company’s revenue in fiscal 2017/18.
The proposals have yet to get through the Senate, but on the other hand, the Medicare review underway is another issue entirely. It is difficult to now how the market will respond in terms of demand for MRIs, the broker concedes, so for the moment it’s difficult to see “the light at the end of the tunnel”.
Slater & Gordon (SGH) Downgrade to Sell from Hold by Deutsche Bank B/H/S: 0/2/2
Deutsche Bank downgraded the stock after the company abandoned fiscal 2016 earnings guidance. This is coupled with pending regulatory risk in the UK and a stretched balanced sheet.
The company has abandoned its fiscal 2016 guidance because of the underperformance of the UK operations, warning that it now appears interim cash flow will be materially worse than expected in the first half and with a softer second half recovery.
Sonic Healthcare Limited (SHL) Downgrade to Sell from Buy by Citi and Downgrade to Underperform from Neutral by Credit Suisse B/H/S: 4/2/2
October’s Medicare stats indicated a grim industry outlook and now MYEFO has brought substantial cuts to pathology and imaging benefits. US Medicare has proposed changes to become effective in 2017 and Citi also expects a fee cut in Germany, all of which are negative for Sonic.
MYEFO has proposed changes to bulk-billing for pathology and imaging which if enacted will have a material impact on diagnostic providers, Credit Suisse notes.
OZ Minerals Limited (OZL) Downgrade to Underperform from Outperform by Macquarie B/H/S: 5/2/1
Contracting demand for most commodities and falling cost curves have driven a material reduction to Macquarie’s outlook for commodity prices, particularly bulks and base metals.
OZ Minerals’ rating is downgraded given its exposure to copper and the downgrade to the broker’s medium-term outlook for that commodity.
Earnings Forecast
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