The local share market has experienced a horror start in 2016, but most stockbroking analysts are not yet 100% in full action mode with several stockbrokers ramping up rather slowly throughout the second week of the calendar.
This might change in the week ahead which may provide a better picture as to whether those analysts are ready to start issuing rating upgrades in the face of relentless selling pressure since the start of the year.
It’s interesting to note, that the contrarian observation from the earnings forecasts tables is that resources stocks heavily populate the positive side of that ledger, believe it or not.
In the good books
AGL Energy (AGL) Upgrade to Buy from Neutral by UBS B/H/S: 3/3/0
UBS analysts have updated their estimates following new contract insights. They argue that within the current negative sentiment that is dominating global equity markets, AGL should be considered a safe haven.
The analysts do acknowledge there remain negative developments on the horizon, including the prospect for significant new renewable supply and a global focus on carbon reduction.
Alumina Limited (AWC) Upgrade to Buy from Neutral by Citi B/H/S: 4/1/2
Citi’s upgrade is premised on the assumption that ongoing production curtailments will pull the alumina market in balance, which should push up the price and make life a lot easier for Alumina.
BHP Billiton Limited (BHP) Upgrade to Buy from Neutral by Citi and Upgrade to Overweight from Equal-weight by Morgan Stanley B/H/S: 6/1/1
Commodity analysts at Citi have lowered their price forecast for iron ore to US$35/tonne from US$40/t for the years (multiple) ahead. In combination with lower price estimates for crude oil, earnings forecasts for BHP Billiton have taken yet another hit.
Regardless, the stockbroker has upgraded the rating to Buy while lowering the price target to $18 from $19.
Amidst widespread debate whether BHP Billiton remains a core holding in investment portfolios, report analysts at Morgan Stanley, a decision has been made to upgrade the rating to Overweight from Equal-Weight.
On the analysts’ calculations, even assuming a 40% dividend cut the dividend yield on offer should be 6.6%. In addition, they believe the shares already price in US$8-9 billion in lost value related to the Samarco disaster. Further, they predict investments will be reduced to fit available cash and support the balance sheet.
JB HI-FI Limited (JBH) Upgrade to Outperform from Neutral by Credit Suisse B/H/S: 2/6/0
The broker is of the view that under a best-case scenario, Dick Smith (DSH) will arise from receivership in much smaller format/shape and JB Hi-Fi will be the main beneficiary if this assumption proves correct.
Northern Star Resources Ltd (NST) Upgrade to Neutral from Sell by Citi B/H/S: 1/2/0
December quarter production pretty much met expectations, but cost control proved better. Citi analysts note the share price has weakened in recent weeks and this provides the trigger to upgrade the stock.
Stockland (SGP) Upgrade to Overweight from Underweight by Morgan Stanley B/H/S: 5/0/1
A-REITs have outperformed the ASX200 by 10% in 2015 and by 42% in the past 5 years, report analysts at Morgan Stanley. They remain of the view this outperformance is likely to last for longer.
At the same time, divergences are opening up inside the sector (see Mirvac Group below).
In the not-so-good books
Harvey Norman (HVN) Downgrade to Neutral from Outperform by Credit Suisse B/H/S: 3/1/3
Credit Suisse has downgraded to Neutral from Outperform on a combination of anticipated benefits from the Dick Smith (DSH) demise and a negative impact on the sales of household goods from an expected slowing in the domestic housing market from fiscal 2017 onwards.
Mirvac Group (MGR) Downgrade to Underweight from Overweight by Morgan Stanley B/H/S: 4/1/1
Further in-depth analysis has taught Morgan Stanley analysts the stock is now “fully valued”. The analysts do believe there are opportunities to “unlock value”, including cost reductions and splitting the business, but they also remain of the view these appear a low probability for now.
South32 Limited (S32) Downgrade to Neutral from Overweight by JP Morgan B/H/S: 2/5/0
Yet another round of material cuts to coal, alumina and manganese price forecasts has triggered a downgrade to Neutral from Overweight. The new forecasts imply South32 won’t be profitable in the years ahead.
Saracen Mineral Holdings Limited (SAR) Downgrade to Neutral from Outperform by Macquarie B/H/S: 1/1/0
Saracen’s December quarter performance beat Macquarie analysts’ expectations by no less than 10%. The analysts suspect it might have been due to better-than-expected grade at Red October.
In addition, the analysts point out the Thunderbox gold operations is ahead of schedule and under budget with first gold expected in the June quarter. The Karari gold mine is now in commercial production and Deep South is progressing as planned.
Following the “impressive” performance, Macquarie has lifted expectations for the gold producer.
Whitehaven Coal Limited (WHC) Downgrade to Neutral from Overweight by JP Morgan B/H/S: 5/2/1
JPMorgan commodity analysts have gone through yet another round of material cuts to forecasts, reducing coal price assumptions by 15–25%. The commodities team’s base case is now for thermal and semi-soft prices remaining flat until 2018.
As one would expect, the revised forecasts have a significant impact on modeling for Whitehaven Coal and therefore the broker has downgraded the stock.
Earnings Forecasts
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