In the good books
Ansell (ANN) Upgrade to Buy from Neutral by Citi B/H/S 3/5/0
Post the shock pre-released financial update, management proved remarkably confident of improvement in the second half due to a major contract win plus resolution of operational variances, observe the analysts. They have amended estimates accordingly.
Citi believes the shares look attractive, post sell-down, despite negative momentum operationally.
JB Hi-Fi (JBH) Upgrade to Accumulate from Hold by Ord Minnett B/H/S 4/4/0
First-half results were ahead of what the broker expected, with sales growth the key driver. The broker upgrades the stock, confident that sales growth can be sustained, supported by the positive impact on industry structure from the demise of Dick Smith (DSH).
Ord Minnett notes margins were soft in the first-half but the company has a track record of strong cost management, with scope for medium-term margin expansion as the investment in the Home division comes to an end.
Nufarm (NUF) Upgrade to Outperform from Neutral by Credit Suisse B/H/S 2/4/1
While Credit Suisse’s investment case is unchanged, the fall in the share price and no substantial change in the outlook means the rating is now upgraded.
The broker expects declines in Brazil should be offset by cost savings and growth in other markets. Trading conditions do not seem to have worsened in the December quarter, the broker observes, judging by results commentary from the company’s peers.
REA Group (REA) Upgrade from Outperform to Neutral by Credit Suisse B/H/S 4/4/0
First half earnings were in line with forecasts and Credit Suisse expects Australian revenue growth to remain strong in the second half. Price increases in May/June should support revenue into fiscal 2017.
REA Group is upgraded following the recent dip in the share price. The broker believes online property offers significant scope both in the near and longer term.
The only negative, in the broker’s opinion, was the guidance for cost growth to be higher than revenue growth. Full year estimates are trimmed by 2.0% to reflect this.
In the not-so-good books
Bank of Queensland (BOQ) Downgrade to Hold from Buy by Deutsche Bank B/H/S 2/5/0
The bank has warned of rising funding costs impacting on margins for the second time and this makes Deutsche Bank’s analysts wonder whether BOQ is receiving more pressure than the others.
The broker suspects, on the balance of probabilities, that its margin is probably more susceptible compared with the major banks in an environment of widening credit spreads.
The broker believes a re-rating in the short term is unlikely and downgrades the stock.
Lifehealthcare Group (LHC) Downgrade to Neutral from Buy by UBS B/H/S 0/1/0
Lifehealthcare’s sales are exposed by around 35% to prices set by the government’s prostheses lists, where key changes have been proposed to reference pricing, UBS observes.
This could be moderated by the company’s specialisation areas such as spinal, which may be less affected, and the opportunity to cut supplier margins. The broker envisages potential upside from the government’s examination of anti-competitive structures.
At this point, given the regulatory risk on prostheses pricing and the difficulty in apportioning a potential impact on earnings, UBS had downgraded the stock.
Whitehaven Coal (WHC) Downgrade to Hold from Add by Morgans B/H/S 4/3/1
Morgans is impressed with the company’s ability to protect its cash margin ($14/t) in the first half but expects this will compress towards $10/t in the second half because of lower coal prices.
De-gearing has begun but is expected to remain slow at current prices. The broker suspects the stock is being priced for balance sheet stress but that the market is underestimating the options the company has to de-gear more quickly if necessary.
Morgans downgrades the stock, believing that investors should wait for the risks to the balance sheet to ease further.
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