In the good books
Aurizon Holdings (AZJ) Upgrade to Buy from Neutral B/H/S 4/4/0
Interim financials (underlying in-line) were playing second fiddle with investors focused on what can and is likely going to go wrong, given severe pressures among Aurizon’s customers in the bulk commodities sector. Management is not going to achieve its targets, that much Citi analysts agree upon.
Where they differ from general market sentiment is in the attractiveness of the yield on offer. Expecting the board to cut the pay-out ratio, Citi suggests investors are currently ignoring the yield and hence passing on an attractive opportunity.
Bendigo and Adelaide Bank (BEN) Upgrade to Buy from Neutral B/H/S 1/4/2
Interim financials proved a significant beat but the market chose to zoom in on the underlying lack of operational momentum, point out the analysts. A big chunk of the upside surprise came from property revaluation profits.
Citi analysts see positives in the lack of asset quality concerns and the fact the Net Interest Margin (NIM) is likely to lift in the second half, supported by mortgage re-pricing.
Myer Holdings (MYR) Upgrade to Neutral from Underperform by Macquarie B/H/S 4/2/1
Macquarie notes David Jones has grown sales above market rates as suggested by the Woolworths SA results. Given the favourable consumer backdrop, the broker expects Myer will also perform.
Given the operational leverage in the business model and the low expectations factored into the share price, the broker believes the risk is to the upside in the short term and has upgraded the stock.
National Australia Bank (NAB) Upgrade to Add from Hold by Morgans B/H/S 3/4/0
National Australia Bank’s quarterly earnings update outpaced the broker but failed to impress, given surprisingly low impairments concealed soft underlying earnings. Morgans upgraded to reflect the recent share price retreat, with a target of $26.20.
In the not-so-good books
Beach Energy (BPT) Downgrade to Equal-weight by Morgan Stanley B/H/S 2/3/0
Oil markets may take longer to recover than many market participants believe, in Morgan Stanley’s view. The broker lowers long-term oil price forecasts to US$60/bbl and believes reserves reporting may emerge as the new debate in 2016.
The broker believes parts of the Cooper Basin are more challenged in the lower commodity environment and downgrades Beach Energy.
CSL Limited (CSL) Downgrade to Neutral from Outperform B/H/S 4/3/1
CSL’s first-half profit met the broker’s forecast, outpacing it on some earnings metrics.
But Credit Suisse notes an underlying schizophrenia, strong earnings on the base business being offset by a higher than anticipated ex-Novartis operation loss, thanks to weaker sales in the northern hemisphere relating to its QIV vaccine, a problem that could resurface in fiscal 2017.
Reckon (RKN) Downgrade to Underperform from Neutral B/H/S 0/3/1
Reckon’s profit fell short of consensus due to the cost of growth initiatives, including marketing and amortisation of the accelerated development of Reckon’s “cloud clouding” platform. The results of a strategic review will see further investment in marketing and offshore expansion, the broker notes.
It will take time for such a strategy to prove it is the best way to increase shareholder value, thus long term uncertainty suggests a possible price-to-earnings de-rating in the meantime, Macquarie warns.
Santos Limited (STO) Downgrade to Underweight from Equal-weight by Morgan Stanley B/H/S 5/1/2
Oil markets may take longer to recover than many market participants believe, in Morgan Stanley’s view. The broker lowers long-term oil price forecasts to US$60/bbl and believes reserves reporting may emerge as the new debate in 2016.
The broker believes Santos is one of the most exposed of the major oil stocks to the lower-for-longer oil price, given the debt issues. The stock’s rating is therefore downgraded.
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