Buy, Sell, Hold – what the brokers say

Founder of FNArena
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In line with the start of the August reporting season, most rating changes are directly correlated with specific company news and developments and ResMed surprised with yet another strong financial result. Iress announced a UK acquisition.

When it came to upgrades, financials got a good showing as companies beat expectations and peer performance. Resources featured again on the down side of the ledger and JP Morgan had a change of heart on CFS Property Office.

In the good books

Challenger Diversified (CDI) was upgraded to Buy from Neutral by UBS. The FY13 result was slightly higher than UBS estimates. The result was driven by significantly reduced operational expenses, along with buy-back accretion and underlying portfolio growth. The broker has upgraded the stock to Buy from Neutral given the discount to valuation and NTA as well as a 7.3% dividend yield.

Henderson Group (HGG) was upgraded to Buy from Neutral by UBS. Henderson’s operating momentum has outperformed peers as second quarter retail net flows accelerate. Although institutional flows were down in the second quarter, this was squared up in July. The outcomes reflect improving macro, regulatory and equity backdrops and UBS has raised the recommendation to Buy.

IRESS (IRE) was upgraded to Neutral from Underperform by Credit Suisse and to Neutral from Underperform by Macquarie, after it acquired UK technology provider, Avelo Financial Services. Credit Suisse thinks the acquisition will provide greater diversification of earnings, and the company’s growth trajectory is significantly enhanced. First half results were slightly ahead of estimates. Forecasts now imply a smaller 3% decline in FY13 earnings compared with the 6% decline in FY12. This is an exciting opportunity in Macquarie’s view. Avelo offers an extensive blue chip customer base to achieve immediate scale. Macquarie thinks transition to the XPLAN platform will take time but a key positive is that competition in next-generation wealth products appears limited. Avelo is expected to be 10% accretive in FY14, post a 2-for-9 rights issue. Macquarie thinks the stock is fully valued in the short term but warms to the potential in the UK.

James Hardie (JHX) was upgraded to Neutral from Underweight by JP Morgan. After a series of weak quarters, JP Morgan’s attention for the first quarter of FY14 will be on whether James Hardie’s performance has improved sufficiently to support management’s FY14 earnings margin target of 20%. As the stock is now trading in line with the broker’s target price, the recommendation has been upgraded to Neutral from Underweight.

ResMed (RMD) was upgraded to Outperform from Neutral by CIMB Securities and to Buy from Hold by Deutsche Bank. The fourth quarter showed continued margin expansion and gains to the bottom line – all pleasing for CIMB. Deutsche Bank was encouraged by the solid fourth quarter, although the impact of competitive bidding in the US won’t be clear for some time. Deutsche Bank liked new developments and new product launches as well as the tailwind from the falling Australian dollar. As there is upside earnings risk, the broker has raised the rating to Buy from Hold.

In the not-so-good books

CFS Property Office (CFX) was downgraded to Underweight from Neutral by JP Morgan. The broker has changed its mind on CFS with regard to the proposed internalisation by CommBank (CBA). Last week the broker upgraded to Neutral but now has downgraded back to Underweight, suggesting that while CFS’ portfolio is attractive, it might be hard to find a buyer, given CBA’s entrenched management rights. Modelling planned asset sales and acquisition of rights and mandates leaves the broker with an unchanged NPV but a 10% reduction in net tangible assets. Target retained at $2.12 but rating downgraded.

Silver Lake Resources (SLR) was downgraded to Sell from Hold by Deutsche Bank. Silver Lake produced 56,000 ounces of gold in the June quarter and reached 151,000 ounces attributable to FY13. Cash costs at Mount Monger were higher than the broker expected, with around 35% of mill feed coming from low-cost stockpiles. With development still required at Mount Monger, and Murchison consuming cash, the broker thinks there is significant balance sheet risk. FY14 expectations have been reduced and the rating has been downgraded.

Woodside Petroleum (WPL) was downgraded to Neutral from Buy by Citi. Citi thinks Woodside will make progress, particularly on the Browse Basin floating liquefied natural gas (FLNG), and while growth for the stock is long dated, the dividend yield is supportive at current levels. The broker thinks the payout ratio of 80% is sustainable to 2020, given the project delays. The projected effective tax rate is now under 15%, so the rating is downgraded to Neutral from Buy.
The FNArena database 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.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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