Buy, Sell, Hold – what the brokers say

Founder of FNArena
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Overall activity in the land of broker downgrades and upgrades remains relatively quiet. One stand-out feature is that although yield stocks might be looking less attractive as market strategists start recommending a bias towards cyclicals and growth stocks, four of the past week’s six positive upgrades were for yield stocks.

In the good books

M2 Telecommunications (MTU) was upgraded to Buy from Neutral by Citi. With almost two-thirds of the company’s staff now in Manila, leveraging that capability into more sales is seen as a profit driver over the medium term.

Spark Infrastructure (SKI) was upgraded to Outperform from Neutral by Credit Suisse. Credit Suisse thinks the company can deliver on distribution growth while maintaining gearing, even under the most adverse scenario. The stock is considered attractive to long-term investors, hence the rating is raised to Outperform from Neutral.

Transurban (TCL) was upgraded to Buy from Neutral by UBS, due to share price underperformance since early June. The price target is also raised to $7.35 from $6.85 to incorporate the upside risk from the F3-M2 link and better traffic.

In the not-so-good books

OrotonGroup (ORL) was downgraded to Underperform from Neutral by Credit Suisse. The Oroton brand was a source of weakness in the FY13 result with like-for-like sales down 4%. The broker finds a lot of uncertainties in the stock, including Oroton Australia’s store expansion and yield growth, while Oroton International does not contribute materially to profit yet.

Sydney Airport (SYD) was downgraded to Neutral from Buy by UBS after the announcement of the corporate restructure. UBS continues to like the stock’s position against global aeronautical assets and the yield and growth outlook.

TPG Telecom (TPM) was downgraded to Neutral from Outperform by Credit Suisse and to Neutral from Outperform by Macquarie. For Credit Suisse, TPG’s FY13 result was overshadowed by the announcement that it will extend the pipe fibre network to around 500,000 apartments in major capital cities. TPG will deploy fibre to the basement and then use VDSL vectoring to deliver broadband at up to 100Mbps. The broker thinks this is a highly compelling offer for consumers. Cash profit forecasts are upgraded for FY16 and beyond by 20% to reflect upside from FTTP deployment. FY14 and FY15 cash profit is upgraded 2% and 10% respectively. The rating is downgraded to Neutral from Outperform because of the share price rally.

With respect to the fibre-to-the-building plans (FTTB), Macquarie estimates that for every $100 in capex required per unit/business connected, TPG would need to generate incremental earnings of $8 million to deliver a return in excess of its cost of capital. The rating is downgraded to Neutral from Outperform. This is despite two key positives. First, the business is trading better than expected and, second, the growing infrastructure base is creating a unique and material investment opportunity. Macquarie will seek more detail on the FTTB and review the status (see Stock in focus for more).

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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