Buy, hold and sell – what the brokers say

Founder of FNArena
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The lead up to the long weekend saw stockbroker analysts thinking about other things, rather than individual company ratings. Alumina led the upgrades, with Leighton and ResMed heading the downgrades, the latter largely because it has met price targets.

Perhaps the most important news from the week past is that upgrades to earnings forecasts have become larger. This includes two major banks (NAB and ANZ), which both had their earnings forecasts lifted by more than 6%.

In the good books

CIMB upgraded Alumina (AWC) to Outperform from Neutral, following a study into structural cost increases across the world’s mining sector.

For Australian investors, the key conclusions are:

  • new supply for most commodities is operating at relatively high costs, providing support for existing producers; and
  • in Australia production, costs in coal and iron ore are poised to surprise to the downside.

For Alumina Ltd, the result has been a boost to valuation/price target to $1.40 from $1.21 and this has triggered an upgrade in rating too; to Outperform from Neutral.

UBS upgraded Retail Food Group (RFG) to Buy from Neutral, having lifted their earnings forecasts for coming years. This has led to an increase in the stockbroker’s price target, to $4.70 from $4.40, and triggered an upgrade in rating to Buy from Neutral. UBS analysts have taken a favourable view on the growth profile, arguing the profile has transitioned from “average growth at discount value” to “above average growth at average value”. Bottom line: shareholders should see further rewards even after the re-rating that has already taken place. The company is generating enough cash to maintain the current 5% yield in dividends, state the analysts. On top of this, the broker sees further bolt-on acquisitions on the horizon.

In the not so good books

Citi followed news about the allegations of impropriety in Leighton Holdings (LEI) international business, and downgraded Leighton to Sell from Neutral. Leighton has made improvements to risk management and governance but investor concerns remain heightened. Hence, the broker has lowered the target price to $15.35 from $18.97, applying a 10% discount to valuation on the increased risk to offshore earnings and cash collection. The rating is downgraded to Sell from Neutral, as the expected total return is negative 7%.

JP Morgan downgraded Matrix Composites & Engineering (MCE) to Underweight from Neutral, saying that there are too many near-term risks in the order book. The company’s order book was at historical lows at the FY13 result and there’s been no major contracts announced since August. Earnings forecasts have been cut to reflect the difficulties building the order book in the near term without sacrificing margin. The price target is reduced to 65c from 95c.

Qantas (QAN) was downgraded to Neutral from Outperform by CIMB, as the August traffic numbers show domestic market capacity growth is moderating and Virgin Australia (VAH) is gaining ground on Qantas in the domestic market. For Qantas, CIMB believes the earnings risk is shifting to the international segment, as capacity in that area is accelerating from a number of foreign carriers. Hence, the rating is downgraded to Neutral from Outperform and the price target is reduced to $1.49 from $1.73. No earnings changes are made at this stage and the broker continues to prefer Qantas over Virgin on valuation. It’s just that in the short term, concerns over the competitive landscape are overshadowing the positives.

Although lifting the price target, UBS downgraded ResMed (RMD) to Neutral from Buy following a recent rally in the stock price. The three-year re-bidding of Round 1 of the US Medicare pricing has been completed and there has been a bounce in price expectations. UBS re-bid price estimates are about 11% higher. UBS notes the nine major cities that took part in the competitive bidding process three years ago affect about 1% of ResMed’s revenue. For UBS, the direction of the price signal is most important and indicates a more rational stance on pricing. There has been change in valuation assumptions but, with the recent rally in the stock price, the rating moves down to Neutral from Buy. The price target is raised to US$53.01 from US$50.50. In Australian dollar terms, this is raised to $5.64 from $5.52.

Earnings forecast

The above was compiled from reports on the FNArena database, which 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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