Buy, Sell, Hold – what the brokers say

Founder of FNArena
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Changes in stockbroker ratings for individual stocks remained in balance during the week ending Friday, June 20. But underlying the trend remains supportive, despite daily profit warnings hitting investor sentiment.

All in all, overall activity continues to be dominated by corporate profit warnings, but thus far these warnings have come from smaller cap stocks in consumer related sectors, traditional media and in IT services.

In the good books

Ansell (ANN) was upgraded to Buy from Hold by Deutsche Bank. The broker believes the company is on track to deliver within guidance, despite the slow economic recovery. Management is expected to focus on lifting organic growth via new products and bedding down acquisitions. The company has also enjoyed a material benefit from ongoing weakness in raw material costs.

McMillan Shakespeare (MMS) was upgraded to Outperform from Neutral by Credit Suisse. The stock has fallen around 17% over the last month reflecting a combination of concern over the CEO’s resignation, uncertainty over earnings and regulatory risk. The broker does not think this concern is justified and, amidst other demanding valuations and/or downside risk to earnings, the stock could be a good place to park.

Orora (ORA) was upgraded to Outperform from Neutral by Credit Suisse. Corrugated box volumes seem steady, enabling Orora to translate cost savings into profit, as expected. The broker assumes value is sourced from earnings growth and not a stock re-rating.

In the not-so-good books

Alumina (AWC) was downgraded to Underperform from Neutral by BA-Merrill Lynch. Merrills believes the market is pricing in an alumina price surge which is neither evident nor imminent. The broker does not believe a “nickel style” price surge is about to happen. While recognising the Indonesian export ban has put pressure on Chinese refineries, the broker observes the alumina refining market remains in surplus.

CFS Retail (CFX) was downgraded to Underperform from Neutral by Credit Suisse. The stock has outperformed the A-REIT sector by 1% since December, supported by the broader yield rally, improved retail sales and internalisation of management. Credit Suisse has made a deeper analysis of the operations and valuation metrics and moves the rating to Underperform from Neutral. The broker expects average net operating income growth of 3.0% to 2016.

Echo Entertainment (EGP) was downgraded to Neutral from Buy by Citi. The company’s trading update was positive, with revenue accelerating since the March quarter. Citi upgrades earnings forecasts by 11% in FY14 and 7% in FY15. The broker notes The Star is outperforming the Queensland properties and gaming spending per visitor has benefited from external driver and a revamped loyalty program. But Citi downgrades as, while the company is delivering on cost savings and revenue trends are stronger, a more bullish stance requires evidence of longer-term market share gains.

nib Holdings (NHF) was downgraded to Underperform from Neutral by Credit Suisse and to Neutral from Overweight by JP Morgan. The company has outlined a strategy to address increased churn and claims inflation and is confident it can deal with the current margin decline. Credit Suisse has lowered FY14 and FY15 earnings forecasts by 5.1% and 3.5% respectively. Nib highlighted margin pressures due to claims inflation but also outlined counter-measures and announced capital management initiatives. JP Morgan believes margins can be restored in FY15 on premium increases but notes that despite the negative reaction, the stock has outperformed recently and enjoys a premium valuation. Time to pull back to Neutral.

Westfield Retail (WRT) was downgraded to Underperform from Neutral by Macquarie. The broker still believes Westfield Retail shareholders will be paying too much for the benefits afforded by the Scentre proposal, but has assessed WRT’s value on the assumption the proposal goes ahead. Scentre would have a subdued earnings growth profile, susceptible to further downside risk on dilutive asset sales, and dividend growth will be restrained by relatively high gearing, the broker warns. If the deal does not proceed, WRT is already trading at the broker’s target.

Earnings Forecast

FNArena 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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