Buy, Sell, Hold – what the brokers say

Founder of FNArena
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Local stock analysts are using the seasonal share market correction in September/October to re-assess and embark on a treasure hunt. In most cases, a weaker share price has reinforced the idea there’s value up for grabs and this explains why yet another week saw significantly more upgrades for individual stock ratings, while only a small number of downgrades were issued.

In the good books

James Hardie (JHX) was upgraded to Neutral from Sell by UBS. James Hardie’s share price has fallen 20% in the sell-off to below the broker’s target, despite the weaker Australian dollar providing a tailwind for earnings and the US housing construction outlook remaining positive. The broker has upgraded earnings forecasts by 2%–6% in FY15-17.

Lend Lease (LLC) was upgraded to Outperform from Neutral by Credit Suisse. CS analysts have returned from the company’s Investor Day with more conviction in the growth outlook for the years ahead. On this basis, they argue the stock deserves to be re-rated, notwithstanding the already impressive looking performance the shares put in over the year past. Management has indicated it will seek to increase offshore exposure in the face of only moderate growth domestically.

Macquarie Atlas Roads (MQA) was upgraded to Outperform from Neutral by Macquarie. The broker is expecting French traffic numbers to have disappointed over recent months, given the lack of economic growth in the country, albeit there remains upside potential to revenues from the pending EU concession decision and the environment for refinancing is positive, the broker notes. Either way, MQA’s price has fallen more than enough to compensate for the risks.

Mount Gibson Iron (MGX) was upgraded to Add from Hold by CIMB Securities and to Buy from Hold by Deutsche Bank. Mount Gibson’s September quarter production was slightly ahead of CIMB’s expectations. CIMB recognises that near-term volatility will place pressure on the company’s margins, but continues to expect a dividend of 4 cents a share is sustainable, despite three years of higher strip mining at Koolan Island. The rating is upgraded to Add from Hold and the target is raised to 80c from 70c. Deutsche Bank downgraded to Neutral in late August but now reverses that decision by upgrading to Buy, following a strong September quarter performance. In addition, the company still has a lot of cash available. Deutsche Bank analysts believe the current share price incorporates an iron ore price of US$75/tonne. Plus they believe the company’s cash position will start improving again in FY18 as that is when Koolan Island cash costs drop to just A$30-40/t. On Deutsche Bank’s analysis, this producer is likely to remain in the red for the next three years, but it will continue paying out 4 cents in dividends each year.

Orora (ORA) was upgraded to Outperform from Neutral by Macquarie. Orora is a beneficiary of a falling Aussie dollar and the broker has adjusted down its currency forecasts. The broker expects Orora to reiterate a positive growth story at its AGM, with North America the key growth driver. As a defensive, ORA has not suffered as much as others in the current pullback but it has still devalued enough for the broker to upgrade to Outperform.

OZ Minerals (OZL) was upgraded to Neutral from Underperform by Macquarie and to Neutral from Sell by UBS. September quarter production was comfortably ahead of Macquarie’s forecast on higher gold grades and mill throughput, with copper also outperforming. OZ looks well placed to beat its 2014 production guidance. The company reported record quarterly milled tonnes and production was 15% ahead of UBS estimates for the September quarter. Production guidance for 2014 looks easily achievable to UBS.

Ten Network (TEN) was upgraded to Neutral from Outperform by Credit Suisse. Ten Network released a weak performance update and CS analysts argue it could hardly have come as a genuine surprise. They make a bold prediction: lowering costs alone won’t restore profitability. In other words, something, somewhere has to change. Retaining the status quo is not an option. On this basis, the analysts believe the coming 12 months will bring change and upgrade to Neutral from Underperform, cutting the price target to $0.22 from $0.27.

In the not-so-good books

Dick Smith (DSH) was downgraded to Underperform from Neutral by Credit Suisse. Analysts suspect underlying growth will be harder to achieve from here onwards. There’s still a good yield on offer but the analysts see limited upside from capital return as sector discounting may well outweigh price inflation.

Fortescue Metals (FMG) was downgraded to Neutral from Buy by UBS. Total shipments in the September quarter were 41.5mt at a realised price of US$71/t. UBS notes the ore shipped was ahead of estimates, despite expecting a strong quarter ahead of the wet season. Earnings changes are minimal. The broker downgrades to Neutral from Buy to reflect the new iron ore pricing environment and a lower long-term price of US$75/dmt CFR.

SAI Global (SAI) was downgraded to Neutral from Buy by UBS. SAI has abandoned its attempts to sell out all parts of its business to interested parties. With a takeover premium now no longer applicable, the broker has revised its estimates, taking into account the lower Aussie dollar. The broker suggests the failure of the strategic review to result in a sale has highlighted a number of issues for SAI, including the lack of CEO and risk surrounding the contract renewal with Standards Aust.

Technology One (TNE) was downgraded to Neutral from Buy by UBS. Technology One has outperformed the ASX small cap industrials index by 50% over the past 12 months and UBS wonders whether the earnings upside potential from the shift to a cloud-based model has been factored into the share price. The broker concludes the answer is now likely to be “yes”. While uncertainties linger, as the cloud offering is refined, UBS has reduced FY15-16 earnings estimates by 4-5% and lifted FY18-20 by 6-8%.

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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