The final week before local reporting season saw stockbroking analysts drop their overall activity by a notch. Commodity prices are still being adjusted to the downside, thus energy stocks and miners continue to feature heavily on the negative side for valuations and price targets and for profit forecasts.
All is not negative on the commodities side of the market, with select resources stocks making their appearance on the positive side with some December quarter production reports surprising to the upside.
In the good books
Beadell Resources (BDR) was upgraded to Outperform from Neutral by Macquarie. Restricted access to the Duckhead pit meant Beadell’s December quarter production fell 22% short of the level required to achieve 2014 guidance. However, record through-put was achieved at the mill and cost performance has improved markedly, the broker notes. Cash increased in the quarter and exploration continues to prove promising. The broker envisages a positive quarter despite the production miss, much improved on a number of metrics.
Fortescue Metals (FMG) was upgraded to Overweight from Equal-weight by Morgan Stanley. Morgan Stanley notes reduced costs and capex assumptions in the December quarter production report and this leads it to a view that Fortescue can ride out the downturn. Still, staying cash-flow positive is not enough and the broker believes prices need to rise in the next few years to justify its new Overweight view, upgraded from Equal-weight.
Independence Group (IGO) was upgraded to Buy from Neutral by UBS. Guidance for FY15 is unchanged after the December quarter production report but UBS notes all assets are performing at levels, which mean it should be comfortably met. UBS upgrades to Buy from Neutral given the strong cash flow, which should drive growth and dividends. Target is raised to $5.10 from $4.90. Gold should account for 46% of the revenue base in FY15 on the broker’s estimates, demonstrating the diversity in the company’s earnings profile.
Pact Group (PGH) was upgraded to Neutral from Underperform by Credit Suisse. Resin prices fell further over the last two months and the broker expects Pact may experience margin expansion in the second half, as selling prices adjust to the lag in raw material costs. The rubbish bin business is also operating in a solid price environment and Credit Suisse revises up earnings multiples.
Silver Lake Resources (SLR) was upgraded to Neutral from Underperform by Macquarie. Silver Lake’s December quarter production came in ahead of forecasts due to higher grades, but costs have blown out significantly, the broker notes, for various reasons. Deferring capex on Daisy and Cock-Eyed Bob will at least provide some cost relief. Silver Lake nevertheless needs a mine plan incorporating higher grade open pit feed, the broker suggests.
In the not-so-good books
Australian Pharmaceutical (API) was downgraded to Hold from Buy by Deutsche Bank. The continued recovery in the company’s earnings is encouraging but after a period of outperformance, the shares are now trading in line with the revised valuation. The company reported a 7.5% lift in retail sales in the first four and a half months of FY15, which compares with the broker’s estimate of 8.0% for the year.
Bradken (BKN) was downgraded to Neutral from Outperform by Macquarie. The bid for Bradken will not proceed as the consortium could not arrange finance on acceptable terms. Target is reduced to $2.80 from the $5.10 that was based on the bid price. Commodity prices have taken another leg down since the AGM and Macquarie expects Bradken will likely focus on repaying debt by lowering dividends in the near term. The broker downgrades to Neutral from Outperform as, while there remains demand for consumables, the demand for capital products is likely to remain subdued. Debt levels are also expected to limit future initiatives.
Credit Corp (CCP) was downgraded to Neutral from Overweight by JP Morgan. Nothing wrong with Credit Corp, which JP Morgan believes still has strong growth potential in front of it. It’s just that the share price has run up so fast, closing the gap with the (now revised higher) price target, and even moving above it. The stockbroker saw a strong interim result, but also notes management has left guidance for FY15 unchanged.
Tap Oil (TAP) was downgraded to Sell from Neutral by UBS. After downgrading the stock last month on the back of lower oil price forecasts, UBS has reduced its valuation again, noting that low oil prices could not have come at a worse time for the company. The broker has also removed any valuation for the company’s exploration assets, considering it will be difficult to achieve fair value for these assets in this market.
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.
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