The broker wrap: BOQ, FMG and REX

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Changes to broker ratings in the past week

Securities analysts at stockbrokers and investment banks in Australia updated their views on the Australian economy and what likely lies ahead for official interest rates last week. The conclusion seems to be that the RBA has a whole lot more work to do to keep the economy humming along. Some experts are now forecasting no less than 100bp in further cash rate cuts.

When it comes to ratings for individual stocks the week past continued to generate more downgrades, but the gap with upgrades is (finally) closing: eight ratings were upgraded and 12 downgraded. Total Buy ratings now stand at 44.49%.

Upgrades

Australian Pharmaceutical Industries (API) was among the upgrades, lifted to Buy by RBS Australia following a review of its model that factored in more optimistic expectations for 2013 an 2014. As well, RBS views the stock as attractively priced relative to peers, while also offering a high, fully franked dividend yield.

RBS also upgraded Regional Express (REX) to Buy on valuation grounds, as despite trimming estimates for full-year 2013 after the recent profit result, the broker continues to see the shares as too cheap to ignore at current levels.

Macquarie is factoring in higher returns on equity for Bank of Queensland (BOQ) in coming years and has lifted forecasts to reflect this, the changes generating an increase in price target. With an improved outlook for the bank, its rating has been upgraded to Outperform.

Private equity target Billabong (BBG) has seen an upgrade from JP Morgan, the broker moving to a Hold given an increased likelihood of a change in ownership with two private equity players ow expressing interest.

A review saw BA Merrill Lynch more positive on some growth options for BlueScope Steel (BSL), with potential for the company to be debt free by next March an additional attraction. A strong balance sheet and an attractive valuation further justify BA-ML’s upgrade to a Buy.

Lynas (LYC) has finally received a Temporary Operating Licence for the LAMP project in Malaysia and this positive (which means a reset on some convertible bonds will be avoided) caused Deutsche Bank to upgrade it to Neutral.

Macquarie says full-year results for WHK Group (WHG) were solid. It was attracted to evidence of the resilient nature of earnings in the business services division in particular. With an attractive yield on offer and expectations for reasonable earnings growth in the coming year, the broker upgraded it to Buy.

Downgrades

Iron ore stocks dominated the downgrades over the past week, with both Fortescue Metals (FMG) and Grange Resources (GRR) seeing two downgrades in ratings respectively. Both RBS and Citi moved to Hold ratings on Fortescue following the announcement it would defer expansion plans in response to weak iron ore prices.

JP Morgan and UBS made the same changes to Grange Resources, moving to Hold. The weakness in iron ore prices means realised prices for Grange’s pellets are higher than operating costs, which has prompted both brokers to adopt a more cautious view on the company. As with Fortescue, earnings estimates and price targets were also lowered.

Gindalbie Metals (GBG) and Atlas Iron (AGO) didn’t escape downgrades, Citi lowering its numbers for both companies to account for cuts to iron ore price expectations. Given this weaker outlook, Citi has downgraded both stocks to Hold.

Weaker iron ore prices have also contributed to BA-ML downgrading Arrium (ARI) to Hold as the softer outlook brings the group’s debt and balance sheet into focus.

ALS (ALQ), which was formerly known has Campbell Brothers, has been downgraded by Macquarie to Sell on the view that forward looking indicators for the core Mineral Services division are turning down, which could underpin a further de-rating.

Macquarie has similarly downgraded Ausenco (AAX) to a Hold due to cuts to earnings estimates to account for lower levels of work for emerging companies.

Property plays have also seen downgrades, with Citi moving to a Neutral rating on Charter Hall Group (CHC) on valuation grounds. This reflects the fact the stock has outperform the A-REIT sector in the year to date.

GPT Group (GPT) has been downgraded to a Sell by Credit Suisse, also on valuation grounds given it is trading broadly in line with the broker’s revised price target. Given limited scope for upside earnings surprises, the broker expects the share price to underperform.

While New Hope (NHC) delivered production and sales numbers for full-year 2012 in line with the expectations of Credit Suisse, the broker has still downgraded its rating to Neutral. The change accounts for some delays to the New Acland Expansion project as well as the relative valuation impact of recent share price outperformance relative to peers.

With respect to changes to target prices, the largest increases were experienced by Energy Resources of Australia (ERA) and Prime Media, in both cases targets being lifted by 8% or more. Resource stocks dominated with respect to cuts to targets, with Grange, Lynas, Fortescue and Gindalbie joining Boart Longyear in seeing targets reduced by at least 13%. For Boart Longyear the change was more than 40%, this reflecting weak earnings guidance from management.

Changes to earnings forecasts (EF) in cents per share

Note: FNArena monitors eight leading stockbrokers on a daily basis. The eight experts are: BA-Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, RBS and UBS.

Important information: 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. Anyone should consider the appropriateness of the information in regards to their circumstances.

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