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The tide appears to have well and truly turned in favour of ratings downgrades on the Australian market, as over the past week brokers in the FNArena database have pushed through 18 cuts in ratings compared to just four upgrades. This brings total Buy ratings to 57.6%, down from 58.2% previously.
Upgrades
A resilient interim earnings result from Macquarie Bank (MQG) was enough for BA Merrill Lynch to upgrade it to a Buy, the change also a reflection of what the broker sees as strong valuation support at current levels.
As BA-ML points out, if current funding sources prove sustainable, the value available from annuity-style income alone is enough to justify most of the current market value of the bank. This implies upside when an improvement in market conditions boosts earnings in other divisions. Others in the market have adjusted forecasts and price target for Macquarie post its profit result.
QR National (QRN) was also upgraded, Deutsche Bank moving to a Buy rating based on the potential for upside to QR’s volumes, which should translate into increased earnings.
BA-ML also upgraded Santos (STO) to a Buy during the week, this following a review of its model resulting in a revaluation of the group’s assets. While the value of the GLNG assets were reduced, this has been offset by increases to the value of the Cooper gas assets.
Expected price tension in gas markets in the coming year should be a further positive and support BA-ML’s upgrade. The price target has also been increased modestly. However, Credit Suisse went the other way, downgradingSantos to Neutral on the back of recent share price outperformance.
A restructuring of debt and a capital raising by Transpacific Industries (TPI) has seen both RBS Australia and Credit Suisse upgrade it to Buy ratings from Hold previously. The improved balance sheet removes some headwinds in the view of RBS, while management will be able to focus on operational rather than financial issues and this should boost the company’s financial performance according to Credit Suisse.
Downgrades
On the downgrades side, OneSteel’s (OST) revision to its earnings guidance on the back of lower iron ore prices saw brokers cut earnings forecasts and price targets significantly. Both Deutsche Bank and RBS Australia downgraded ratings to Sell and Hold, respectively, reflecting concerns over debt covenants and ongoing tough market conditions.
While quarterly production for Aquila Resources (AQA) was solid, RBS Australia has still downgraded it to a Sell rating, this reflecting the broker’s concern over the company’s ability to raise sufficient cash to meet its development ambitions. This implies a capital raising is a possibility in coming months.
A similarly disappointing production report from Kingsgate (KCN) saw both Deutsche and Citi downgrade the stock to Hold from Buy previously, with targets and earnings estimates cut accordingly. A disappointing quarterly result from Paladin (PDN) was also enough for RBS to downgrade it to a Hold from a Buy, with earnings and price target also reduced.
Australian Pipeline Trust (APA) has been downgraded on valuation grounds by Macquarie following recent share price gains, while valuation has seen Credit Suisse make the same shift to Hold from Buy on Australian Worldwide Exploration (AWE) while RBS Australia issued a similar downgrade for Consolidated Media (CMJ).
UBS also downgraded Mirvac (MGR) to a Hold following a review of sector valuations, while Citi resumed coverage on Spotless (SPT) with a downgrade to a Neutral rating because tough market conditions have caused the broker to lower its earnings expectations. The price target was also reduced.
Ongoing increases to the N5 implant failure rate have Credit Suisse concerned enough about Cochlear (COH) to downgrade it to an Underperform rating, with the broker also cutting its price target.
Ongoing tough market conditions are behind Deutsche Bank’s downgrade to Hold from Buy on CSR (CSR), the broker also lowering earnings estimates and price target leading into the company’s interim profit result. James Hardie (JHX) was downgraded by both Credit Suisse and JP Morgan, in both cases the rating moving to Underperform from Neutral.
Harvey Norman (HVN) copped two ratings downgrades to Neutral from Outperform post a first-quarter sales result that showed the company has had to sacrifice margins to defend market share. Brokers across the market also lowered earnings estimates and price targets for the stock on the back of the report.
For Iron Road (IRD) it was a review of magnetite projects and changes to foreign exchange assumptions that saw RBS Australia downgrade it to a Hold from Buy, the broker’s price target also being reduced.
Tatts (TTS), GPT (GPT) and Blackmores (BKL) were also downgraded during the week, with valuation the key factor in the decisions of brokers to lower ratings for the three stocks, while tough ad market conditions saw forecasts, price target and rating for Ten Network (TEN) lowered by RBS.
[2]Note: FNArena monitors eight leading stockbrokers on a daily basis: BA-Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, RBS and UBS.
For more information, visit FNArena.com [3].
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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in the Switzer Super Report
- Paul Rickard: Advice for the yield hungry [4]
- Peter Switzer: Global easing cycle well underway [5]
- Tony Negline: Three tax options for foreign super transfers [6]