The broker wrap: upgrades for AGL, CSL and Toll, cuts to Harvey Norman, Mirvac

Founder of FNArena
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When it comes to ratings for individual stocks, the providers of services to the mining and energy sectors remain at the centre of stockbrokers’ attention in Australia. With continued profit warnings from the likes of NRW Holdings (NWH), the attention comprises mostly of negative end results.

On the positive side, more stocks were upgraded than downgraded in the past week. Are we witnessing a reversal of trend? Possibly. The week past recorded six downgrades and ten upgrades. The overall tally now indicates 42.66% of ASX-listed shares are rated Buy, 43.88% Hold and 13.46% Sell.

Downgrades

Every single upgrade reported last week was a move up to Buy from Neutral except one, which was an upgrade to Buy from Sell. Almost every downgrade was similarly uniform, with all cut to Neutral from Buy except one, which was a drop from Neutral to Sell.

NRW Holdings was the one stock downgraded to Sell, a move made by Credit Suisse after yet another profit warning at the company’s annual general meeting (AGM) last week on the back of lower revenues and ongoing margin pressure. It’s interesting to note that CIMB (when it was still RBS) downgraded the stock to Hold back in September, predicting an emerging softness in earnings. Six other brokers in the FNArena database are at Buy, most lamenting current earnings softness as well, but hanging in there on valuation and the longer term upside seen to be on offer once the cycle turns.

Regis Resources (RRL) has been cut to Neutral by BA-Merrill Lynch on concerns the December quarter won’t provide enough to see the company hit its full-year production guidance, as well as a bit of creeping execution risk. While the broker remains a fan of the company, it believes the market may be assuming an event free ramp-up at Garden Well, which may not pan out.

Next we move on to Rex Minerals (RXM), which was downgraded to Neutral by JPMorgan after a trip out to the company’s Hillside project. While the broker remains positive on the project, citing a long mine life and solid margins, it is growing increasingly concerned about the amount of capex that will be required to bring the project on line. A bit of clarity on funding would likely turn the broker back to positive.

Mirvac (MGR) was another to be downgraded from Neutral last week, in this case the decision being made by Macquarie. The broker is torn between what looks to be the start of a patchy residential recovery and the increasing potential for write-downs in the company’s business. In the end, it was a valuation call, with shares now trading too close to the broker’s target.

The FNArena Database reads like a downgrade history for Mirvac, with Citi making the cut in August, while Credit  Suisse and JPMorgan made the same move to Neutral at the end of October. In all cases, the moves were made on the back of continued short-term earnings softness, with fairly positive views all around on post-cycle prospects.

The next downgrade from to Neutral was worn by Harvey Norman (HVN), with yet another previous supporter buckling under the pressure of a darkening outlook for the company. Last week saw Deutsche Bank move lower, citing the threat of increased competition from JB Hi-Fi (JBH), which is planning a small move into white goods and kitchen appliances. The humorous side of this story is that brokers almost unanimously panned JB Hi-Fi for making the move in the first place, with few expecting any sort of success.

The last downgrade we recorded was that of Fleetwood Corp (FWD), which was also dropped to Neutral. Macquarie made the move on the back of AGM commentary, with earnings forecasts also lowered to reflect lower occupancy rates and a pause in iron ore orders. JPMorgan and CIMB made the same moves back in October, both citing the prospect of weakening earnings in FY2013, although CIMB sees big things in FY2014-15.

Upgrades

We’ll start off coverage of the upgrade side with the only stock boosted to Buy from Sell, Aristocrat Leisure (ALL). There was plenty of commentary following last week’s full-year results and most of it was positive given a fairly solid earnings beat and good performances from all regions. On top of the better than expected full-year performance, Credit Suisse also sees the potential for share repurchases given strong cash flows, hence the double upgrade.

Amongst the upgrades from Neutral to Buy, CSL (CSL) had brokers reacting positively to an earnings upgrade from 12% expected full-year net profit growth to 20% net profit growth. BA-Merrill Lynch pushed through the recommendation upgrade, citing both the higher earnings and an expected multiple expansion across FY2013 and FY2014.

Analysts at JPMorgan upgraded AGL (AGK) to Buy, citing the passing of the regulatory cloud that has been an overhang for a while now. With the broker thinking too much downside is now being factored in, it feels there is now a decent value proposition on offer.

BA-Merrill Lynch upgraded ALS (ALQ) to Buy, noting the recent guidance issued by management goes a long way to de-risking the outlook for the company. Increases to earnings forecasts through FY2015 were also made by the broker, who sees a number of value creation opportunities via both organic growth and M&A options.

Aurora Oil & Gas (AUT) was lifted to Buy by Credit Suisse, which believes narrower downspacing and HiWay technology is not being priced into the stock at current levels. Solid production growth through 2016 also supports the broker’s call.

Cabcharge (CAB) also saw an upgrade to Buy over the course of last week, with CIMB seeing recent share price weakness as providing a nice valuation boost. The broker believes an overly bearish outcome has been priced into the stock, although it does admit the prospect of Visa and Mastercard 5% surcharge caps does increase earnings risk. The week prior, JPMorgan downgraded its recommendation to Sell on the aforementioned surcharge risks.

Challenger Financial (CGF) was another of the stocks upgraded to Buy, with JPMorgan believing concerns over capital, margins and earnings transparency are now more than factored into the share price. AGM commentary was fairly well received by other brokers as well, especially news LAGIC capital requirements over the next three years will likely come in at the lower end of the forecast range. Management backed its newly found capital confidence by announcing a $50 million buyback that is expected by most to be instantly earnings-per-share (EPS) accretive.

Toll Holdings (TOL) also received  an upgrade to Buy, with BA-Merrill Lynch noting decent trading volumes over the past couple of months and expectations for reasonable conditions through Christmas paint a much nicer holiday valuation picture.

Norfolk Group (NFK) was also upgraded to Buy, with JPMorgan upbeat about a number of non-binding and conditional takeover proposals being received by the company. While the quality of the bids is yet unknown, the broker still thinks this is a good sign about the perception of the group’s assets. CIMB stayed at Neutral, however, noting investor sentiment would need to improve before it considers lifting.

JPMorgan also upgraded Macquarie Atlas (MQA) to Buy citing an improved view on cash-flow metrics and the fact the stock is now trading at a 22% discount to valuation.

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, CIMB (former 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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