In the good books

Cleanaway (CWY) was upgraded to Buy from Neutral (B/H/S 3/2/0) by UBS. Cleanaway has made a cash bid for Tox Free Solutions (TOX) at $3.425, which amounts to a 28% premium. UBS had considered Tox’ assets to be undervalued and an acquisition would diversify Cleanaway’s earnings base and provide significant synergies. UBS also considers consensus earnings forecasts for Cleanaway to be too low. The broker has not yet factored a successful takeover into forecasts, but has added a 50% chance to its valuation, increasing its target to $1.64 from $1.38, sufficient for an upgrade to Buy.

Fortescue (FMG) was upgraded to to Buy from Neutral by UBS (B/H/S – 5/2/1) as part of a broader update on commodities’ outlook for 2018. The price target gains 1% to $5.30 but the broker’s Net Present Value (NPV) dives by 17% to $5.30. The upgrade has been inspired by “value”. UBS is very much Overweight the sector, attracted by higher-for-longer elevated price levels and prospects of plenty of excess cash, much of which should find its way into shareholders’ pockets. The target price is $5.30.

Retail Food Group (RFG) was also upgraded to Neutral from Sell (B/H/S – 0/1/0) by UBS. The company is conducting a business-wide review to better ensure a sustainable future. UBS reduces long-term growth forecasts to account for the risk of increased franchisee support. UBS reduces its nominal terminal growth rate estimate for RFG to 1% from 3%. However, given weakness in the share price the broker upgrades to Neutral from Sell. Target is reduced to $3.15 from $4.55.

Whitehaven Coal (WHC) was upgraded to Buy from Neutral (B/H/S 3/3/2) by UBS. As part of UBS’ broader update on commodities’ outlook for 2018 (see above), UBS has upgraded Whitehaven Coal to Buy from Neutral. The price target gains 25% to $4.50.

In the not-so-good books

AWE (AWE) was downgraded to Sell from Neutral (B/H/S – 1/2/2) by Citi. Mineral Resources (MIN) has confirmed an all-scrip offer for AWE, with AWE shareholders receiving one MIN share for every 22.325 shares held. This values AWE at $0.80 a share as of Friday’s close and compares with the bid from China Energy Reserve and Chemical at $0.73 per share, cash. So close to Christmas, Citi is not sure that investors awaiting a higher offer will be rewarded by Santa and downgrades. Target is $0.72.

Tox Free Solutions (TOX) was downgraded to Neutral from Buy by UBS (B/H/S – 0/4/0) as the stock is trading largely in line with valuation. Target is raised to $3.50 from $2.85. The broker believes Cleanaway’s bid goes a long way to closing the valuation gap and peers may not be able to extract the same synergies, or be too heavily geared, to make a counter bid.

The above is a compilation of the week’s Broker Calls from FN Arena.

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.