In the slipstream of the departure from Chevron in the NTNG project, Beach Petroleum is feeling the crunch with the company receiving two downgrades during the week. PanAust, now trading on take-over premium, also received two downgrades, while the banks continue to remain prominent receivers of recommendation downgrades.
Miners and energy companies will soon be updating investors with their quarterly production achievements, which should be interesting given resources stocks, and their contractors, remain responsible for most of the downward adjustments in valuations/targets and in profit forecasts.
In the good books
ERM Power (EPW) was upgraded to Add from Hold by Morgans. BUY/HOLD/SELL: 2/1/0 Morgans has raised earnings forecasts, factoring in operating cost leverage in the electricity sales business. The broker expects double-digit earnings growth across FY15-18. The outlook, potential share price upside and a solid yield of 5.8% justify an upgrade to Add from Hold in the broker’s view.
Qube Logistics (QUB) was upgraded to Outperform from Neutral by Macquarie. BUY/HOLD/SELL: 4/3/1 Given the Moorebank Terminal in Sydney has been discussed for a decade now, the market does not ascribe any value for it in Qube’s valuation. Macquarie envisages a strong valuation proposition based on location and the increasing use of rail infrastructure in the logistics industry. Qube is out of favour as it’s too expensive, trading at a premium to peers Aurizon and Asciano, but this is not the case if Moorebank is factored in, the broker contends.
In the not-so-good books
Beach Energy (BPT) was downgraded to Neutral from Outperform by Macquarie and to Underperform from Neutral by Credit Suisse. BUY/HOLD/SELL: 0/2/3 Chevron has announced it will not participate in stage 2 of the NTNG project, meaning Beach reverts to 100% ownership. Beach will spend limited capital on the project until another partner is found. The Chevron exit means Beach is largely devoid of near-term catalysts, and with a new CEO it may be some months before any new strategies are announced. Credit Suisse believes, without near-term deal upside from unconventional plays, the story is tougher for Beach in a low-priced oil environment. A risk to this view is a second farm-in to the project.
Bendigo & Adelaide (BEN) was downgraded to Underweight from Equal-weight by Morgan Stanley. BUY/HOLD/SELL: 1/4/3 Downward pressure on margins and reduced scope for acquisitions signal a downgrade. Bendigo’s business mix is more sensitive to margins than other Australian banks. With advanced accreditation behind schedule and bank capital requirements in a state of flux, Morgan Stanley envisages little scope for capital relief in the near term.
PanAust (PNA) was downgraded to Neutral from Outperform by Macquarie and to Equal-weight from Overweight by Morgan Stanley. BUY/HOLD/SELL: 5/3/0 It has been a long time coming, but finally PanAust’s largest shareholder, Guangdong Asset Management, has made an unconditional bid for the balance of the company at $1.71per share. This represents a zero premium, compared to the previous 2014 offer of $2.30 which represented a 46% premium. But the copper price was much stronger then, and the broker believes this unconditional bid has a greater chance of getting over the line, with a low chance of a counter-offer. Morgan Stanley envisages the potential for a small bid rise to its target of $1.85 but acknowledges there is no certainty. Morgan Stanley suspects the board may try to push the price higher, given the opportunistic nature of the bid, but also expects some reluctance to push too hard, given the outcome of last year’s process.
Washington H S Pattinson (SOL) was downgraded to Hold from Add by Morgans. BUY/HOLD/SELL: 0/1/0 First half results were in line with the broker’s expectations. The immediate focus in Morgans’ view remains on the M&A activity in the telco sector. The continued improvement in the building products contribution and a bottoming of coal contributions are of significance as well. Morgans downgrades to Hold from Add, as the arbitrage between SOL and TPG Telecom’s (TPM) share price continues to close. The broker remains attracted to the progressive dividend policy and strong balance sheet.
Xero (XRO) was downgraded to Underperform from Neutral by Macquarie. BUY/HOLD/SELL: 0/1/2 The broker has been forced to reassess its margin assumptions for Xero, noting that companies in Xero’s space tend to post negative earnings in periods of strong growth. Xero is growing at a rapid rate and maybe the company can buck the trend, but on revised assumptions the broker has “reluctantly” downgraded to Underperform on a risk/reward basis. This is not a reflection on operating momentum or quality of management, the broker is quick to point out. Target falls to NZ$12.25 from NZ$12.50.
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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