Resources stocks seem to be making a turn for the better, with Rio Tinto’s interim report well received and responsible for a positive appearance in this week’s report. All in all, views and opinions about resources stocks and about those who provide services to them, like Downer EDI, remain sharply divided. With good reason too, as shown by Orica’s worse-than-expected market update during the week.
Banks are absent from this week’s update because analysts have as yet not had the opportunity to respond to Friday’s change of heart by ANZ bank. With both National Australia Bank and Bendigo and Adelaide Bank updating today, and with CommBank scheduled to update later in the week, this is about to change in a rather radical manner.
In the good books
Downer EDI (DOW) was upgraded to Buy from Neutral by Citi, to Overweight from Neutral by JP Morgan and to Outperform from Neutral by Macquarie. Buy/Hold/Sell: 4/3/1 FY15 results were in line with guidance but exceeded Citi’s expectations at the EBIT line. FY16 guidance appears appropriate in Citi’s view, reflecting what management realistically expects to achieve rather than being aspirational. FY16 guidance is weak but JP Morgan believes the sell off is overdone. JP Morgan expects future years to be relatively flat in terms of growth. Macquarie says the 11% trashing of the share price ignores Downer’s strong cash flow and balance sheet optionality. On a 5.9% yield and following the sell off, Macquarie has decided that the stock is worthy of an upgrade to Outperform.
See also DOW downgrade.
OceanaGold Corp (OGC) was upgraded to Outperform from Neutral by Credit Suisse. Buy/Hold/Sell: 3/3/0 The company has made a scrip bid for Romarco, a Canadian miner that has the Haile project in the US. Credit Suisse believes the acquisition will address the company’s medium-term production profile and add life at low cost while diversifying risk.
Rio Tinto (RIO) was upgraded to Outperform from Neutral by Macquarie. Buy/Hold/Sell: 5/3/0 Rio’s result beat the broker by 10% on stronger than expected cash flow. Cash flow, and announced reductions in capex, should relieve concerns over the company’s capacity to maintain a progressive dividend policy, the broker suggests. The broker still sees a potential shortfall in 2015 but thereafter, cash flow generation should be strong enough to support the dividend, the broker believes. Rio may start to commit to previously flagged growth projects from next year but for now, dividends are the focus.
Spotless Group (SPO) was upgraded to Buy from Hold by Deutsche Bank. Buy/Hold/Sell: 4/0/0 While the company’s margins are expected to compress over the medium term, the broker expects strong cash generation will allow it to supplement this with bolt-on acquisitions. Deutsche Bank upgrades, given the strong outlook for Spotless over the next 12 months.
Super Retail (SUL) was upgraded to Add from Hold by Morgans. Buy/Hold/Sell: 5/1/2 Given the sharp fall in the Australian dollar, the broker believes all retailers will have to address cost inflation. Morgans sticks with those best placed to effectively pass on the costs. The broker expects FY15 forecasts to be met and FY16 looks achievable.
Tiger Resources (TGS) was upgraded to Outperform from Neutral. Buy/Hold/Sell: 2/0/0 June quarter production beat the broker’s estimates by 15%. Continued strong production is expected to provide an incremental catalyst for the company as will a reduction in the debt position. Macquarie expects free cash to improve markedly after commissioning of the enhanced plant and this should help repair the balance sheet.
In the not-so-good books
Aurizon (AZJ) was downgraded to Neutral from Buy by UBS. Buy/Hold/Sell: 4/4/0 UBS is adjusting the timing of regulated network forecasts, which results in a downgrade to FY16 and FY17 estimates. More clarity is expected from the final decision in October but, in the meantime, the broker downgrades reflecting the recent share price performance.
Downer EDI (DOW) was downgraded to Neutral from Buy by UBS. Buy/Hold/Sell: 4/3/1 FY15 results were slightly higher than UBS expected. FY16 guidance signals the difficulty in predicting the flow of uncontracted revenue, something the broker expected. Nevertheless, the scale of the decline in the base business is larger than UBS anticipated. The broker is attracted to the stock and related opportunities but downgrades to Neutral from Buy, assuming little or no growth in earnings over the next few years.
See also DOW upgrades.
Flight Centre (FLT) was downgraded to Underperform from Neutral by Macquarie. Buy/Hold/Sell: 2/3/1 On the company’s own admission, Flight Centre is battling an increase in competitive forces. Macquarie analysts have re-opened their analysis into the matter and concluded the challenge is far from over for this former high-flyer. Online travel agents continue to grab market share, says Macquarie on the basis of credit card data analysis. In addition, the analysts now believe the bricks and mortar presence is acting as a disadvantage longer term due to higher operational costs.
Tap Oil (TAP) was downgraded to Sell from Neutral by UBS. Buy/Hold/Sell: 0/1/1 June quarter production was up 16.5% on the prior quarter but UBS notes liquidity has again become an issue, as the company has reached the end of its waiver term with debt financiers. Pressure on liquidity is coming from JV partner Northern Gulf being in default, lower oil prices and a steep repayment profile. UBS downgrades to Sell from Neutral. Target edges down to 26c from 27c.
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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