Last week marked the worst week for the Australian share market for the year thus far. It’s therefore no surprise that stockbrokers responded by issuing more upgrades than downgrades for individual stocks.
Equally unsurprisingly, the banks featured prominently with the sector attracting three upgrades and one downgrade (see our Thursday report [1]). Other (former) market darlings equally attracted upgrades; AMP, Ardent Leisure, and REA Group. Investors should note all these upgrades (no exception) are to Neutral from Sell, or equivalent ratings, which is a signal in itself.
In the good books
AMP (AMP) was upgraded to Buy from Hold by Deutsche Bank. Buy/Hold/Sell: 3/5/0 First quarter funds and flows suggest AMP is well positioned to maintain solid earnings growth. Deutsche Bank, when examining forward earnings estimates, balance sheet strength and yield appeal, does not believe the positives are priced in. AMP is now the broker’s top pick among wealth managers.
[2]Argent Leisure (AAD) was upgraded to Hold from Reduce by Morgans. Buy/Hold/Sell: 0/5/0 Following a de-rating, Morgans lifts its recommendation back to Hold from Reduce. The broker expects firm performances from the business units in its quarterly update, with the exception of health clubs. The broker likes the high growth from Main Event and solid dividend yield. Nevertheless, uncertainty about new management and medium term risks with health clubs makes for a more neutral proposition.
National Australia Bank (NAB) was upgraded to Neutral from Sell by Citi. Buy/Hold/Sell: 3/3/1 The first half results signalled to Citi the bank’s operations are back in line with peers. The bank has taken the action the broker considers necessary to restore the franchise, with a capital raising and a path to resolving legacy issues. Citi observes some risk the half-year dividend may need to be re-set as the payout ratio moves up to 85% – which appears high for a business looking to recover its market position.
REA Group (REA) was upgraded to Outperform from Neutral by Credit Suisse. Buy/Hold/Sell: 5/2/1 March quarter growth was weak but the broker expects a pick up in the June quarter. On this basis, relatively small adjustments are made to forecasts. FY15 earnings estimates are reduced by 2.0%, which still equates to 30% growth for the year. The drop in the share price is considered a buying opportunity.
Recall Holdings (REC) was upgraded to Hold from Reduce by Morgans. Buy/Hold/Sell: 2/4/0 As the share price is trading closer to valuation, Morgans upgrades to Hold from Reduce. If the acquisition by Iron Mountain does not eventuate, the broker considers the downside risk to the share price is now more limited. The broker considers the offer is only marginally positive for institutional shareholders, but expects cross shareholdings among institutions should the transaction succeed.
Scentre Group (SCG) was upgraded to Outperform from Neutral by Credit Suisse. Buy/Hold/Sell: 2/2/3 The company’s first quarter update was welcome news to the broker, with a combination of increased development commencements and specialty sales growth. The biggest risk Credit Suisse highlights is regarding non-core disposals, where there was no news. Offsetting the potential dilution, the broker observes, is some well-timed debt refinancing.
In the not-so-good books
Crown Resorts (CWN) was downgraded to Equal-weight from Overweight by Morgan Stanley. Buy/Hold/Sell: 3/4/1 Morgan Stanley has become more cautious on Macau casinos, given the recent deterioration in industry demand, which could potentially be structural. Earnings risk could add to Crown’s balance sheet pressure.
[3]iiNet (IIN) was downgraded to Hold from Add by Morgans. Buy/Hold/Sell: 1/7/0 As expected, TPG Telecom (TPM) has countered M2 Telecom’s (MTU) offer for iiNet. What Morgans did not expect is that the iiNet board would support TPG’s $9.55 bid over the M2 scrip offer as, at face value around $9.61, the M2 offer is higher. Morgans believes the M2 offer is better but suspects iiNet is concerned about the value of M2 scrip. The broker does not rule out M2 countering with another bid but considers it unlikely.
Incitec Pivot (IPL) was downgraded to Neutral from Buy by Citi. Buy/Hold/Sell: 2/5/1 The broker expects profit of $135 million and a 4.5c dividend at the first half result. Key influences are expected to be higher average fertiliser prices and more stable volumes. The broker remains positive for the longer term but, after strong outperformance this year, the balance of risks looks more even.
McAleese (MCS) was downgraded to Underperform from Neutral by Macquarie. Buy/Hold/Sell: 0/2/1 Atlas Iron (AGO) may recommence production at two of its three mines this month and thus McAleese would recommence haulage. If so, new contracts and profit sharing deals are expected, which would see McAleese FY15 earnings come in at around $70 million, the broker calculates, below $85-90 million guidance. While a restart is good news, and the company is expected to remain in compliance with its covenants, the level of debt on the balance sheet means McAleese is not out of the woods.
Treasury Wine Estate (TWE) was downgraded to Underweight from Equal-weight by Morgan Stanley. Buy/Hold/Sell: 0/2/6 Morgan Stanley believes consensus expectations are too optimistic on the earnings outlook. The broker has analysed FY16 earnings and risks, which leads to a reduction of 8.0% in forecasts. The broker suspects the FY16 Grange and Penfolds Bin releases will create a profit “hole” and the company will struggle to cycle the release of the 2012 bin range release. Moreover, the leverage to a weaker Australian dollar is considered overstated.
Earnings Forecast
[4]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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