Several brokers chose last week to review their commodity price and Aussie dollar forecasts, leading to some significant alterations to earnings forecasts and target prices.
Outside of the resource sector, up/downgrades were fairly even and dispersed across sectors. Notably, brokers are running out of stocks to downgrade simply on the basis of over-valuation, although there were still a couple of candidates this week, including high-flying M2 Telecommunications.
In the good books
AusNet Services (AST) was upgraded to Neutral from Underperform by Macquarie. Buy/Hold/Sell: 0/6/1 FY15 has been tough for the company, with unfavourable tax resolutions and cost over-runs but FY16 should be better as AusNet benefits from revenue catch up. The broker notes the dividend has only grown with inflation over the last couple of years and this trend is unlikely to change with the higher participation in the reinvestment plan, supporting the current guidance for 8.4c per share.
Carsales.com (CAR) was upgraded to Add from Hold by Morgans. Buy/Hold/Sell: 7/0/1 New car sales data for March shows the recovery in vehicle sales is continuing to gain momentum. The broker suspects potential changes to the industry structure could also add value.
Independence Group (IGO) was upgraded to Outperform from Neutral by Credit Suisse and to Buy from Neutral by Citi. Buy/Hold/Sell: 3/3/1 The broker observes, with unchanged gold price forecasts and a significant depreciation in the Australian dollar, Independence is the biggest beneficiary of a revised commodity price outlook. The broker increases earnings estimates by 24% for FY16, and raises the estimated dividend in FY15 and FY16 to 18c and 38c respectively.
Lend Lease (LLC) was upgraded to Buy from Neutral by UBS. Buy/Hold/Sell: 6/2/0 A growing development pipeline internationally means activity is high for Lend Lease and set to increase. UBS expects continued positive news flow for the rest of 2015, with a particular focus on apartment projects.
Oil Search (OSH) was upgraded to Buy from Neutral by UBS. Buy/Hold/Sell: 7/1/0 UBS is raising 2015 Brent forecasts to US$56.25/bbl from US$52.50/bbl. The broker has also reduced long-term Australian dollar assumptions to US75c from US80c. Oil Search is returned to a Buy rating from Neutral, after recent share price weakness, with near-term catalysts around the Antelope and Taza drilling results.
Sirius Resources (SIR) was upgraded to Outperform from Underperform by Credit Suisse. Buy/Hold/Sell: 5/1/0 Credit Suisse is upgrading to Outperform from Underperform given recent share price underperformance, and higher cash flow expectations. The stock benefits from a valuation uplift on the broker’s lower Australian dollar forecasts, which offsets lower nickel prices.
In the not-so-good books
Brambles (BXB) was downgraded to Equal-weight from Overweight by Morgan Stanley. Buy/Hold/Sell: 2/5/0 Morgan Stanley’s proprietary survey finds small risks to the outlook for pallets. Revenue acceleration is further away than the broker previously assumed and emerging markets may have to contribute more to support near-term growth. The broker lowers Brambles’ earnings forecasts by 7.0% over the forecast period.
Dexus Property (DXS) was downgraded to Underperform from Neutral by Credit Suisse. Buy/Hold/Sell: 2/1/4 Dexus earnings-per-share growth is falling and the stock appears fully priced in Credit Suisse’s view. The broker reviews its model and expects the current price/earnings ratio will become more stretched as growth slows.
Drillsearch Energy (DLS) was downgraded to Neutral from Outperform by Macquarie. Buy/Hold/Sell: 3/3/0 Drillsearch continues to take proactive measures to adapt to the current oil price environment. Macquarie downgrades to Neutral from Outperform and retains a $1.20 target. Macquarie is encouraged by the cash flow conservation and capital discipline and believes the company has the ability to deliver material wet gas production over coming years. Production growth is set to benefit from increased transparency potential in east coast gas markets and available third party capacity at Moomba.
Echo Entertainment (EGP) was downgraded to Underperform from Outperform by Credit Suisse. Buy/Hold/Sell: 5/2/1 The south-east Queensland gaming machine market remains buoyant, with the broker noting 7-8% growth in the March quarter. Credit Suisse notes consumer confidence, spurred by rising house prices, has also been an important factor. Lower end players are driving the growth too, the broker observes. Based on share price strength the broker downgrades to Underperform from Outperform.
Iluka Resources (ILU) was downgraded to Underperform from Neutral by Macquarie. Buy/Hold/Sell: 5/1/2 Incorporating lower mineral sands forecasts Macquarie downgrades to Underperform from Neutral. Weak demand, particularly from China is weighing. Supply discipline for zircon has kept prices buoyant but the broker believes the latent overcapacity will suppress any material price increases as demand recovers.
Newcrest (NCM) was downgraded to Neutral from Buy by Citi. Buy/Hold/Sell: 0/4/4 The broker’s gold forecasts have been trimmed until 2020, with fundamental tightness being outweighed by US dollar strength and macro investment headwinds. Citi downgrades Newcrest to Neutral from Buy after a strong re-rating in the share price.
Rio Tinto (RIO) was downgraded to Neutral from Buy by Citi. Buy/Hold/Sell: 4/4/0 Citi expects the bear market will continue in iron ore with large scale supply growth set to add pressure to weak demand. The broker expects iron ore prices to fall slightly over the first three quarters of 2015 then slowly rebound. With Rio Tinto the question for Citi is whether a yield above 5.0% is enough to offset iron ore price headwinds and a lack of cash flow generation.
Tower (TWR) was downgraded to Underperform from Neutral by Credit Suisse. Buy/Hold/Sell: 1/0/1 The company has announced a NZ$50 million adverse development cover for the February 2011 earthquake. Credit Suisse observes, while this appears prudent, close to a full year of earnings are at risk before the reinsurance provides cover. This is a clear reminder to the broker of the earnings downside risk and, therefore, dividend risk.
Treasury Wine Estates (TWE) was downgraded to Underperform from Neutral by Macquarie. Buy/Hold/Sell: 0/3/5 Macquarie has reviewed the latest data on the Australian wine industry in the light of ongoing currency weakness. Total wine consumption has been flat since FY10 but recent trends suggest to the broker the category may be in decline. Bucking the weaker trend is luxury wine, where continuing growth is driving pricing gains. The announcement of the closure and sale of several wineries is the correct strategy in Macquarie’s view but does reflect ongoing over-capacity and quality challenges in the Australian industry. The broker downgrades to Underperform from Neutral, as it struggles with the current multiples.
Whitehaven Coal (WHC) was downgraded to Neutral from Buy by Citi and to Hold from Add by Morgans. Buy/Hold/Sell: 3/5/0 The broker’s commodity team has upgraded near-term coal prices but downgraded 2016-18 prices. This drives earnings downgrades for Whitehaven from FY17. Citi downgrades to Neutral from Buy and reduces the target to $1.60 from $1.70. Although the new debt facility provides funding certainty the broker expects only modest cash generation. Morgans revises valuation on adjustments to the coal price and currency outlook. Provided costs and production are on track the broker’s view on the stock is almost entirely based on whether the coal price can recover in the next 2-3 years.
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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