Merger and acquisition activity has driven broker actions this week with a ratings upgrade for iiNet and a downgrade for TPG. Recall Holdings has also been upgraded.
In the good books
Morgans upgraded iiNet (IIN) to Add from Hold. Buy/Hold/Sell 3/5/0 M2 Telecom has made a scrip-based bid as a counter offer to TPG Telecom’s $8.60 cash bid. Morgans believes the M2 bid is superior to the TPG offer. Should a higher bid not materialise, the broker believes iiNet shareholders should be comfortable with equity in the combined group and this is a better outcome than the TPG offer.
Macquarie upgraded Insurance Australia Group (IAG) to Outperform from Neutral. Buy/Hold/Sell 1/7/0 If the NSW storms were not bad enough, IAG has also seen a jump in claims for the earlier Cyclone Marcia to levels well above expectations. The combination sees the insurer downgrading FY15 margin guidance and reporting reinsurance protection for 2015 is now all but used up. However, aggregate reinsurance will kick in if further events occurred, thus the broker suggests earnings certainty remains through to end-2015. On that basis the broker has cut its FY15 earnings forecast but increased FY16, and on the strength of the IAG sell-off has upgraded to Outperform.
Macquarie upgraded Recall Holdings (REC) to Outperform from Neutral. Buy/Hold/Sell 2/3/1 Macquarie reviews assumptions around a merger with Iron Mountain. The suggested synergies of US$250 million are considered a stretch but the deal would still work without synergies, given the tax benefits. The broker considers the current share price does not hold any material takeover premium yet the value creation from the merger would be significant and materially accretive.
Macquarie upgraded Wesfarmers to Neutral from Underperform. Buy/Hold/Sell 0/6/2 Coles’ March quarter sales growth of 4.1% remains a standout, the broker suggests, and implies the supermarket is stealing share from Woolworths. There is nevertheless downside risk assuming Woolies responds with a price war. But Bunnings continues to thrive, K-Mart and Officeworks are now delivering on investment and Liquor, and Target is quietly turning around. The broker believes the Coles risk is built into the current Wesfarmers price and a 10% premium to market is justifiable on a 5.3% yield.
In the not-so-good books
Morgans downgraded TPG Telecom (TPG) to Reduce from Hold following the counter bid for iiNet from M2 Telecom. Buy/Hold/Sell 1/1/3 Morgans believes the M2 bid is superior to the TPG offer. Regardless of the outcome, the broker considers M2’s bid means TPG shareholders are worse off. Either TPG walks and earnings are lower than expected without iiNet, or it pays more and the value created for TPG is therefore lower.
Deutsche Bank downgraded Seven West Media (SWM) to Hold from Buy. Buy/Hold/Sell 4/3/1 The company intends to undertake an equity raising with maximum proceeds of $612 million which, in the broker’s view, will remove a significant overhang on the balance sheet. But the undertaking is highly dilutive to Deutsche Bank’s earnings forecasts and the rating is downgraded to Hold from Buy.
The above was compiled from reports on FNArena, which 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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