The local share market had worked through a not too bad week by the closing bell on Friday, 29th May 2015 and – how predictable – the number of recommendation downgrades for the week outnumbers the upgrades. We registered 12 downgrades versus seven upgrades. Most were valuation related.
In the good books
Alumina (AWC) was upgraded to Overweight from Equal-weight by Morgan Stanley. Buy/Hold/Sell: 6/0/ Morgan Stanley finds potential for margin expansion and upgrades to estimates. With cost savings noted that were not previously factored in, combined with improving alumina price, the broker expects this should carry the stock higher.
[1]Dexus Property (DXS) was upgraded to Neutral from Sell by Citi. Buy/Hold/Sell: 1/3/3 Channel checks reveal continued demand for office assets and Citi observes pressure for asset values to rise and cap rates to fall. Following the pull back in the share price the broker considers the stock is more attractively priced and upgrades.
SAI Global (SAI) was upgraded to Outperform from Neutral by Credit Suisse. Buy/Hold/Sell: 1/6/0 SAI Global is suffering from weak revenue growth and the expiry of the Publishing Licence Agreement is looming. The PLA loss is priced in and the currency and cost savings are providing earnings tailwinds, the broker notes. Overall, Credit Suisse envisages a reasonable earnings outlook and notes SAI Global is trading at a discount to the Small Industrials and to its own long-run average price/earnings ratio.
Virtus Health (VRT) was upgraded to Outperform from Neutral by Macquarie. Buy/Hold/Sell: 4/0/0 IVF volumes were up 6.9% in April and up a robust 4.6% for January-April, compared to a flat first half. Higher price point fresh-cycle growth outpaced frozen for the first time in several months. Industry growth remains modest but appears to be strengthening.
In the not-so-good books
AGL Energy (AGL) was downgraded to Neutral from Buy by Citi. Buy/Hold/Sell: 3/4/1 The new CEO has defined the future direction for AG with a clear focus on process and efficiency. The recent strong performance means the broker considers the stock fair value. Delivery of earnings expectations and realising targets are now required. If AGL achieves its full cost cutting target then Citi envisages significant additional value.
[2]Independence Group (IGO) was downgraded to Neutral from Outperform by Credit Suisse. Buy/Hold/Sell: 2/4/1 Independence Group has made an offer of 0.66 shares for each Sirius Resources (SIR) share plus cash of 52c a share. The deal will combine the Sirius development asset, Nova, with Independence’s strong cash flow and create a diversified miner with a market cap around $2.7bn. Sirius shareholders will keep the non-nickel assets via a spin out. Credit Suisse believes it is a good deal for Sirius but much less so for independence shareholders.
Oil Search (OSH) was downgraded to Neutral from Overweight by JP Morgan. Buy/Hold/Sell: 6/2/0 Analysts have adopted lower oil price forecasts for the years ahead. Apart from lower corporate forecasts across the board, the move only leads to one recommendation downgrade in Australia. Oil Search, downgraded to Neutral from Overweight. The price forecasts adopted by the break-away group have WTI ranging between US$54-US$59/bbl in the three years ahead, and Brent US$6/bbl higher.
Ramsay Health Care (RHC) was downgraded to Underweight from Equal-weight by Morgan Stanley. Buy/Hold/Sell: 2/4/2 Rising lapse rates and growth in low-cost policies signal to the broker a risk from FY17 onwards regarding the rates paid by insurers to hospitals. Accordingly, Morgan Stanley downgrades Ramsay Health earnings estimates and reduces the rating to Underweight from Equal-weight.
REA Group (REA) was downgraded to Hold from Add by Morgans. Buy/Hold/Sell: 4/3/1 Growth in depth and volumes has fallen, as east coast real estate vendors hold off selling properties in the hope of making a bigger profit. Morgans believes this greed-driven withholding of listings has meant the number of houses and apartments for sale have plummeted and created near-term pressures for REA Group. The broker reduces earnings forecasts by 9-11% over the FY15-20 period.
Sirius Resources (SIR) was downgraded to Hold from Buy by Deutsche Bank, to Neutral from Outperform by Credit Suisse and to Neutral from Buy by Citi. Buy/Hold/Sell: 2/4/0 In addition to the scrip/cash offer Sirius shareholders will be entitled to the final Independence Group dividend for FY15. Deutsche Bank believes Independence Group is paying full value for the stock and assumes a very bullish nickel price. Credit Suisse suggests the market was already pricing in the chance of an offer. The offer now leaves the Sirius share price linked to Independence and removes some of the fundamental basis for valuation support. Accordingly, Citi downgrades to Neutral, High Risk from Buy. Citi rates the stock as High Risk because of the volatility that could ensue. As the takeover requires shareholder approval, if denied, this could mean a fall in the Sirius share price back to pre-bid levels, the broker maintains.
Earnings Forecasts
[3]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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