Resources stocks have started to rally from beaten down share price levels while stockbroking analysts are still paring back forecasts and valuations. As they say in the trade: timing is everything!
And so it is that negative adjustments to price targets and estimates are being fully populated by industrial commodities and energy, with few exceptions only such as Nufarm (agri-sector) and Dexus (property).
Total upgrades and downgrades for the week were seven versus seven. Note: this is against a background of major indices planning yet another attack at the (so far) elusive 6000.
In the good books
Ansell (ANN) was upgraded to Neutral from Underperform by Credit Suisse. Buy/Hold/Sell: 2/4/2 Raw materials pricing remains favourable and is expected to be subdued over the near to medium term. On balance, the broker envisages softer macro economic conditions are largely offset by lower input costs and the benefits of recent acquisitions and new product launches.
[1]Base Resources (BSE) was upgraded to Neutral from Underperform by Macquarie. Buy/Hold/Sell: 1/1/0 The broker has downgraded its mineral sands price forecasts and hence its Base earnings forecasts. Weak prices, a high debt burden and the export levy dispute with Kenya have led the stock to underperform. These overhangs are likely to remain but operationally Base is performing well, the broker notes. The northern summer is also seasonally stronger for mineral sands.
Nufarm (NUF) was upgraded to Neutral from Underperform by Credit Suisse. Buy/Hold/Sell: 0/6/1 Recent rainfall has meant a solid start to Australian winter crops. Credit Suisse is raising second half revenue forecasts to 5.0%, on higher demand for pre-emergent herbicides. The company’s geographic diversity should provide a buffer to weak market conditions.
Suncorp (SUN) was upgraded to Buy from Hold by Deutsche Bank. Buy/Hold/Sell: 2/4/2 Softer medium-term earnings growth is envisaged as general insurance margins normalise but Deutsche Bank believes there is capacity for higher dividend yields. This is based on support for ongoing special dividends and capacity for ordinary payouts towards the top end of the 60-80% range in a low growth environment.
Tabcorp (TAH) was upgraded to Outperform from Neutral by Credit Suisse. Buy/Hold/Sell: 3/2/3 Wagering momentum continues and Credit Suisse is modelling 5.3% organic wagering revenue growth. Reports suggest the industry is growing solidly and Tabcorp is maintaining share. Credit Suisse aligns the Australian risk-free rate with other gaming stocks under coverage and upgrades to Outperform from Neutral.
In the not-so-good books
GBST Holdings (GBT) was downgraded to Reduce from Add by Morgans. Buy/Hold/Sell: 0/0/1 Currently the stock is priced for perfection and the broker would prefer to acquire it at lower levels. Rating is downgraded to Reduce from Add. There may be a strong chance the company can sign another two to three new customers this year and raise the potential for upgrades but there is also revenue risk from further consolidation in the Australian retail broking market.
[2]GWA Group (GWA) was downgraded to Hold from Buy by Deutsche Bank. Buy/Hold/Sell: 0/5/1 Following the sale of Dux and Brivis the company will distribute 28.8c per share to shareholders by way of a capital return and a franked special dividend. The announcement was broadly in line with expectations and, given the shares are trading in line with the target, Deutsche Bank downgrades to Hold from Buy.
Independence Group (IGO) was downgraded to Neutral from Buy by UBS. Buy/Hold/Sell: 3/3/1 March quarter production was consistent with the broker’s expectations but the downgrade is based on recent share price appreciation. The broker expects the stock to stay a favourite with some investors but considers it fully valued.
Earnings Forecast
[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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