Buy, Sell, Hold – what the brokers say

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Brokers, in general, have been in a rather negative mood so far this week with more downgrades than upgrades. Oz Minerals got a double downgrade from Macquarie after a site tour and Qantas and Southern Cross Media were also downgraded.

In the good books

Sonic Healthcare (SHL) was upgraded to Buy from Hold by Deutsche Bank. The broker is comfortable that any impact on domestic operations from a passage of the government’s co-payment proposal, while negative, can be managed. As the share price has fallen 5% relative to the market since the budget, the risk seems to be priced in, and Deutsche Bank also makes positive revisions to earnings forecasts.

Deutsche Bank has upgraded UGL (UGL) to Buy from Hold. Deutsche Bank believes the market is undervaluing UGL on concerns regarding the level of sustainable earnings in engineering. Debt levels are also a concern but the broker thinks debt is past its peak and the company will not have to raise equity to prevent a breach of covenants.

In the not-so-good books

Macquarie downgraded Monadelphous Group (MND) to Underperform from Neutral. Macquarie has reviewed the fundamentals underpinning the stock. The company has had mixed success in the awarding of recent work and the potential for large scale new contracts in resources and oil and gas appears limited. The broker envisages a declining earnings outlook for the next few years.

Macquarie downgraded Oz Minerals (OZL) to Underperform from Outperform. The broker is adjusting forecasts after a site tour. Increases to underground capital expenditure have translated to material cuts to earnings forecasts. Macquarie believes OZ Minerals has the potential to generate its market capitalisation in cash in around five years but how it allocates cash represents the key catalyst for the stock.

CIMB Securities downgraded Qantas to Hold from Add. CIMB notes current conditions remain particularly weak, with excess capacity and softening leisure demand in the second half for domestic airlines. CIMB is downgrading its rating to Hold from Add, with the stock now trading near its $1.39 target and the market pricing in the benefits of an improved capacity outlook. CIMB advises investors to wait for a cheaper entry point or more tangible signs of yield improvement.

Deutsche Bank downgraded Southern Cross Media (SXL) to Hold from Buy. The company has downgraded profit guidance for FY14, expecting it to be down around 10% after forecasting a flat outcome previously. Deutsche Bank is concerned and expects further headwinds in FY15, noting gearing remains high and presents a risk if there were further downgrades to come.

Credit Suisse downgraded Telstra (TLS) to Neutral from Outperform. Optus has announced some aggressive new mobile pricing plans and Credit Suisse expects Telstra to react. The broker trims mobile revenue growth to 2.1% from 3.8%, to reflect this expectation. The stock is trading close to the broker’s revised valuation.

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.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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