The week’s overview of upgrades and downgrades reveals falling share prices are always a stimulus for broking analysts lifting ratings on individual stocks.

Stocks in the limelight during the week included iiNet (take-over battle), ALS Ltd, Recall Holdings (take-over, but no battle), ResMed (value discussion post sell-down) and oil and gas producers in the Cooper basin which were united around disappointing production reports and the flaring up of consolidation speculation.

In the good books

ALS (ALQ) was upgraded to Hold from Sell by Deutsche Bank and to Neutral from Sell by UBS. Buy/Hold/Sell: 0/5/2 March quarter earnings were weaker than expected but Deutsche Bank upgrades to Hold from Sell as there are few negative catalysts remaining. While the broker continues to have a negative outlook for the oil and gas business this only contributes 10% to ALS’ earnings and so is less meaningful to near-term overall earnings. The company has issued FY15 profit guidance of $135 million, ahead of UBS’ expectations. Management has also disclosed that a $290 million impairment would be taken against the carrying value of oil and gas investments. The scale of the write-down is significant in the broker’s view.

AMP (AMP) was upgraded to Neutral from Underperform by Macquarie. Buy/Hold/Sell: 2/6/0 Despite a full valuation Macquarie is upgrading following the favourable Australian performance from Reinsurance Group America in its first quarter results. The broker upgrades earnings forecasts by 2.5% to reflect mark-to-market adjustments.

Aristocrat Leisure (ALL) was upgraded to Neutral from Sell by Credit Suisse. Buy/Hold/Sell: 5/1/1 March quarter appears to have been strong for gaming in Oklahoma. The data was a positive surprise for Credit Suisse and brings a 3.0% upgrade to FY15 earnings estimates. The broker assumes the stronger earnings are sustained.

Bank of Queensland (BOQ) was upgraded to Buy from Hold by Deutsche Bank. Buy/Hold/Sell: 1/5/2 Bank of Queensland, on Deutsche Bank’s estimates, is trading at a 5.0% discount to the major banks, despite offering much faster growth. The broker envisages upside risk to earnings and returns should the major banks re-price their mortgage books. A change in market dynamics could allow BOQ to deliver above cost of equity returns for the first time since the GFC.

BC Iron (BCI) was upgraded to Neutral from Underperform by Macquarie. Buy/Hold/Sell: 0/2/1 March quarter production was better than expected and Macquarie is upgrading earnings forecasts, reinstating earnings from Iron Valley, which had been removed because of uncertainties surrounding the ramp up. The broker believes BC Iron needs to continue cutting costs to become positive on cash flow at spot prices.

DUET (DUE) upgraded to Neutral from Underperform by Credit Suisse. Buy/Hold/Sell: 1/5/1 DUET enters the next regulatory period with a cash flow payout ratio that is already high. Credit Suisse suspects there is currently an M&A premium being priced into the shares which is likely to persist for some time.

Pact Group (PGH) was upgraded to Outperform from Neutral by Credit Suisse. Buy/Hold/Sell: 2/3/0 High-density poly resins prices have increased substantially in the past two months because of a supply squeeze in monomers. Credit Suisse suspects Pact may face a $3 million raw material headwind in FY16, reversing prior positive assumptions. The broker upgrades to Outperform from Neutral, given the 6.5% fall in the share price since February and only a minor revision in the target price to $4.75 from $4.80. Pact is awaiting approval for the steel drum manufacturing acquisition and, along with the Sulo acquisition, the broker expects FY16 should show the benefits.

Spark Infrastructure (SKI) was upgraded to Outperform from Neutral by Credit Suisse. Buy/Hold/Sell: 3/2/2 Spark Infra is the broker’s preferred exposure of the regulated utilities. Credit Suisse estimates management will be able to extend the 3-5% distribution growth target, which was set for the last regulatory period.

In the not-so-good books

Beach Energy (BPT) was downgraded to Hold from Add by Morgans. Buy/Hold/Sell: 0/3/3 Beach reported a sharp reduction in sales in the March quarter, with production affected by weather, longer downtime at Moomba and the timing of shipments. Morgans expects a greater focus on conventional oil and gas exploration as a result.

Drillsearch (DLS) was downgraded to Neutral from Outperform by Credit Suisse. Buy/Hold/Sell: 1/5/0 Drillsearch offers the best value and best position of the Cooper Basin juniors, in Credit Suisse’s view. Still it is not breaking even and the reserves life is short.

Lynas Corp (LYC) was downgraded to Underweight from Neutral by JP Morgan. Buy/Hold/Sell: 0/2/1 JP Morgan is downgrading Lynas to Underweight from Neutral based on near-term risks such as production issues, prevailing prices and a highly leveraged balance sheet. Production at the LAMP was down 9.0% quarter on quarter and well below phase 1 capacity. Production was affected by instability in the solvent extraction operation. Revenue implied realised prices of US$11-12/kg compared with US$15/kg in the December quarter.

ResMed (RMD) was downgraded to Neutral from Outperform by Macquarie. Buy/Hold/Sell: 5/3/0 March quarter flow generator sales were strong but rather than viewing this as a positive, Macquarie considers it a risk, as the AS10 upgrade cycle comes to an end in FY16 and instead becomes an earnings growth headwind. The broker also remains concerned about sluggish growth in masks and whether this can be turned around. Rating is downgraded to Neutral from Outperform and the target to $9.00 from $9.50.

Seven West Media (SWM) was downgraded to Hold from Buy by Deutsche Bank. 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. Seven Group’s (SVW) preference shares will be converted into ordinary shares and a pro rata offer of 2.27 for every three shares held will be made to non-Seven Group shareholders. The undertaking is highly dilutive to Deutsche Bank’s earnings forecasts and the rating is downgraded to Hold from Buy.

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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