Merger, demerger and acquisition activity drove broker action this week, with analysts casting their eye over the TPG bid for iiNet and BHP’s South32 spinoff.
In the good books
Citi upgraded BHP Billiton to Buy from Neutral. Buy/Sell/Hold 4/0/4. Citi upgraded following share price weakness and on the estimate that investors looking for yield can have some 5.5%, if they buy now or 6% if they wait until South32 has become a separately listed entity, which should happen by late May/June. Citi believes South32 post separation can become a high yielding stock in its own right, estimating a yield of circa 6% for the spin-off.
Macquarie upgraded Bluescope Steel (BSL) to Outperform from Neutral. Buy/Sell/Hold 7/0/1. Macquarie has updated FX forecasts, assuming a lower Australian dollar and euro versus the US dollar over the next couple of years. The broker has also made material cuts to near-term iron ore price forecasts. In the steel sector, BlueScope is the largest beneficiary of the changes to forecasts and the broker expects steel spreads to improve.
Credit Suisse upgraded iiNet to Outperform from Neutral and Morgan Stanley to Equal-Weight from Underweight following the TPG Telecom bid. Credit Suisse notes iiNet may declare a special dividend to pay out excess franking credits to shareholders. The broker upgrades on the basis that iiNet is trading below terms and offers a 16% annualised return through to deal completion. Morgan Stanley does not believe the ACCC is likely to block the bid and notes the new company would have a 27% retail broadband share, well behind the leader Telstra, which has 45%.
In the not-so-good books
Morgans downgraded iiNet (IIN) to Hold from Add. Buy/Sell/Hold 3/1/4. Morgans only recently upgraded to Add but has now pulled the rating back to Hold, following the bid by TPG Telecom at $8.60 a share. The broker now sets the target at $8.60, from $7.52. The broker notes iiNet board has the potential to distribute retained profits as a special dividend and the offer price would go down by whatever the cash component is.
Citi downgraded TPG Telecom (TPM) to Sell from Neutral. Buy/Sell/Hold 2/2/2. TPG’s offer for iiNet has strong strategic logic, in the broker’s view, and potential earnings accretion of 14% in year one. Still, the shares are priced for perfection while the deal is not yet completed, so the broker suggests it is better taking money off the table at current prices and downgrades to Sell from Neutral.
Morgan Stanley downgraded Wesfarmers (WES) to Equal-weight from Overweight. Buy/Sell/Hold 0/5/3. Morgan Stanley is downgrading to Equal-weight from Overweight on the back of slower growth at Coles. While its strategies are considered more sustainable than rival Woolworths, the broker contends it is not immune to the weaker industry outlook.
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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