Last week stockbrokers continued to downgrade more stocks than they upgraded. Bank of Queensland and Nufarm responsible for two downgrades each.
The regional lender and seeds and crop protection provider were the latest contributors to what increasingly looks a subdued, if not disappointing series of out-of-season reporting results, which also has revealed most retailers surprising to the downside.
In the good books
AGL Energy (AGL) was upgraded to Buy from Neutral by Citi. Buy/Hold/Sell: 3/4/1 The broker has reviewed its valuation for Australian electricity providers, increasing its longer term electricity price forecasts on higher east coast gas price assumptions and moving PE valuation to a relative, rather than absolute, basis to better reflect investor appetite for yield. The recent decline in electricity demand, and subsequently lower prices, along with renewable pricing uncertainty, has caused AGL to issue profit warnings and its share price to underperform.
Echo Entertainment (EGP) was upgraded to Overweight from Equal-weight by Morgan Stanley. Buy/Hold/Sell: 6/2/0 Morgan Stanley expects Australasian VIP gaming growth of 48% and 26% in FY15 and FY16 respectively. Echo Entertainment and its competitors are driving structural VIP growth by providing junkets with better working capital and commission rates versus Macau. The broker believes junkets are decelerating in Macau, given China’s anti-corruption measures and a slowing Chinese property market. Australia has been dubbed the key jurisdiction, which should benefit from the slowdown in Macau. In this scenario, the broker considers Echo Entertainment the most leveraged to growth and upgrades to Overweight from Equal-weight.
In the not-so-good books
Bank of Queensland (BOQ) was downgraded to Neutral from Buy by Citi and to Underweight from Neutral by JP Morgan. Buy/Hold/Sell: 0/6/2 Bank of Qld’s result was in line and suggests the continuation of a multi-year recovery story, the broker contends. The bank has returned to system lending growth levels after years of being below system. But recovery tailwinds are likely now easing, the broker suggests, and investors will not be happy with an increase in investment-related expenses. JP Morgan accepts the higher expense trajectory overshadowed some positive aspects including margin improvement and volume growth.
BlueScope Steel (BSL) was downgraded to Neutral from Buy by UBS. Buy/Hold/Sell: 6/2/0 UBS suspects there is considerable risk around consensus growth expectations. Given the broker’s global view on Chinese steel consumption, production and the direction of commodity prices, the market is considered too optimistic about a turnaround for BlueScope’s Australian steel division. The broker’s lower forecasts, 7.0% below current market expectations, stem from a cautious near-term outlook for regional steel spreads, the iron sands and Asian businesses through the June half.
Energy Developments (ENE) was downgraded to Hold from Add by Morgans. Buy/Hold/Sell: 5/1/0 The company has lifted earnings guidance for FY15. Morgans had suspected this might end up the case because of strong Queensland power prices and higher large-scale generation certificate (LGC) prices as well as favourable currency movements. The broker considers the growth outlook healthy but, given limited upside offered at the current share price and the potential sell-down by its major shareholder, the rating is downgraded.
Nufarm (NUF) was downgraded to Sell from Hold by Deutsche Bank and to Hold from Add by Morgans. Buy/Hold/Sell: 0/4/2 Deutsche Bank views the first half result, which was broadly in line with expectations, as a negative, suspecting the outlook commentary is not sufficient to sustain the recent rally in the share price. The result was boosted by foreign exchange gains and lower R&D expense while net operating cash flow was significantly weaker than the broker expected. The first half result was slightly below Morgans’ forecasts but pleasing in that it revealed continued progress on working capital. Morgans expects further benefits on this front and $116 million in cost savings should lift returns significantly over the next 2-3 years.
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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