The underlying themes in the Australian share market, viewed from the angle of stockbroker interpretations and expectations, is one of opening up value among beaten down cyclicals, while resource stocks continue to cause havoc for profit forecasts and short to medium term valuations.
In the good books
BC Iron (BCI) was upgraded to Overweight from Equal-weight by Morgan Stanley. The first quarter report was soft and the broker notes the Iron Ore Holdings (IOH) deal has not attracted market support. Nevertheless, the 60% decline in the share price since early August is overdone in Morgan Stanley’s view. The broker finds value in the stock and upgrades, a view that relies on a base case price and volume recovery.
Coca-Cola Amatil (CCL) was upgraded to Neutral from Underperform by Credit Suisse. Credit Suisse notes the investor briefing revealed that some sharp and productive actions were being undertaken. The company has sold 29.4% of the Indonesia franchise back to Coca-Cola. Australian and SPC initiatives appear solid with a marketing campaign aimed at broadening consumption to younger consumers.
Drillsearch Energy (DLS) was upgraded to Equal-weight from Underweight by Morgan Stanley. The September quarter was solid, albeit slightly below forecasts. Morgan Stanley considers wet gas exploration and appraisal are the keys to unlocking further value in the company.
Oil Search (OSH) was upgraded to Neutral from Sell by Citi. The stock has underperformed, which means it is now trading below the target of $8.80, raised from $8.78. The company is blessed with a large contingent resource base, which provides the opportunity for high margin production growth but Citi believes the share price factors in much of this value.
Retail Food Group (RFG) was upgraded to Buy from Neutral by UBS. The company has acquired Gloria Jean’s Coffee network, which the broker believes will be transformational. The acquisition price of $163.5 million is to be funded by equity and debt. Retail Food now expects FY15 profit growth, ex Gloria Jean’s, to be up 18.5% from up 15%. UBS lifts FY16-17 earnings forecasts by 20-29% to incorporate guidance on Gloria Jean’s. The rating is upgraded to Buy from Neutral as, on balance, the broker envisages a number of scale and network benefits from the deal.
Southern Cross Media (SXL) was upgraded to Buy from Sell by Citi. The share price now reflects the broker’s concerns about the operations outlook. The risk of an equity raising is still there but the underlying valuation remains intact.
UGL (UGL) was upgraded to Neutral from Underperform by Macquarie. The DTZ sale process is on track and the medium term engineering outlook remains favourable. UGL has maintained FY15 engineering revenue guidance. The new CEO starts next month. The broker has now removed DTZ from its numbers, leading to a halving of earnings forecasts and the expectation of a capital return. The outlook for infrastructure is positive and the broker suggests there are now fewer reasons to be negative on UGL.
In the not-so-good books
Goodman Group (GMG) was downgraded to Underperform from Neutral by Credit Suisse. Development profit is under pressure as volume growth slows and super-normal margin product rolls off. Ambitious execution is also required in the US and Brazil. Rating is downgraded to Underperform from Neutral.
Vocation (VET) was downgraded to Neutral from Outperform by Macquarie. Following a Department of Education review, Vocation has agreed to a series of measures to improve operations in its Solution business, which the review found to have significant shortcomings. Funding has been withheld. It’s a negative financially and for its reputation, and while VET is structurally well positioned longer term, it will take a while to restore market confidence.
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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