Buy, Sell, Hold – what the brokers say

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Commodity forecast downgrades by Citi were the main reason for the three downgrades this week as one other resource company – Bluescope – got a surprise upgrade as at least one broker reviewed its cautious stance.

In the good books

Morgans upgraded Bluescope Steel (BSL) to Hold from Reduce. The broker was cautious about the stock previously, based on how much of the FY14 financial performance was cyclical and how much was related to ACCC intervention on anti-dumping issues. In FY15, despite declining spreads, Morgans finds evidence of cyclical improvement, particularly in Australia, and this should provide a floor to the share price.

Macquarie upgraded Treasury Wine Estates (TWE) to Neutral from Underperform. Macquarie transfers coverage to a new analyst and examines the outlook for Australia’s wine export market. The broker finds luxury wine exports to China have likely bottomed and look like returning to growth. The low end of the market is slow but the broker notes the rate of value decline is easing and growth could turn positive in coming months. Near-term earnings for Treasury Wine are supported by elevated luxury inventory but caution prevails because of the structural issues with the large commercial category.

In the not-so-good books

Citi downgraded Atlas Iron (AGO) to Sell from Neutral. Citi does not believe it has been bearish enough on the iron ore price. Forecasts are downgraded again as demand is weak and supply continues to surge. The broker suspects Atlas Iron’s balance sheet is now in a precarious position, having tipped into net debt in FY14 because of the construction of the Mt Weber mine. Rating is downgraded to Sell from Neutral and the target to 14c from 55c.

Citi downgraded Fortescue Metals (FMG) to Neutral from Buy on the back of its iron ore forecast downgrades. The broker considers Fortescue the fittest of the iron ore plays, with the lowest cost and longest life assets, able to weather the downturn.

Citi downgraded Origin Energy (ORG) to Neutral from Buy. Citi now believes there is a need for oil supply cuts to offset price declines and OPEC is unlikely to lead. Therefore, the outlook is for current lower pricing to remain in place for longer. With a longer-term supply/demand balance, the broker envisages little requirement for new supply sources to be developed.

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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