It should come as no surprise that stock rating downgrades continue outnumbering upgrades as the local share market has bounced swiftly and sharply from a temporary fear-driven sell off in September-October. Nor should it surprise that the negative side of the ledger carries a heavy contribution from the energy sector, given oil prices have fallen further than most investors and analysts would have expected them to.
In the good books
Computershare (CPU) was upgraded to Neutral from Sell by UBS. The company has signalled operating conditions are softer but still expects earnings to be up around 5% in FY15. UBS has been cautious about the weak organic growth profile of the core registry business amid concern that replacing revenue holes with growth and acquisitions is becoming an increasingly capital-intensive task. Valuation now reflects the softer outlook, in the broker’s opinion, and the rating is upgraded.
Qantas (QAN) was upgraded to Buy from Hold by Deutsche Bank. Oil and jet fuel prices have declined rapidly since the start of FY15. Deutsche Bank increases earnings forecasts as a result. While it remains early in the recovery process, the broker is pleased to observe the main line is increasing load factors, both domestically and internationally.
In the not-so-good books
ALS (ALQ) was downgraded to Sell from Neutral by Citi. Despite the share price halving since its 2012 peak, Citi believes downside earnings risks remain. The pressures are overwhelming management’s efforts to manage the business. The valuation appears attractive against global peers but in the broker’s opinion that assumes similar market exposures and margin volatility and, unfortunately, that is not the case. The broker transfers coverage to a new analyst and downgrades to Sell from Neutral.
AusNet Services (AST) was downgraded to Underperform from Neutral by Macquarie. One-off costs meant AusNet’s interim result fell short of the broker. Cash flow was better than expected nonetheless but still not enough to cover maintenance capex and the dividend, without a DRP, the broker notes. While the interim dividend is as expected, the risk is to the downside for the next distribution.
Caltex Australia (CTX) was downgraded to Neutral from Outperform by Credit Suisse. Caltex has set some aggressive targets for earnings and cost savings and the broker concedes the company has met every one of them to date. The broker remains extremely positive on the industry as a whole, and suggests surprisingly strong refining margins may lead to capital management opportunity. Caltex might be a high quality defensive business with further positive news flow to play out, the broker suggests, but a 90% share price rally since December is pushing things just a little too far.
JB Hi-Fi (JBH) was downgraded to Equal-weight from Overweight by Morgan Stanley. The outlook for retail is deteriorating in Morgan Stanley’s view as unemployment rises, income growth slows and the housing tailwind eases. The broker expects the headwinds for discretionary retailers are increasing and lowers FY15 estimates. JB Hi-Fi is downgraded to Equal-weight from Overweight on higher capex estimates and weaker gross margins.
Oil Search (OSH) was downgraded to Sell from Neutral by Citi. 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. The broker downgrades Oil Search to Sell from Neutral as the current share price exceeds the target and lowers the target to $8.01 from $8.80, based on a lower oil price and Australian dollar rate.
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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