Broker actions have been heavily weighted towards downgrades so far this week, following AGMs and divestment announcements.
JP Morgan upgraded Pacific Brands (PBG) to Neutral from Underweight. The company will divest its Brand Collective division for $39 million to various parties. JP Morgan believes this will remove a distraction for management and simplify the business. The broker considers the recent revenue growth is a positive development but is concerned the business is repositioning at a time when gross margins are under pressure from the currency. (see downgrade below)
In the not-so-good books
Credit Suisse downgraded iiNet (IIN) to Neutral from Outperform following the AGM, which revealed continued subscriber growth but also increasing costs. Credit Suisse is downgrading earnings forecasts by 5% following the strong performance of the stock over the year to date. The broker continues to expect the small cap telco sector will benefit from industry consolidation and this should underpin iiNet.
Macquarie downgraded Orica (ORI) to Underperform from Neutral. The headline FY14 result was just ahead of Macquarie’s forecasts but the quality was considered low, boosted by asset sales and a 23% tax rate. The broker is underwhelmed by the value of the chemicals division sale but considers the capital management potential good news, although any buy-back will not be announced until around March next year.
Citi downgraded Pacific Brands to Neutral from Buy. The company has sold Brand Collective for what Citi considers is a very low $39 million. The broker lowers earnings forecasts by 5% for FY15 and by 6% for FY16, given the net loss of earnings from the sale. Citi observes restructuring is now mostly complete and the remaining brands have far greater equity but downgrades because of the recent share price moves. A 55c target is retained. See upgrade.
Morgan Stanley downgraded Toll Holdings (TOL) to Underweight from Equal-Weight. Morgan Stanley suspects management’s return-on-capital targets are challenged. Only the network businesses offer the leverage, namely forwarding and express, and these two also have their challenges.
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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