Clearly, this share market is having difficulties coming to grips with total non-performance for substantial sections of the ASX, including energy and mining stocks and their contractors, while financials, yield stocks and structural growth stocks seem limited by valuation concerns. Maybe the unexpected rate cut by the People’s Bank of China can put some oomph in the non-performing parts of this market that might last longer than a day or two?

No surprise, the lion share of recommendation downgrades involves industrial companies, particularly those involved in servicing the mining industry, as the likes of Programmed Maintenance and Seven Group continue to indicate this downturn hasn’t ended just yet.

In the good books

BlueScope Steel (BSL) was upgraded to Neutral from Underperform by Macquarie. It’s probably time the BHP spin-off twins, flat steel Bluescope and long steel Arrium (ARI), got together to talk about how they might restructure the domestic steel market. There are many options the two could explore to the benefit of shareholders. Meanwhile, the broker has marked commodity prices and the Aussie dollar to new forecasts, which leads to a drop in its BSL target to $5.39 from $5.52. But given BSL’s underperformance since its FY14 result, the broker upgrades to Neutral.

Programmed Maintenance (PRG) was upgraded to Add from Hold by Morgans. First half results missed the broker’s forecasts, but the outlook for the second half is stronger than expected. Morgans is mindful that the company has completed a re-design of the workforce division, which will generate $3 million per annum in savings. Separately, the outlook for marine seems better with Ichthys work to drive higher sales.

See also PRG downgrade.

Woolworths (WOW) was upgraded to Add from Hold by Morgans. Current like-for-like sales weakness reflects the high base under previous fuel discounting, rather than a loss of momentum, in Morgans’ view. The broker believes the news flow has reached a low point and the supermarket business is cycling some artificially high comparables. Morgans lowers earnings forecasts by 2% for FY15 but considers the recent share price decline has created a relatively appealing yield and valuation proposition.

See also WOW downgrade.

In the not-so-good books

DUET (DUE) was downgraded to Underperform from Neutral by Credit Suisse. Duet has announced a 1:8 rights issue to raise $397 million, which is likely a response to the Dampier-Bunbury pipeline being placed in negative credit watch in August, the broker suggests. DUE received a lukewarm response to its note issue in September. Given DUE is reliant on either DRPs or, in this case, a dilutive issue to fund its growth, shareholder returns are actually below that of the headline 6.8% yield, the broker notes. On that basis, the broker downgrades to Underperform, cutting its target to $2.46 from $2.48 to account for dilution.

Echo Entertainment (EGP) was downgraded to Underperform from Neutral by Credit Suisse. According to Echo’s CEO, there is a 40% expenditure gap per capita to Star Sydney from Crown Melbourne (CWN) which management would like to address. The broker’s analysis suggests Star punters lose more…sorry…spend more than Crown punters which means to close the gap, Star would need to up its visitor numbers. That will cost significant money, the broker warns.

Flexigroup (FXL) was downgraded to Neutral from Buy by UBS. Flexigroup reiterated FY15 guidance at its AGM but admitted the first four months have been tough. Beyond FY15, a challenging growth profile for consumer leasing and an already high base for Certegy means Flexigroup’s other divisions are going to have to do some serious heavy lifting, the broker warns. Competition, costs and a $2.5 million loan provision are making life difficult.

GUD Holdings (GUD) was downgraded to Sell from Neutral by Citi. Citi considers the stock is overvalued, given the headway that is yet to be made regarding restructuring and operational improvements. Investor briefings, while supportive, do not overcome the broker’s impression that the stock is overpriced.

James Hardie (JHX) was downgraded to Equal-weight from Overweight by Morgan Stanley. Revenue growth was strong in the second quarter despite a slower-than-expected recovery in the US. The rate of margin expansion continues to disappoint Morgan Stanley and the rating is downgraded to Equal-weight from Overweight. The broker refrains from an Underweight rating as the stock has outperformed in the past despite consensus downgrades. Industry view remains Attractive.

Programmed Maintenance (PRG) was downgraded to Sell from Neutral by Citi. The first half result was weak and, while acknowledging the potential, Citi is concerned about the cyclical and structural headwinds. Rating is downgraded to Sell from Neutral and target to $2.46 from $3.02. See also PRG upgrade

Seven Group (SVW) was downgraded to Hold from Add by Morgans. The forecast downgrade at the AGM does not come as a surprise to Morgans, as increased cancellations have accentuated the fall off in capital equipment sales. The broker reduces FY15-16 earnings and continues to believe Seven is a quality exposure. However, in the current environment it is likely to be range bound and the rating is downgraded to Hold from Add.

Sonic Healthcare (SHL) was downgraded to Underperform from Neutral by Credit Suisse. The dynamics of Australian pathology have caused the company to downgrade FY15 guidance. Credit Suisse now forecasts earnings growth of 3.2%. Key issues for the broker include higher operating costs and the recent vitamin D and folate fee reductions. The underperformance of the US pathology business, which accounts for around 10% of US revenues, surprised the broker as it has clearly affected the incremental recovery in US revenue. New offshore contracts are a positive, but domestic concerns remain.

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.

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.