Spot prices for crude oil and many other industrial and non-industrial commodities continue to weaken, and this is placing a lot of pressure on forecasts and on valuation models.
In this context, investors should never underestimate the potential for bad news to generate more bad news and eventually end up creating a self-fulfilling negative spiral. Geared-up balance sheets that are coming under pressure from a sudden low price environment in the energy space will do exactly that. Expect the focus of the financial sector to shift towards debt, balance sheets and debt-servicing abilities soon.
In the good books
Beach Energy (BPT) was upgraded to Buy from Neutral by Citi, to Outperform from Neutral by Macquarie and to Add from Hold by Morgans. Citi considers the recent sell off presents a buying opportunity. The broker is cautious about the outlook for unconventional gas but believes the stock is cheap and the Cooper unconventional represents a free option. Beach’s investor update was encouraging for Macquarie. Western Flank expansion is becoming increasingly important to Beach as oil prices fall. With solid cash flow and a sound balance sheet, Beach has become a compelling investment at a 25% discount to net asset value. Beach is comfortable with its stage one goals in the Cooper Basin while oil discoveries at Martlet, Burners and Balgowan highlight the potential from the drilling program at the Western Flank, in Morgans’ view.
Dexus Property (DXS) was upgraded to Neutral from Underperform by Credit Suisse. Post share price consolidation (six for one) the securities have experienced somewhat of a sell-off and Credit Suisse analysts see an opportunity emerging, declaring it’s all a bit overdone.
Federation Centres (FDC) was upgraded to Buy from Hold by Deutsche Bank. Federation Centres has underperformed since its FY14 results, despite the results being one of the strongest in the A-REIT sector. The broker acknowledges profitability on longer-dated developments appears modest but visibility on the scope and timing has improved. Operational performance in aggregate appears to be on the rebound and Deutsche Bank upgrades.
Mirvac (MGR) was upgraded to Overweight from Underweight by Morgan Stanley. Australian residential exposure remains attractive to the broker but it is the east coast which is most attractive. Western Australian concerns are increasing, with potential for declining affordability creating downside risk for residential volumes and margins. Morgan Stanley upgrades Mirvac to Overweight from Underweight and the stock is now the broker’s preferred residential A-REIT.
Paladin Energy (PDN) was upgraded to Overweight from Equal-weight by Morgan Stanley. Paladin’s equity raising has cleared near-term debt issues and the uranium price has recovered from mid-year lows. The broker now envisages Paladin offers investors a pure exposure to a more positive uranium outlook. Rating is upgraded to Overweight from Equal-weight and the target to 55c from 45c.
Tower (TWR) upgraded to Buy from Neutral by Citi. Following the FY14 result Citi is upgrading FY15 forecasts by 21%. The insurer is highlighting industry opportunities following consolidation in the NZ market. The broker finds there is a lot to like about the stock, with strong growth in dividends, profitability and improved reinsurance protection. See also TWR downgrade.
In the not-so-good books
Aristocrat Leisure (ALL) was downgraded to Neutral from Buy by UBS. FY14 profit of $118.1m was up 10.2% but below the broker’s forecasts. Adding back in the research and development investment in the US business means there would have been little or no growth from this division. The broker’s forecasts are unchanged for FY15 and FY16 is lowered by 7.4%. UBS remains attracted to the investment case but downgrades to Neutral from Buy on the price strength.
Fisher & Paykel Healthcare (FPH) was downgraded to Sell from Neutral by UBS. Fisher & Paykel Health’s result beat the broker by 8%, with a 10% profit increase. Quality was not great but strength in core product lines and another impressive margin result makes it academic. The interim dividend has increased by 7%. FPH continues to deliver on its strategy but at a forward multiple of 27x has become too pricey for the broker.
Magellan Financial (MFG) was downgraded to Equal-weight from Overweight by Morgan Stanley. Magellan’s global equity position is attractive but funds under management growth is slowing. The broker does not believe a repeat of the rapid institutional inflows of FY13/14 is likely and retail flows appear to have peaked with market share maturing and competition emerging.
Seek (SEK) was downgraded to Hold from Buy by Deutsche Bank. Seek’s market update signalled strong domestic volumes, but Deutsche Bank analysts point at costs which are rising too. And then there’s increased investment in operations. Deutsche Bank maintains management is conducting the correct strategies, but results likely won’t be reflected in FY15 performance numbers. On this basis, limited upside is seen from present share price levels and thus the rating has been pulled back to Hold from Buy. Estimates have been slightly lowered.
Stockland (SGP) was downgraded to Underweight from Overweight by Morgan Stanley. Morgan Stanley downgrades to Underweight from Overweight, given Stockland’s material exposure to Western Australian residential markets and limited scope for positive margin surprise in FY16.
Tower (TWR) was downgraded to Neutral from Outperform by Credit Suisse. FY14 results were below Credit Suisse’s forecasts. Earnings have been affected by a number of large events and management has now put in place reinsurance cover that should reduce downside risk and provide increased confidence in the dividend.
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.