Most broker actions in the week so far have been on the back of the oil price falls as analysts revise expectations and their forecasts for share prices with them.
Citi upgraded BHP (BHP) to Buy from Neutral. Post a general revision, including the impact of lower priced oil on commodities in general, Citi analysts have taken an axe and cut forecasts for BHP by double digits for the years’ ahead. The analysts do see support from dividends, which they believe will not be cut, and from initiatives such as the spin-off of non-core assets.
Morgans upgraded Fortescue (FMG) to Hold from Reduce. Fortescue has responded to the plummeting iron ore price by halving capex in FY15 while keeping production guidance steady. The broker hopes this does not mean the deferral of the detrital processing plant, which would improve ore quality and thus reduce export price discounts. The reduction in capex increases the broker’s net present value calculation for FMG but the broker has applied a 20% risk discount in light of iron ore price risk. Fortescue has seen a substantial share price fall nonetheless, thus the broker upgrades to Hold, although the broker is no longer forecasting dividends for FY15-16.
Citi upgraded Origin Energy (ORG) to Buy from Neutral. Citi expects FY14 will be the low point of earnings for Origin, with a step up over the next couple of years from monetising the legacy gas contract position and first production at APLNG.
Citi upgraded Oil Search (OSH) to Neutral from Sell. Citi has revised oil price forecasts lower, again. The broker believes at current prices, returns from PNG are sufficient for a stable cash flow. The broker’s rating is upgraded but Oil Search remains the least preferred large cap oil stock.
Citi upgraded Qantas to Buy from Neutral. The broker believes there is further upside on the expectation that all domestic carriers are actively striving for profitability and adequate returns. The oil benefit will be skewed to the second half while domestic yields were positive for the second month in a row.
JP Morgan upgraded Ramsay Health Care (RHC) to Overweight from Neutral. The market has had its doubts about the investment in France but JP Morgan has recently visited the country to obtain a better understanding of the private hospital sector. Generale de Sante is a well-regarded group with a portfolio of 75 hospitals/clinics. The real upside, in the broker’s view, comes from the ability to leverage global size for purchasing medical consumables.
UBS upgraded Virgin Australia (VAH) to Neutral from Sell. UBS has made a number of changes to forecasts, which leave FY15 broadly unchanged with a pre-tax loss of $115 million and push FY16 to a profit of $130 million. Jet fuel price assumptions have been lowered. The broker expects the company to become profitable in FY16, one year behind Qantas (QAN).
In the not-so-good books
Deutsche Bank downgraded CSL (CSL) to Hold from Buy. The company provided news of progress across a number of developments but this was offset in the broker’s view by a disappointing result from the fibrogen trial in aortic surgery. Management intends to keep R&D spending at 8-9% of revenue.
UBS downgraded Santos (STO) to Neutral from Buy. In the wake of the OPEC decision not to cut production, UBS has reduced oil price forecasts and expects there is more pain to come for investors, with a bottom yet to be sighted for the oil price. Santos is the most affected of the major stocks and the broker suspects high debt plus low oil prices means its credit rating will probably come under pressure.
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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