Broker movements this week were driven by quarterly and half yearly results, with James Hardie and CSR getting the most attention. Both pleasantly surprised on the upside, although there are always brokers who fail to be impressed by the crowd and chose to go their own way, which in this case was down.
In the good books
Deutsche Bank upgraded James Hardie (JHX) to Buy from Hold following second quarter results, which were hard to fault. The quarterly result gives the broker the confidence to increase the terminal earnings margin assumption to 25% from 20%. Moreover, the 6-10% primary demand growth in FY14 is expected to accelerate into FY15, as it appears to Deutsche Bank the market sentiment towards fibre cement is shifting, because of a reduced cost focus.
Citi also upgraded to Neutral from Sell, noting key markets have finally moved in sync and James Hardie has upgraded FY14 profit guidance after a strong September quarter. Underpinning the guidance is the expectation of increases of more than 20% in US margins, as well as improvements in Australia and New Zealand, along with steady earnings in the Philippines.
Credit Suisse upgraded James Hardie to Outperform from Neutral, while UBS downgraded to Sell from Neutral (see below).
Citi upgraded CSR to Neutral from Sell following its first half results. An improving market helped CSR to a first half that beat Citi’s forecasts by 13%. The broker has lifted FY14-16 profit by 19-29% on improved margins and product mix in building products, as well as lower cash costs in aluminium and an increased market appetite for property sales.
Credit Suisse and Macquarie also upgraded CSR to Outperform from Neutral. Macquarie says the first half results suggested the Viridian recovery is continuing while building products showed an improvement. Meanwhile, aluminium earnings have been protected by the weaker Australian dollar.
In the not-so-good books
Graincorp Limited was downgraded to Neutral from Overweight by JP Morgan. The recent speculation about the ADM offer, and that it may be vetoed by the Australian government, means the probability it won’t go ahead, for JP Morgan, has been raised to 30%. Incorporating a higher risk premium reduces the present value of the offer to $11.46. The price target remains at $12.93.
Singapore Telecom (SGT) was downgraded to Neutral from Overweight by JP Morgan.
The second quarter profit was 9% below JP Morgan’s estimates. Optus revenues declined 6%. The broker thinks Vodafone’s recovery, when it happens, is likely to hit Optus harder than Telstra (TLS). The brightest spot in SingTel’s report was Singapore, where wireless revenue grew 7%. JP Morgan has reduced FY14-16 earnings estimates by 6-7% and revised the price target to SG$3.88 from SG$4.15.
James Hardie was downgraded to Sell from Neutral by UBS. The strong September quarter result may have given the share price a big lift, but UBS is wary about the trend continuing. The broker has downgraded to Sell from Neutral. The quarterly result showed a rise in US volumes of 25% and a 4% price increase but UBS does not feel this justifies a 15% increase to what was an already stretched valuation.
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.