A resurgent airline sector and continuous positive momentum for healthcare stocks featured heavily in stockbroker research updates. On the negative side there is the fall-out from lower energy prices for local oil and gas stocks, plus specific disappointments in the industrials sector.
In the good books
Atlas Iron (AGO) was upgraded to Neutral from Sell by UBS. Atlas has responded to the 50% fall in the iron ore price this year by reducing its cost base, but at spot AGO is still cash flow negative, the broker notes. Yet the broker believes at this level larger producers such as Fortescue Metals (FMG) and Brazil’s Vale are sitting at cash break even, which should elicit some production curtailment. The broker is thus suggesting iron ore may have found a bottom. It has upgraded AGO to Neutral but warns this call is not without risk.
Challenger (CGF) was upgraded to Neutral from Underweight by JP Morgan. The company has been informed its aged care annuities will not receive previous favourable tax treatment. The company will appeal the decision as it is a reversal of a 2012 approval but, because of the consistent underperformance recently, JP Morgan is upgrading to Neutral from Underweight. The broker considers the stock still has offsetting positives likely to come from the financial systems inquiry.
Corporate Travel (CTD) was upgraded to Add from Hold by Morgans. The company will acquire Chambers Travel, based in the UK, and Diplomat Travel, based in the US, funded by a $45.5m entitlement offer at $8.80 a share. All are highly accretive and Morgans believes Corporate Travel is now better placed to win more global contracts.
Nufarm (NUF) was upgraded to Neutral from Underweight by JP Morgan. Following confirmation of weaker market conditions in Australia and Brazil in the first half and with a fall in the share price to levels in line with valuation, JP Morgan upgrades to Neutral from Underweight. The broker notes weak demand from the summer crop in Australia could lead to price and margin pressure in the second half, because of an inventory overhang but this has been an issue for the last two years. See also NUF downgrade.
Sandfire Resources (SFR) was upgraded to Add from Hold by Morgans. The current market may not be conducive to new positions in miners but Morgans finds fundamental value is emerging in Sandfire Resources. After reducing mill throughput and production assumptions for FY15 and FY16, the broker reduces the target to $5.70 from $5.90. With the fall in the share price since October the revised target now implies 31% potential upside from the current share price.
In the not-so-good books
Amcor (AMC) was downgraded to Underperform from Neutral by Credit Suisse. The broker has adjusted its Amcor forecasts to account for the company’s various currency exposures and a fall in resin prices, although AMC will likely pass most of this on to customers.
Metcash (MTS) was downgraded to Hold from Add by Morgans. Metcash’s turnaround strategy is only at an early stage, the broker concedes, but the first half result indicated few tangible signs of improvement. Delays highlight the complexity of the strategy. Even management admits earnings visibility is low in the near term, making it difficult for the broker to provide forecasts. The broker was not impressed MTS signalled “no issues” with the balance sheet while cutting the dividend payout ratio and increasing the DRP underwriting ratio.
Nufarm (NUF) was downgraded to Neutral from Buy by UBS. UBS is reducing earnings forecasts by 5-10% for FY15-16. The reasons behind the more cautious outlook comprise revisions to growth expectations within the Australian, South American and European businesses. See also NUF upgrade.
OceanaGold (OGC) was downgraded to Neutral from Buy by Citi. Citi maintains the view the company is a high quality gold producer with low cash costs but believes it is close to fair value after a strong recovery. Earnings forecasts are lowered in FY15/16 to adjust for lower copper and gold price forecasts.
Tabcorp (TAH) was downgraded to Hold from Buy by Deutsche Bank. The dismissal of Tabcorp’s appeal against the Supreme Court of Victoria’s judgment in favour of the state government is a minor negative but the broker believes the equity market was only pricing in a small prospect of success. The broker expects Tabcorp to seek leave to appeal.
Tap Oil (TAP) was downgraded to Neutral from Buy by UBS. B/H/S: 0/2/0
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.
Vocation (VET) was downgraded to Neutral from Outperform by Credit Suisse and to Neutral from Buy by UBS. It has dawned upon CS analysts that the fall-out from the Victorian licence disaster is far worse than just brand damage for Vocation. The analysts concede downgrading the stock now looks like closing the gate after the horse has bolted, since the share price has fallen so dramatically, but they explain the move is to highlight the fact that uncertainty remains. UBS has critical concerns about the company’s operations going forward, including a deterioration in student enrolments, downside risk to FY15 guidance and balance sheet leverage.
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.
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