Brokers have been busy over the break and Rudi Filapek-Vandyck will provide a complete overview of what they’ve done over the past two weeks on Monday. But here are some of the highlights with a surprising amount of upgrades.
In the good books
Morgans upgraded Acrux Limited (ACR) to Hold from Reduce. The broker expects a seasonally stronger quarter for Axiron when marketing partner Eli Lilly reports its results this month. Morgans advises that investors with a short-term view can consider trading the stock into the expected result. Upside risk is predicated on continuing weakness in the Australian dollar and the stabilisation of script volumes. Downside risk is uncertainty surrounding the clinical risks being reviewed by regulators.
Macquarie upgraded NAB to Outperform from Neutral and Morgan Stanley upgraded from Equal-weight to Overweight. Macquarie considers the underperformance of the business bank is explained by an over emphasis on value-neutral retail expansion and a poorly constructed cost reduction program, which led to a revenue hole. Macquarie is pleased the bank is working to address this situation. Morgan Stanley has taken the view there are now sufficient signals the tide might be turning under the new CEO.
Macquarie upgraded QBE Insurance to Outperform from Neutral. QBE strengthened its capital position in 2014 and Macquarie believes the current risk/reward balance is favourable. That said, premiums are expected to remain weak in 2015. While upgrading to Outperform from Neutral, the broker does not believe a material re-rating is likely, given the difficult operating conditions in the sector and uncertainty regarding forecast earnings.
Credit Suisse upgraded Santos (STO) to Neutral from Underperform. Credit Suisse has been amongst the most bearish on Santos in the Australian share market, arguing that only a fool would not incorporate a highly dilutive capital raising in the modeling for the company. CS maintains a capital raising is going to happen, pointing out the company stands to lose some 16mmboe of existing production from 2015-2020. The upgrade is actually based upon the fact that if Santos does not raise additional capital, the analysts can see 20-30% more downside, over time. In case of a capital raising of at least $2.5bn, today’s share price seems “fair”.
In the not so good books
Morgan Stanley downgraded CBA to Equal-weight from Overweight. Morgan Stanley has decided to reshuffle its preferences among Australia’s major banks. CBA goes from number one to number three with National Australia Bank (NAB) now most preferred. The analysts suggest CBA is about to run out of steam, with the EPS upgrade cycle coming to an end and with its valuation most stretched in the sector.
Morgans downgraded Lend Lease Corporation (LLC) to Hold from Add. Morgans is increasingly wary of the company’s valuation and downgrades to Hold from Add. Continued compression of cap rates, while helping the FY15-17 earnings performance outlook, makes the medium-term pipeline more expensive. The broker is concerned about the prospect of replenishing major projects albeit very confident regarding the earnings profile for the next couple of years.
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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