Analysts are still incorporating the new normal for crude oil and other commodity prices in their models, while investors in the share market are not taking any prisoners either.
Apart from energy companies and mining stocks, retail-oriented stocks such as OrotonGroup and Pacific Brands were equally prominent on the negative side of the ledger.
In the good books
OZ Minerals (OZL) was upgraded to Outperform from Neutral by Macquarie. Macquarie makes modest reductions to copper price forecasts but the weaker Australian dollar forecasts means upgrades to OZ Minerals’ earnings expectations. The stock should also benefit from weaker oil prices.
[1]REA Group (REA) was upgraded to Buy from Hold by Deutsche Bank. With the acquisition of MOVE in a joint venture with News Corp (NWS) Deutsche Bank adjusts forecasts. Current US exposure is not substantial but the addressable market of US$14 billion provides significant growth potential, in the broker’s opinion. With the roll forward of valuation, Deutsche Bank upgrades its rating to Buy from Hold, given the amount of upside to current trading levels.
In the not-so-good books
AGL Energy (AGL) was downgraded to Neutral from Buy by Citi. Citi has downgraded FY15 profit forecasts by 15% and FY16 by 6%, primarily from lower wholesale electricity prices, especially in Victoria where AGL has the most excess capacity. Rating is downgraded to Neutral from Buy. The broker envisages downside risk to consensus earnings estimates in FY16 and would need to see delivery on earnings growth before the stock re-rates.
ALS (ALQ) was downgraded to Sell from Neutral by UBS. UBS already had lowered expectations on the back of falling energy prices last year, but they’ve decided to lower forecasts a little more given persistent weakness, which is expected to impact on the company’s Reservoir Group (RG) oil and gas services business. UBS analysts estimate the RG business is 60-70% exposed to exploration-related activities. Revised estimates imply a downtrend in EPS and DPS for this year and next, before an up cycle commences.
[2]BC Iron (BCI) was downgraded to Underperform from Outperform by Macquarie. Macquarie is downgrading BC Iron to Underperform from Outperform on the back of new commodity price forecasts. The broker expects spot iron ore prices to trough at US$60/t in the second half of 2016 which, based on current break even points, is likely to mean all four mid-cap producers generate significant losses. Cuts to Australian dollar forecasts provide a little relief.
Grange Resources (GRR) was downgraded to Neutral from Outperform by Macquarie, in the wake of reductions to iron ore price forecasts. The broker expects spot iron ore prices to trough at US$60/t in the second half of 2016, which would mean significant losses for the company.
Mineral Resources was downgraded to Sell from Neutral by UBS. The commodities team at UBS has lowered price forecasts for iron ore (incorporating the impact from lower oil prices) and their peers at the equities desk note this means this company’s iron ore mining operations will now be loss making at the EBITDA level. The analysts are quick in pointing out this is and remains a high quality business, but for now the negatives from down trending iron ore prices outweigh any positives.
Orotongroup (ORL) was downgraded to Neutral from Buy by Citi and to Neutral from Outperform by Credit Suisse. Another profit warning in six weeks and Citi analysts have clearly turned more cautious post the disappointing event. The analysts believe management’s guidance remains “ambitious” while visibility remains low. Citi does see profits likely higher in FY16, but risks remain. Credit Suisse says reduced discounting and FX had a greater impact on gross profit than was initially expected. Credit Suisse reduces earnings forecasts by 42% for FY15, suspecting the new strategy will take time to bed down while FX remains a headwind.
Regis Resources (RRL) was downgraded to Sell from Hold by Deutsche Bank and to Neutral from Outperform by Macquarie. The preliminary December quarter production data is in line with Deutsche Bank’s estimates, despite throughput issues continuing at Garden Well. The disappointment at Garden Well was countered by higher output at Rosemont. The broker downgrades FY15 earnings forecasts by 4%. Macquarie’s changes to the gold price forecast have a mixed impact. Those producers with Australian dollar cost bases benefit from a weaker forecast for the currency while international producer earnings forecasts are reduced. Macquarie expects the gold price to average over $1,700/oz over FY16-18, suggesting Australian-based producers should generate significant cash flow. That said, the sector has outperformed in recent weeks and the broker is downgrading Regis Resources to Neutral from Outperform.
Tassal Group (TGR) was downgraded to Neutral from Overweight by JP Morgan because of the potential oversupply in the domestic salmon market. The broker acknowledges the risks associated with its valuation and the fact that, long term, global demand dynamics for fish protein remain favourable.
Earnings Forecast
[3]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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