It should be no surprise that broker downgrades are now outnumbering upgrades by a wide margin. The share market has been on a tear of late and there’s not necessarily a sign around this strong upward momentum is going to run into a brick wall anytime soon.
On the negative side, we saw multiple downgrades in ratings for REA Group, Newcrest Mining and Tabcorp Holdings. All three companies also delivered a positive surprise, but analysts are turning less comfortable with specific valuations.
In the good books
BC Iron (BCI) was upgraded to Neutral from Underperform by Macquarie. December quarter production was better than Macquarie expected with cost reductions starting to have an impact. The company will assess the carrying value of its assets and the broker expects an impairment charge of $100 million is possible given the decline in iron ore prices.
Japara Healthcare (JHC) was upgraded to Add from Hold by Morgans. The health care sector is attracting investor attention, reflecting an interest in sustainable and defensive earnings. The recent share price weakness creates the opportunity for the upgrade as Morgans believes the stock is trading too far below its peers.
Macquarie Group (MQG) was upgraded to Overweight from Equal-weight by Morgan Stanley. Further analysis by analysts at Morgan Stanley suggests there is a strong case for further re-rating of the shares, also because there appears to remain further upside to current consensus expectations. Morgan Stanley has decided not to wait for the market catch-up and upgrades.
In the not-so-good books
Boral (BLD) was downgraded to Neutral from Overweight by JP Morgan. Residential construction remains positive across Australasia and the US which should underpin reasonable growth in the sector over the next five years. Boral has generated a 27% total return over the last year and is now trading in line with the target price of $5.85, revised up from $5.60. Hence, JP Morgan downgrades to Neutral from Overweight.
Brambles (BXB) was downgraded to Hold from Add by Morgans. Morgans analysts observe Brambles shares have performed well in past months, supported by a weakening Aussie dollar. They also believe this is now reflected in the share price. Any disappointment in the upcoming interim report might trigger a pull-back, they warn. Preferring to remain on the cautious side, Morgans has decided to pull back the rating.
Federation Centres (FDC) was downgraded to Neutral from Buy by Citi. Citi notes investor demand for Australian shopping centres is rising but some will benefit more than others. The broker finds pricing in the sector is increasingly demanding. The broker’s rating on Federation Centres is downgraded to Neutral from Buy, with the stock having returned over 70% in the last two and a half years.
Kathmandu (KMD) was downgraded to Neutral from Outperform by Macquarie. The first half update signals a small loss is imminent for the half, which Macquarie takes to mean there was no improvement in the post Christmas sales. This appears to be the worst half-year performance since the stock listed and the broker expects it will continue to trade with a high degree of uncertainty.
Newcrest Mining (NCM) was downgraded to Sell from Hold by Deutsche Bank and to Hold from Add by Morgans. The December quarter was broadly in line with Deutsche Bank’s forecasts, driven by Cadia and Telfer which both benefitted from a lower Australian dollar. Lihir remains problematic and the broker notes issues at Hidden Valley and Gosowong. Newcrest retains leverage to a weaker Australian dollar but Deutsche Bank highlights the weight of US dollar debt. Cadia Valley and Telfer have driven an upgrade to production guidance but Morgans is not completely convinced, noting costs in Australian dollar terms have increased.
Orora (ORA) was downgraded to Neutral from Overweight by JP Morgan. JP Morgan is downgrading to Neutral from Overweight. The broker considers the risk/return balanced, while a falling Australian dollar offers potential for improved pricing in the domestic market. In the near term earnings momentum is expected to slow as a result of a step up in gas costs, the furnace turnaround and repeal of the carbon tax. This makes the broker more cautious.
REA Group (REA) was downgraded to Hold from Add by Morgans, to Neutral from Outperform by Credit Suisse, to Underperform from Neutral by Macquarie and to Neutral from Buy by UBS. The analysts at Morgans believe there’s more upside potential for the shares, but not enough to warrant an Add rating. Revenue growth accelerated, driven by an increased uptake in depth products. Credit Suisse expects this story to continue as the company increases its share of property transactions online but considers a lot of growth is priced into the stock. Increased costs reflect marketing and investment in new product pipelines, and international investments should kick in down the track. Macquarie thus sees ongoing longer term growth. But on current pricing, REA would need to generate five years of 20% compound growth before it could provide a 5% yield to investors, the broker calculates. Too rich. Downgrade to Underperform. UBS maintains FY15-18 estimates but reduces earnings per share forecasts to factor in increased depreciation and amortisation from higher capex.
Tabcorp (TAH) was downgraded to Sell from Neutral by Citi and to Neutral from Outperform by Credit Suisse. First half results were strong but the decision to release franking credits through a 30c special dividend stole the show in Citi’s view. To fund this, the company will undertake a $236 million equity raising. The choice to raise equity suggests the board is being conservative about overextending debt or maybe intends to use debt for future acquisitions. The broker believes, operationally, Tabcorp is executing successfully but valuation appears stretched. Credit Suisse would have preferred that Tabcorp fund its 30c special dividend with debt rather than an equity raising. The broker downgrades to Neutral from Outperform because of share price strength.
Toll Holdings (TOL) was downgraded to Reduce from Hold by Morgans. Morgans believes the risks are to the downside as far as the upcoming interim results are concerned. In combination with the observation the shares are trading above their long-term average PE, a downgrade to Reduce seems apt. Operating conditions are still challenging, suggest the analysts. This is why they suspect a disappointment might be forthcoming.
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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