The first week after the February reporting season was still very much dominated by the fall-out from what turned out to be a merely non-exciting corporate confession season. It has to be noted though, most of these rating changes were issued early in the week. Things toned down considerably as the week matured.
Underlying, the general sentiment among stockbroking analysts is that “value” certainly is harder to find these days, despite the local market experiencing its first down week in two months. Price targets and earnings estimates show big revisions, on both positive and negative sides of the ledger, but negative revisions are mostly dedicated to smaller resources stocks and mining services providers.
In the good books
Medusa Mining (MML) was upgraded to Equal-weight from Underweight by Morgan Stanley. Buy/Sell/Hold: 2/0/2. Morgan Stanley is broadly Underweight gold equities, reflecting its view on the direction/outlook for gold. An exception is made for Medusa Mining, on the belief that the operational turnaround is now sustainable.
[1]NRW Holdings (NWH) was upgraded to Neutral from Underperform by Credit Suisse. Buy/Sell/Hold: 1/0/4. First half results disappointed the broker. Credit Suisse has downgraded forecasts for FY15 and assumes no profit is recognised on resolution of the Roy Hill rail contract. The valuation now tempts the broker to become positive but the unknowns pose too much risk.
Oil Search (OSH) was upgraded to Overweight from Equal-weight by Morgan Stanley. Buy/Sell/Hold: 5/1/1. The first year of LNG production reveals a low-cost, high operating margin environment with free cash flow to deliver the next phase of organic growth for Oil Search. Morgan Stanley expects the share price to continue to perform as projects gain momentum.
Pact Group (PGH) upgraded to Buy from Hold by Deutsche Bank. Buy/Sell/Hold:1/0/4. The stock is trading at an 11% discount to Deutsche Bank’s valuation. While the first half results were disappointing, this is considered largely the effect of a number of one-off factors. The broker expects the second half will show an improvement, with benefits from the acquisition of Sulo and lower raw material costs.
In the not-so-good books
ASX (ASX) was downgraded to Underweight from Neutral by JP Morgan. Buy/Sell/Hold: 0/4/4. Activity in February revealed stronger trends for the cash market but listings activity was reduced. All up, JP Morgan’s earnings forecasts are unchanged. In contrast share price performance has been exceptionally strong and leaves the valuation stretched.
[2]Deutsche Bank downgraded Charter Hall (CHC) (Buy/Sell/Hold: 3/2/1), Cromwell Property (CMW) (Buy/Sell/Hold: 0/1/4) and Investa Office (IOF) (Buy/Sell/Hold: 0/3/2) to Sell from Hold and Stockland (SGP) to Hold from Buy (Buy/Sell/Hold: 2/3/2). Deutsche Bank has reviewed the A-REIT sector and comes to the conclusion that, in an environment of subdued tenant demand, there will always be developers willing to sacrifice a super normal margin to get these developments leased up quickly. Analysis suggests that a tightening of market cap rates from current levels by 100 basis points would lead to a drop in feasibility rents of around 18% for prime logistics development and 29% for prime CBD projects.
CSR (CSR) was downgraded to Hold from Buy by Deutsche Bank. Buy/Sell/Hold: 3/4/1. After reviewing aluminium prices Deutsche Bank reduces earnings estimates for CSR. While the broker continues to believe there is upside in building products this is seen factored into the current share price.
Fortescue Metals (FMG) was downgraded to Equal-weight from Overweight by Morgan Stanley. Buy/Sell/Hold: 2/5/1. It looks like Fortescue Metals has negotiated an extension for part of its debt, with negotiations ongoing for the remainder. The basic premise remains in place, they highlight, and that is that on spot prices, FMG makes modest free cash flow. This restricts its ability to repay debt. On Morgan Stanley’s calculation, the company needs a mid US$70/t iron ore price to repay all debt by 2021.
Mantra Group (MTR) was downgraded to Neutral from Buy by UBS. Buy/Sell/Hold: 2/2/0. First half results were ahead of the broker’s forecasts. Still, UBS believes most of the cyclical upside for the next 12 months is factored into the share price. Rating is downgraded to Neutral from Buy on valuation.
Prime Media (PRT) was downgraded to Underweight from Overweight by Morgan Stanley. Buy/Sell/Hold: 2/1/1. In a post-post results analysis, Morgan Stanley has come to the conclusion that Prime Media’s market share has peaked at a moment when ad sales are weak. The conclusion is that market consensus expectations will prove too optimistic. In addition, the analysts suggest cost pressures are likely to come through on increasing affiliate fees.
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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