Buy, Sell, Hold – what the brokers say

Founder of FNArena
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The sector of engineers and contractors was responsible for most changes in ratings last week with some stocks receiving upgrades as share prices tumble, but most analysts zooming in on persisting downward risks and thus scaling back ratings to Neutral, or worse. There’s no denying that, in many cases, valuations do look “cheap”, but this doesn’t preclude there are more negative developments yet to be announced.

In the good books

Brambles (BXB) was upgraded to Buy from Neutral by BA-Merrill Lynch. The broker has decided to upgrade the rating to Buy from Neutral, on the basis of relative value and the exposure to the US economic recovery. Around 50% of the company’s revenue comes from the Americas. The broker’s US economists expect the QE tapering to begin in March next year but there is a risk it comes earlier and has a sharper focus. The stock is now trading at a price/earnings premium to the market of 19% versus a long-term average of 33%. Merrills FY14 earnings forecasts are maintained.

Charter Hall (CHC) was upgraded to Buy from Neutral by BA-Merrill Lynch. The broker recommends investors buy Charter Hall, as it is best placed to benefit from the current level of investor demand for direct Australian real estate, with property funds management driving around 40% of earnings. Merrills considers the current share price represents a compelling entry point.

Drillsearch (DLS) was upgraded to Outperform from Neutral by Macquarie. Robust crude production is expected in the medium term and the company has confirmed an increased commitment to the unconventional program. Macquarie notes unconventional expenditure is not expected until the second half and the market is likely to focus on the growth in crude production and exploration potential on the Western Flank.

James Hardie (JHX) was upgraded to Buy from Hold by Deutsche Bank. The second quarter result was hard to fault and gives the broker the confidence to increase the terminal earnings margin assumption to 25% from 20%. Moreover, the 6-10% primary demand growth in FY14 is expected to accelerate into FY15 as it appears the market sentiment towards fibre cement is shifting, because of a reduced cost focus.

JP Morgan was the only broker to upgrade WorleyParsons (WOR) – to Neutral from Underweight – after a profit guidance downgrade. The broker suggests the corresponding share price plunge is just what it needed to bring the market in line with the short term headwinds that had been building, and reflected all at once in the company’s FY14 guidance downgrade. That said, the downgrade was more severe than the broker had forecast. The broker nevertheless believes WorleyParsons’ medium-long term drivers remain intact. Target falls to $16.51 from $19.16 but on the share price response, rating upgraded to Neutral.

See also WOR downgrades.

In the not-so-good books

Downer EDI (DOW) downgraded to Neutral from Outperform by Credit Suisse. New contract wins have led to CS analysts lifting EPS estimates for the years ahead. This has pushed up the price target to $5.40 from $5.05. Downer EDI is looking towards a positive growth year in FY15, after what looks like a mildly negative FY14, point out the analysts. The problem CS analysts have with the scenario above is that it seemingly has been priced in already.

Graincorp (GNC) was downgraded to Neutral from Overweight by JP Morgan. The broker has downgraded to Neutral from Overweight. The recent speculation about the ADM offer, and that it may be vetoed by the Australian government, means the probability it won’t go ahead, for JP Morgan, has been raised to 30%. Incorporating a higher risk premium reduces the present value of the offer to $11.46.

Singapore Telecommunications (SGT) downgraded to Neutral from Overweight by JP Morgan. The second quarter profit was 9% below JP Morgan’s estimates. Optus revenues declined 6%. The broker thinks Vodafone’s recovery, when it happens, is likely to hit Optus harder than Telstra (TLS). The brightest spot in SingTel’s report was Singapore, where wireless revenue grew 7%. JP Morgan has reduced FY14-16 earnings estimates by 6-7% and revised the price target to S$3.88 from S$4.15. The rating is downgraded to Neutral from Overweight.

WorleyParsons (WOR) was downgraded to Neutral from Buy by BA-Merrill Lynch and to Neutral from Outperform by Credit Suisse. The company has downgraded FY14 profit guidance to between $260-300 million six weeks after saying that profit would be ahead of FY13 ($322 million). The downgrade was blamed on a greater-than-expected decline in Australia and project deferrals and additional costs in Canada. Forecasts have been consistently downgraded over the past three years and Merrills expects negative market sentiment may constrain the share price upside until a sustainable earnings recovery is apparent. CS analysts have some difficulties in getting their heads around what just happened, but at the end of the day, they agree on one thing: there is no hiding from a 27% downgrade. The sudden change in guidance remains hard to explain within only a space of six weeks, they add. To add more insult to injury: management gave a big presentation only three weeks ago. And here comes the hard assessment: “uninvestable” until more clarity arises about earnings prospects.

Earnings forecast in cents per share

The FNArena database 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.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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