Last week, broker activity was all about corporate action, falling share prices and disappointing guidances for the year ahead. The first two factors triggered nine recommendation upgrades, while corporate disappointments were responsible for eight downgrades during the week.
In the good books
Cromwell Property (CMW) was upgraded to Buy from Neutral by BA-Merrill Lynch. The company has acquired Northpoint at a very attractive price, with an 8.7% yield. Cromwell has sold two lower quality properties to fund its share of the acquisition and has flagged further sales to recycle capital into more value adding opportunities. The stock offers exposure to a unique combination of yield and growth.
Fairfax Media (FXJ) was upgraded to Outperform from Underperform by Macquarie. The broker believes the worst may now be over for Fairfax’s declining metro mastheads, with cost cuts and the digital transition set to provide support. The sale of Stayz has boosted the balance sheet, Domain is likely to be a value driver as it establishes itself in the number two real estate digital classifieds position, and while the outlook remains subdued, the broker feels consensus forecasts are too pessimistic.
OrotonGroup (ORL) was upgraded to Outperform from Underperform by Credit Suisse. Following recent share price weakness and a downgrade to the outlook, Credit Suisse has raised the recommendation to Outperform from Underperform. The company downgraded FY14 guidance and, while this is material, the broker believes it is largely reflected in the share price. Having reviewed the potential in the new brands, Credit Suisse concludes there is value in the stock at current levels.
In the not-so-good books
Ausenco (AAX) was downgraded to Underweight from Neutral by JP Morgan. The company has reduced 2013 guidance and raised equity at a significant discount. JP Morgan is concerned about the speed of the decline in the balance sheet. A turnaround in demand is expected to take some time, and the broker finds it hard to see any positive catalysts in the near term.
Newcrest Mining (NCM) was downgraded to Underperform from Neutral by Macquarie. The broker has become more bearish on the outlook for the gold price, with Fed tapering now likely, Indian physical demand subdued and mine supply set to have another growth year. Newcrest has suggested it is cash flow neutral at $1450/oz, which is about $100 more than spot right now.
Nufarm (NUF) was downgraded to Neutral from Outperform by Credit Suisse. Nufarm’s AGM provided first half earnings guidance, which was below the broker’s forecast, which it then reduced by 8-10%. Rain in SE Australia should mean weeds and pesticide demand in the second half, but Nufarm remains a high risk proposition given exposure to weather and commodity prices. Debt is elevated on ongoing working capital investment in South America.
Qantas (QAN) was downgraded to Neutral from Buy by UBS. UBS has taken to reducing forecasts for the second time in two days after the company updated the market with a profit warning. The company expects a pre-tax loss of $250 to 300 million in the December half. Three assets could be sold, in the broker’s view, but each is complicated. These are the Sydney airport leases, the frequent flyer program and equity stakes in Jetstar’s offshore ventures. Overall, UBS finds it difficult to recommend the stock and has downgraded the rating to Neutral from Buy.
Westfield Retail Trust (WRT) was downgraded to Neutral from Outperform by Macquarie after the details of the proposed merger between Westfield Retail (WRT) and Westfield’s (WDC) Australasian business was released last week. Macquarie believes the merger makes strategic sense, but the pricing basis of free cashflow proportions ignores gearing levels. Crunching the numbers implies pricing for WRT of 21 times, which is pretty steep. The total return for WRT shareholders under the cash/scrip deal is reasonable, but the share overhang will likely weigh over performance. Downgrade to Neutral.
Earnings forecase 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.
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