Buy, Sell, Hold – what the brokers say

Founder of FNArena
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Overall activity among stockbrokers in Australia is slowing down, and quite rapidly so, as the industry is winding down and preparing for Christmas cheer and the annual break. The number of research reports on individual companies that is being distributed to customers is now at a low volume and might have been at zero if it wasn’t for industrial companies continuing to issue (unwelcome) profit warnings.

The week past saw profit warnings from QBE, GUD and Silver Chef, amongst others, while OZ Minerals showed there’s still plenty of corporate risk inside the resources sector too. Note both JP Morgan and Deutsche Bank reduced their crude oil price forecasts during the week.

In the good books

APA Group (APA) was upgraded to Add from Hold by CIMB Securities. The company has upgraded FY14 earnings guidance as assets and investments perform. CIMB thinks the company has a sustainable competitive advantage and solid balance sheet. That said, the stock appears fully priced against utility peers but the broker believes the exposure to the emerging gas market, strong growth forecast and expansion projects justify the premium

Cabcharge Australia (CAB) was upgraded to Outperform from Neutral by CIMB Securities. The company has faced numerous headwinds for the past few years and the broker suspects these will not be abating soon. But the broker believes that even under a bear case scenario, the valuation is appealing, as the stock offers a 7.5% dividend yield and there is potential for up to 16% in upside with a full cyclical recovery. The benefits of moving to cards from cash continues and, according to CIMB, the remaining earnings are of significantly higher quality, given regulatory risk has largely been removed and competition within the payment industry substantially reduced.

Fleetwood Corp (FWD) was upgraded to Neutral from Underperform by Credit Suisse. The lack of visibility in the company’s key markets is a potential problem and the broker thinks there’ll be further downgrades to consensus expectations. Nevertheless, Credit Suisse thinks the valuation is finally starting to take these risks into account. The rating is upgraded to Neutral from Underperform on the back of share price weakness.

OZ Minerals (OZL) was upgraded to Buy from Sell by Citi.Prominent Hill has seen a 12% depletion in contained copper, the broker notes. Inventory is nevertheless supportive of OZ Minerals’ strategic plans, and the new mine plan is largely in line with the broker’s expectations. While the Malu extension offers slim margins, it will extend the life of the Hill to 2024, and costs should also decline. After the fall in the share price, OZL now offers compelling value, despite a weak outlook for copper.

In the not-so-good books

Ampella Mining (AMX) was downgraded to Neutral from Outperform by Credit Suisse. Ampella and Centamin have entered into a merger deal whereby Ampella shareholders will receive one Centamin share for every five Ampella shares they own. Credit Suisse observes that, while the resource was metallurgically challenging and not commercially mineable at this stage, the transaction’s pricing sets an unfortunate precedent for valuing other juniors. The broker does not have a view on Centamin so downgrades the rating to Neutral from Outperform.

Mount Gibson Iron (MGX) was downgraded to Underperform from Neutral. Mt Gibson will buy Gindalbie’s (GBG) Shine hematite prospect for $12 million plus royalties. The broker finds Shine is a little further from the rail sidings than it would have liked but is a reasonably advanced project. It’s small, has a short mine life and can’t support much capex, but it’s cheap, in Credit Suisse’s opinion. The broker has updated the iron ore price as well as adding Shine to the model. Mount Gibson has three iron ore mines with limited lives and, despite the cash backing, Credit Suisse is wary of acquisition risk, given the company’s plans to buy substantial coal or iron ore projects.

Qantas Airways (QAN) was downgraded to Neutral from Buy by Citi. The first half loss has revealed the ongoing stresses of weak demand and heightened competition for Qantas. While there are parts of the business which hold significant value, there has to be a plan to unlock value. Without such a plan the market will not be inclined to attribute fair value to these businesses.

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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