Buy, Sell, Hold – what the brokers say

Editorial director of Switzer
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It was another slow week in analyst world as we creep into Christmas. The biggest news was the acquisition by IAG of Wesfarmers insurance underwriting business, which saw action from brokers on both parties, mostly on the positive side of the equation.

In the good books

CIMB Securities upgraded IAG to Hold from Reduce, following the announcement of the acquisition by IAG of Wesfarmers’ (WES) underwriting business for $1.85 billion, strengthening its position in the Australian and NZ markets. CIMB notes the price is high but the deal looks accretive. The 10-year distribution agreement with Coles provides a new channel and also limits a competitive threat, although the broker thinks it could cannibalise existing business.

The recent decline in the share price means the valuation is less stretched and the broker thinks this acquisition will support earnings until Asian growth kicks in. BA Merrill Lynch, Credit Suisse, Deutsche Bank and Macquarie all left their ratings unchanged at Underperform, Neutral, Hold and Outperform respectively.

CIMB Securities also upgraded Wesfarmers (WES) to Hold from Reduce, following the announcement. CIMB asks whether the company will now look at buying a metallurgical coal asset at the bottom of the cycle or return cash. Given the negative franking balance, a dividend pay-out ratio above 100% is considered unlikely. The company may consider a capital return but CIMB notes this was not particularly popular last time with retail investors. The company has flagged the opportunity for counter cyclical investment in coal and a desire to evaluate acquisitions that offer economies of scale or downstream benefits.

Macquarie also upgraded Wesfarmers to Neutral from Underperform, following the deal. The price paid is significantly higher than Macquarie’s valuation and the broker expects a capital return.

In the not-so-good books

Citi downgraded Amcor (AMC) to Neutral from Buy. As the company is about to be separated from spin-off Orora (ORA), Citi analysts have re-assessed. Bottom-line: while they ascribe a value of $1.10-1.20 to Orora, the price target for Amcor has only fallen by $0.56. The analysts think Amcor is already trading on a premium vis-a-vis international peers and a further widening of this premium cannot be justified.

Credit Suisse downgraded Gindalbie Metals to Underperform from Neutral. Credit Suisse is valuing Gindalbie on the assumption that Ansteel continues to assist with beneficial swapping of funding for Karara equity. Gindalbie has warned that a full solution to the problems may take all of 2014 and consume capex. Hence, the broker thinks Gindalbie’s share will drop again, maybe to as little as 14%.

The above was compiled from reports on the FNArena database, which 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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