Buy, Sell, Hold – what the brokers say

Founder of FNArena
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The past week proved unexpectedly busy with resources and related cyclicals dominating on the upgrade side, while reliable industrials, including the major banks, otherwise known as yesteryear’s outperformers, are clearly dominant when it comes to receiving downgrades.

In the good books

Alumina (AWC) was upgraded to Outperform from Underperform by Credit Suisse. Last month the broker maintained an Underperform rating on AWC based on expectations of low alumina/aluminium prices and a too-high A$. The A$ has since fallen and alumina prices have rallied off their lows but more importantly, the shift to spot trading in alumina has picked up pace. This would mean a substantial increase in dividend to AWC from Alcoa, which could be passed on to shareholders given no debt. The broker is forecasting a 7.3% fully-franked 2015 dividend yield for AWC after a more subdued 2014.

Goodman Group (GMG) was upgraded to Overweight from Neutral by JP Morgan and to Buy from Hold by Deutsche Bank. In previewing their expectations for REITs in 2014, both brokers suggest a challenging year with rising bond rates, lower trust income growth and fewer earnings benefits from lower debt. That said, following relative underperformance in 2013, JP Morgan expects solid valuation support around healthy transaction markets. Deutsche Bank predicts large caps with growth are set to outperform. On this basis, GMG has been upgraded.

Incitec Pivot (IPL) was upgraded to Buy from Neutral by BA-Merrill Lynch. The stock is trading at a 15% price-earnings discount to the ASX200, with 10% being the long-term average. To this backdrop, add 16% earnings-per-share growth compared with 5% for the ASX200 and the broker’s belief that industry headwinds have abated, and Merrills provides a compelling case for an upgrade.

Credit Suisse has upgraded JB Hi-Fi (JBH) in a sector review to Outperform from Neutral and lifts the target price to $23.06 from $21.75. Strong in-store and online Christmas trading with electronics made it one of the best performers in December. Discounting appeared negligible and prices were stable. CS expects retailers overall will outperform in 2014 and offer strong growth across the board.

Mt Gibson Iron (MGX) was upgraded to Outperform from Neutral by Macquarie. Macquarie has undertaken extensive remodelling of its iron ore producer/developer valuations based on both individual factors and adjusted A$ and iron ore price assumptions. Mt Gibson is among those offering “excellent” exposure to expanding pellet and lump premiums and has been moved onto the broker’s preferred list, with an upgrade to Outperform.

Citi upgraded Super Retail’s rating to Neutral from Sell following the sharp sell-off that followed the disappointing market update. Prior to the correction, Citi was convinced the shares were too expensive. This has now been corrected with the addition that any upside is believed to remain limited until the market gets more comfortable with growth at what is arguably Australia’s prime retailer.

In the not-so-good books

JPMorgan has downgraded ARB Corp (ARP) to Neutral from Overweight ahead of its interim report next month, citing the resources slowdown and the effect of fringe benefits tax changes on fleet demand. The broker expects a soft result as domestic challenges overshadow export growth potential arising from a lower $A.

ANZ Bank (ANZ) was downgraded to Neutral from Buy by Citi. This week’s banking sector update is one of seemingly contradictory conclusions. Citi analysts have become more positive on earnings growth and reliability of margins for Australian banks. Yet they also downgraded three out of the Big Four to Neutral. The reason is that valuations are “quite full” and projected total returns remain below 15% for the year ahead, which is the cut off to warrant a Buy rating in Citi’s universe. Minor adjustments have been made to estimates. Commonwealth and Westpac were the other two downgrades.

Australand Property Group (ALZ) was downgraded to Neutral from Overweight by JP Morgan. In previewing its expectations for REITs in 2014, the broker suggests a challenging year with rising bond rates, lower trust income growth and fewer earnings benefits from lower debt. That said, following relative underperformance in 2013, the broker expects solid valuation support around healthy transaction markets. On a sector relative basis, Australand is downgraded.

Investa Office Fund (IOF) was downgraded to Underweight from Neutral by JP Morgan and to Hold from Buy by Deutsche Bank as a result of the same reviews by the two brokers.

Iluka Resources was downgraded to Neutral from Outperform by Credit Suisse. December quarter sales recovered strongly from a weak September and Iluka believes demand is on the mend. On the downside, mineral sands prices declined by more than the broker expected. Iluka’s sales volumes are likely to be erratic going forward under the new spot trading system.

Due to a technical glitch, this week’s update runs from Monday to Monday, instead of ending on Friday. This anomaly will be rectified next week. 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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