Revisions of sector forecasts and input prices were still a theme this week, as analysts reviewed their outlooks for a number of key commodities, which resulted in mostly upgrades for companies like Newcrest Mining and Incitec Pivot.
Macquarie downgraded Woodside Petroleum ahead of its financial results, with a big projection of a 35% drop in earnings over the next 10 years, if no new growth projects or acquisitions eventuate.
In the good books
GUD Holdings (GUD) announced its interim result and was upgraded to Neutral from Sell by Citi and Neutral from Underperform by Credit Suisse. The FY14 guidance was unchanged after the first half and this implies a substantial improvement in the second half, according to Credit Suisse. The broker would prefer a cheaper valuation to compensate for the risk profile but, at current levels, the risk/reward balance is fairly even. Citi considers the company’s controllable improvements, such as cost cutting and restructuring, will be the primary drivers of earnings growth in the short term, rather than any fundamental improvement in the underlying businesses.
Credit Suisse was one of the last to move on Super Retail (SUL), following its trading update last week, when CEO and group managing director Peter Birtles confirmed the result was below expectations. The market reacted poorly to that news, which showed seasonal issues are affecting the BCF leisure segment. Credit Suisse believes this reaction reflects the fact the stock was priced well above the market and has moved the rating to Neutral from Underperform.
UBS upgraded Newcrest Mining (NCM) to Neutral from Sell, following a review of its gold and copper commodity forecasts. Long-term gold price forecasts were increased by 18% and long-term copper price forecasts by 16%. This has lifted the valuation of Newcrest by 71%. The broker’s short-term earnings forecasts have also been lifted on higher copper prices and lower Australian dollar forecasts for FY14 and FY15.
Citi upgraded Incitec Pivot (IPL) to Buy from Neutral following a revision to fertiliser prices and a reduction in the AUD/USD forecast, which resulted in an increase in forecast earnings for FY14-15 by 12-18%. As prices for the fertilizer diammonium phosphate (DAP), rally from their lows in November and the new year signals improved demand from Brazil, Asia and the EU, Citi now expects DAP prices for FY14 and FY15 of US$425/t and US$450/t respectively. If IPL meets the Citi target, it will return approximately 14% (excluding dividends, fees and charges).
In the not-so-good books
Macquarie downgraded its rating on Woodside (WPL) to Underperform from Neutral, ahead of the company’s 2013 financial results. Macquarie calculates that, without any further growth project developments or acquisitions, Woodside’s earnings will fall around 35% over the next decade. Production will peak in 2014 but this will merely buy management time to consider how it might proceed. Given there appears limited upside in oil prices, WPL’s individual issues will come to the fore amongst energy peers, the broker suggests. Falling earnings mean falling dividends.
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.
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Also in Switzer Super Report:
- Charlie Aitken: An Aussie at 75 cents means you need more US in your portfolio [1]
- My SMSF: A shared responsibility [2]
- Roger Montgomery: Sirtex offers promise on good results [3]
- Tony Negline: Keep your binding death benefit nominations and your will aligned [4]
- Questions of the Week: Super Retail’s future and Buffet’s Berkshire Hathaway [5]