Buy, Sell, Hold – what the brokers say

Founder of FNArena
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As overall activity among stockbrokers is ramping up ahead of this year’s pivotal February reporting season, the number of rating upgrades for individual stocks is almost twice as high as the number of downgrades.

Popular themes this month remain sold-down resources stocks (seemingly too cheaply priced thus upgrades follow), and still elevated valuations for defensive industrials for whom questions continue to arise regarding feasible growth in the year(s) ahead.

In the good books

Woolworths (WOW) was upgraded to Outperform from Neutral by Credit Suisse. Credit Suisse thinks accelerating supermarket growth is likely to lead to a re-rating and expects like-for-like sales growth will more closely match rival Coles this year and Woolworths may even better Coles in at least one of the next several quarters. Credit Suisse suspects that the agreement with the ACCC to cap fuel discounts will have less impact on Woolies. The main negative potential for Woolworths is a critical event such as the exit from the Masters business by Lowe’s or termination of the project by Woolworths. Still, the broker thinks the likelihood of such an event is low.

Macquarie Group (MQG) was upgraded to Buy from Neutral by Citi. Macquarie’s earnings should benefit from a strengthening capital market cycle, in Citi’s view. The broker believes there is significant upside for the company from the impending divestments by JP Morgan, Morgan Stanley and Deutsche Bank. Citi considers the buyers of these divested businesses will not have the resources and experience to match Macquarie.

Perpetual (PPT) was upgraded to Neutral from Sell by UBS. December quarter funds under management grew 9.4%, or 4.7% excluding the Trust Co acquisition. UBS expects synergies with Trust should underpin the earnings profile. The broker is cautious regarding weak net flows and constrained top-line growth, but expects leverage to a rising domestic equities market will offset the weak organic story. See also PPT downgrade.

Grange Resources (GRR) was upgraded to Overweight from Neutral by JP Morgan. Grange’s quarterly production report provided some insight into the potential cash flow from Savage River. Grange generated $21 million in cash over the quarter, despite paying $11 million in dividends, to post an 8% cashflow yield. Production was actually a little below expectation so it was all about lower costs.

In the not-so-good books

Perpetual (PPT) was downgraded to Neutral from Outperform by Macquarie. Perpetual saw net $400 million of equities net inflows in the first half compared to $800 million net outflows in the first half last year. With marginal accretion expected from the Trust Company acquisition, the broker expects profit to hit the top of the guidance range. But the share price has outperformed the market by 30% since the FY13 profit result and the PE is at a 30% premium to the market.
See also PPT upgrade.

ResMed (RMD) was downgraded to Neutral from Outperform by Macquarie. The broker is positive about the long-term prospects because of an under-penetrated market, strong position and undemanding valuation, but observes the market seems to be already picking a rebound in pricing. Near-term, there are earnings risks with perhaps overly optimistic revenue expectations and Macquarie suspects there will be a better entry point than at current levels.

Toll Holdings (TOL) was downgraded to Underweight from Overweight by JP Morgan. The broker expects the first half to be flat on a constant currency basis. While the depreciation of the Australian dollar should help translated earnings, JP Morgan expects the market to focus on the underlying trends.

Wesfarmers (WES) was downgraded to Neutral from Outperform by Credit Suisse. Credit Suisse has downgraded the rating to Neutral from Outperform because the stock has outperformed over 2013. The broker expects 2014 to be the year of capital management for Wesfarmers, which should provide yield support for the share price and increasing defensive characteristics. Outperformance for earnings is considered largely dependent on accelerating retail spending in FY14 and on coal prices in FY15.

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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