The underlying message this week is clear: while the share market as a whole is finding the going tough since the calendar moved into 2014, securities analysts are seeing better value and expectations are skewed towards a more positive outcome for shareholders’ profits this year.
All of this still has to be confirmed during the February reporting season, of course, and the number of local profit report releases will start ramping up from this week onwards. There doesn’t seem to be a clear trend in broker responses at this stage, other than that resources companies are enjoying positive momentum, as are companies in the building materials sector.
In the good books
AGL Energy (AGK) was upgraded to Outperform from Neutral by Macquarie.
AGL is now the front-runner to acquire Macquarie Generation over ERM Power (EPW) now the Chinese consortium has pulled out, according to Macquarie. If not successful, Delta Coastal is another opportunity, which should ensure market position. Ahead of the Feb result, the broker has upgraded to Outperform.
Fortescue Metals (FMG) was upgraded to Buy from Neutral by Citi. The December quarter was below the broker’s estimates because of cyclone activity, but costs were better than expected and, combined with the Australian dollar depreciation, that has driven earnings upgrades.
Insurance Australia (IAG) was upgraded to Neutral from Sell by UBS. UBS has updated forecasts following the lifting of research restrictions. The broker estimates the proposed transaction with Wesfarmers (WES) to be neutral for FY15 earnings and boost FY16 by 6.3%.A refund is required to be paid to customers for not passing on full benefit of lower premiums from 1 July 2013. UBS believes the issue must be dealt with carefully in an environment where growth is slowing and market share needs to be protected.
Origin Energy (ORG) was upgraded to Overweight from Neutral by JP Morgan. Origin’s earnings are expected to recover through FY15 and FY16 while fears surrounding APLNG’s capital requirements have diminished, according to JP Morgan. The broker has re-set timing to capture first gas in late 2015.
Regis Resources (RRL) was upgraded to Buy from Neutral by UBS. Despite the company lowering the life of mine production profile at Garden Well, the broker’s valuation for the company has increased because of the recent lift to long-term gold price assumptions. Regis remains one of the lowest cost producers in the Australian gold sector. UBS believes the company has the ability to maintain a healthy dividend stream.
Western Areas (WSA) was upgraded to Buy from Neutral by UBS. December quarter production of contained nickel was down 3% but ahead of the broker’s forecasts. The company expects to update guidance at the half-year result. UBS has raised the 2014 nickel price forecast, but lowered the 2015 and 2016 price forecasts. Offsetting some of this decline is an average 3% reduction to the Australian dollar for 2014-2015.
In the not-so-good books
AGL Energy (AGK) was downgraded to Neutral from Overweight by JP Morgan. At the right price, acquisition of MacGen, or part thereof, should enable AGL to strike a balance between the drag on near-term earnings and longer-term value creation, in the broker’s opinion. In the meantime, the focus is on the falling away of the Loy Yang A compensation. The broker envisages gas sales are unlikely to bridge the gap from falling compensation.
Drillsearch Energy (DLS) was downgraded to Neutral from Overweight by JP Morgan and to Neutral from Buy by UBS. Drillsearch has increased production guidance by 30% and now beat expectations over two strong quarters. JP Morgan continues to like the strategy and asset mix but believes there are better options on a valuation basis, such as Senex Energy (SXY). December quarter production was 30% ahead of UBS estimates, driving a 28% rise in sales revenue, quarter on quarter. The company has increased production guidance but UBS was surprised at the size of the increase. A reserves upgrade is expected to follow. The broker likes the performance of Bauer but thinks the share price adequately captures the upside. Hence, after a 21% rally over the past three months, the rating is downgraded to Neutral from Buy.
Treasury Wine Estates (TWE) was downgraded to Neutral from Outperform by Macquarie. Treasury Wine has cut its FY14 guidance by 17% based on weaker sales in Australia and a slowdown in China and the broker does not see conditions improving in the near term. Macquarie has also replaced its TWE analyst, pulling its rating back to Neutral pending a full review of the numbers.
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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