Thus far, the quality of the companies receiving profit forecast upgrades clearly outweighs those receiving downgrades.
With Rio Tinto and two of the Big Four banks receiving upgrades in the week past, that last statement speaks of itself. Others enjoying upward momentum in earnings projections include Brambles, David Jones, Transurban and News Corp. On the negative side, we find the likes of Goodman Fielder, Cochlear, OrotonGroup and Bradken.
In the good books
Bank of Queensland (BOQ) was upgraded to Buy from Neutral, Medium Risk by BA-Merrill Lynch. The regionals should now benefit from regulatory changes and the broker has removed its return on equity discount for BOQ, leaving a higher forecast than BEN. The regionals should continue to trade at a discount to the majors but the broker expects the gap to narrow.
Boral (BLD) was upgraded to Buy from Sell by Citi. The broker has transferred coverage to another analyst and noted that construction activity has lifted and this is flowing through to earnings estimates. Citi thinks FY14 marks the start of a genuine extended recovery, with particular strength in Sydney construction combined with a slow but inevitable recovery in US earnings.
Carsales.com (CRZ) was upgraded to Buy from Hold, by Deutsche Bank, after a solid first half result. Deutsche Bank is encouraged by the continued investment in sales and marketing and thinks this will provide a sustainable platform for earnings growth. The broker also likes the fact that guidance is set in an environment of low new car inventories such that it captures the risk.
QBE Insurance (QBE) was upgraded to Buy from Neutral by UBS. There are still some problems on the horizon but UBS is satisfied these have been factored into expectations. Hence, the rating is upgraded to Buy from Neutral following underperformance in the share price over the past months. The broker still thinks it is possible that another re-basing is on the cards but the upheaval in the transformation phase should have run its course.
Skilled Group (SKE) was upgraded to Outperform from Neutral by Credit Suisse. Skilled’s result was weak but nevertheless in line with the broker’s expectations and showed some stability compared to the previous half. The broker believes the second half will show material improvement, given SKE is cutting costs and looking for acquisitions and contract wins where industry improvement is required and has a visible pipeline in the oil and gas space.
In the not-so-good books
Commonwealth Bank (CBA) was downgraded to Neutral from Overweight by JP Morgan. CBA’s result showed stronger trading income provided a buffer against lower credit spreads, which allowed the bank to write off software expenses and redundancies. It was nevertheless a solid result featuring balance sheet expansion, albeit a decision not to neutralise the Dividend Reinvestment Plan (DRP) is evidence CBA still needs to build up its tier one ratio. The market typically loses interest in CBA once it goes ex-div so the broker has pulled its rating back to Neutral.
Computershare (CPU) was downgraded to Underweight from Neutral by JP Morgan and to Neutral from Outperform by Credit Suisse. Computershare’s result beat JP Morgan’s expectations but the company admitted a one-off jump in US registries before increasing guidance. One-offs aside, the broker sees earnings growth as constrained over the next 12-18 months given hedge roll-offs and an increasing number of contract losses. Computershare’s result beat Credit Suisse by 9% on stronger margins and lower costs. The broker has lifted forecast earnings and increased its PE valuation as a result. The revenue growth outlook nevertheless still looks soft and the stock has rallied 15% recently. Target rises to $12.60 from $11.50 but rating pulled back to Neutral.
Domino’s Pizza (DMP) was downgraded to Sell from Neutral by UBS. Japan was the highlight, again, in a solid first half but Europe was held back by known issues, again. UBS does not expect any significant improvement in Europe until at least the first half of 2015 and finds the share price increasingly hard to justify.
Primary Health Care (PRY) was downgraded to Neutral from Buy by UBS.
The first half was broadly in line with expectations. The broker suspects the new recommendations from the Audit Commission will probably include co-payments for GP visits. This may be well flagged but the debate is not helping the share price. Until there’s more certainty, the broker is reducing the rating to Neutral from Buy.
Rio Tinto (RIO) was downgraded to Neutral from Buy by BA-Merrill in the wake of the 2013 results. The shares have performed strongly and, while the valuation is un-demanding, the broker cannot find any catalysts on the near-term horizon. Merrills emphasises that the shares are not considered that expensive as such. It’s more a case of the stock moving in the opposite direction to the iron ore price recently, a situation the broker does not think is sustainable.
Southern Cross Media (SXL) was downgraded to Neutral from Buy by Citi.
Format changes at 2DayFM increase the potential earnings risk on the metro radio business and Citi is downgrading forecasts as a result. Near-term operational trends may be negative, particularly in radio, but the broker thinks there’s still material upside in a deal with Nine Entertainment (NEC), although timing and legislative changes remain key hurdles.
Ten Network Holdings (TEN) was downgraded to Neutral from Buy by Citi. Citi welcomes the fact that Ten has stabilised its revenue share and adjusts forecast to reflect modest growth. Still, the broker is awaiting confirmation that management’s efforts to restore the network are going to result in profits. Execution risk is high and the valuation is stretched so Citi is downgrading the rating to Neutral from Buy.
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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