Buy, Sell, Hold – what the brokers say

Founder of FNArena
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A lot of action, but not many themes. This is probably the best description to characterise the final week of the local February reporting season in terms of stockbrokers updating their views and calculations while corporate reports continued to hit their screens.

While the week past saw more rating downgrades than upgrades, for the second week in a row, there’s decidedly more positive news in adjustments to valuations, price targets and earnings estimates where, apart from resources and related stocks contributing heavy cuts to the downside, the underlying current is clearly positive, which should provide support.

It will be a lot quieter in March.

In the good books

Graincorp (GNC) was upgraded to Neutral form Underperform by Credit Suisse following Graincorp’s AGM. Volume expectations are in line with forecasts, although efficiency benefits are not as solid as hoped for and capex expectations have been increased. That said, the broker suggests GNC offers value on a medium term view.

IRESS (IRE) was upgraded to Buy from Hold by Deutsche Bank, following its earnings announcement. Earnings were in line with the broker’s forecasts, while profit was ahead. The raised dividend was the key positive surprise. Deutsche Bank observes solid growth prospects in Australia and UK wealth management, driven by regulatory change and product roll out.

Nib Holdings (NHF) was upgraded to Neutral from Sell by Citi. Nib has guided to below-industry policy-holder growth in FY14. The broker is lowering forecasts for Australian resident health insurance but this is more than offset by increases for students and NZ, albeit the NZ increase is of lower quality.

Prime Media (PRT) was upgraded to Outperform from Neutral. Prime Media’s earnings lift took all by surprise. Full-year guidance was maintained but the broker now thinks this is conservative, given the second half skew. With an 8% yield, the broker suggests PRT is compelling value on a 10 times multiple. Moreover, the abolition of media rules would see PRT as the obvious takeover choice for Seven West (SWM).

Virtus Health (VRT) was upgraded to Buy from Neutral by UBS. Virtus Health turned in a mixed first-half result that met UBS’ revenue estimates but fell short of net profit after-tax estimates. Management said Queensland and site expansions and refurbishments dragged on the first half and guides for a pro-forma second half.  Employee costs grew in step with revenue, suggesting to UBS the core business structure was firm. UBS expects stronger cycle growth in the second half and no nasty surprises.

Whitehaven Coal (WHC) was upgraded to Add from Hold by CIMB Securities and to Overweight from Neutral by JP Morgan. Never mind the financial numbers, this story is all about total capital expenditure on Maules Creek remaining within budget and this increases the valuation on offer. Whitehaven is generating a lot of cashflow and if capex remains inside budget, the risk for negative surprises diminishes. This year’s forecast has now been pushed into the negative (loss) but future years have been lifted, modestly. The interim results were better than JP Morgan forecast. Maules Creek is on track for first production in 2015. Despite no obvious near-term catalysts, the broker takes a longer view and upgrades to Overweight from Neutral, given the stock is trading at a sizeable discount to the risk-weighted valuation.

In the not-so-good books

AGL Energy (AGK) was downgraded to Underperform from Neutral by Credit Suisse. AGL posted a big miss with retail the major disappointment, blamed on mild weather, weak demand, discounting and higher operating expense. Management has retained full-year guidance, which the broker finds very optimistic and thus anticipates a downgrade later down the track.

BlueScope Steel (BSL) was downgraded to Underperform from Outperform by Credit Suisse. Although the first half result pleased the broker, exceeding the guidance at the AGM, the rating was downgraded to Underperform from Outperform, reflecting the share price strength. Credit Suisse notes all segments improved and the company appears to be moving in the right direction.

Boart Longyear (BLY) was downgraded to Underperform from Neutral by Macquarie following its result. The main news was the securing of amended debt covenants to gain a temporary suspension of interest cover. The group has said its capacity to meet its financial obligations is uncertain and has initiated a strategic review. Macquarie has quadrupled FY14 loss projections and sets the target price at 20c – a 50% discount to FY14 projected net tangible asset backing to reflect the continuing deterioration of the asset base.

IOOF (IFL) was downgraded to Hold from Buy by Deutsche Bank. The first half earnings missed the broker’s forecast. The result highlighted relatively stable gross margins and cost discipline despite an increasing regulatory burden. Deutsche Bank believes the company is well placed to benefit from industry consolidation, supported by a solid balance sheet but the rating was downgraded to Hold from Buy on valuation.

Mermaid Marine (MRM) was downgraded to Neutral from Outperform by Macquarie. Mermaid Marine expects FY14 earnings will be flat, mostly because of hold ups at the supply base. The company has acquired Singapore vessel business, Jaya, for an enterprise value of $449m, funded by an equity issue at $2.40. Macquarie thinks the deal looks marginal but the value will ultimately come down to the management of the assets over the longer term. The rating is lowered to Neutral from Outperform, because of slower underlying growth in FY15 and the acquisition risks.

Qantas (QAN) was downgraded to Underperform from Neutral by Credit Suisse. The first half loss was better than the broker expected. Second half operating conditions are about to deteriorate, with Credit Suisse noting January looks to have had the weakest domestic load factor in the history of the broker’s data. The company needs asset sales to fund its way through the second half to avoid an equity raising, although some kind of government liquidity backstop is considered an equally likely outcome.

Transfield Services (TSE) was downgraded to Neutral from Outperform by Credit Suisse. The first half results were well below forecasts and Credit Suisse wants more proof for the turnaround story. The margin decline is a concern for the broker, despite the benefits from cost savings. Balance sheet repair has been pushed out further.

Treasury Wine Estate (TWE) was downgraded to Underweight from Neutral by JP Morgan because of reduced valuation support as well as the possibility of more disappointing earnings in the second half and FY15. JP Morgan thinks the bull case emanating from the potential to liberate value through asset divestment is either priced in or flimsy.

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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