Buy, Sell, Hold – what the brokers say

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Changes in stockbroker ratings for individual stocks remain limited post an unusually active February reporting season. Without exception, all changes were of specific, individual character. Most active was gold producer Alacer Gold, which attracted one upgrade and two downgrades, following its market update. Apart from company specific valuation and risk angles, stockbrokers continue to differ on views about the medium to longer-term outlook for the price of gold bullion.

In the good books

Alacer Gold (AQG) was upgraded to Neutral from Underperform by Macquarie. Alacer’s result showed strong cash generation from continuing operations at Copler, although a loss was booked due to the discontinuation of Australian operations. A 2c dividend was nevertheless paid. The broker is now more positive on the upcoming sulfide definitive feasibility study and while awaiting the outcome, has decided risk is to the upside.

See also AQG downgrade below.

Arrium (ARI) was upgraded to Neutral from Underweight by JP Morgan. The share price has been dragged down recently by weakening iron ore prices, highlighting the sensitivity of the stock, and JP Morgan observes it is now below the target – unchanged at $1.40. The rating is upgraded to Neutral from Underweight but the broker retains the view that there are few positive catalysts on the horizon.

CSR (CSR) upgraded to Buy from Hold by Deutsche Bank. Deutsche Bank considers the significant leverage in the building products business, combined with potential pricing power, suggests consensus expectations for FY15 and FY16 are too low. The broker believes the March price increases in plasterboard, bricks, insulation and glass are more likely to stick, with the current recovery in the housing market.

Transfield Services (TSE) was upgraded to Neutral from Underweight by JP Morgan. The company is facing a number of headwinds – competitive pressure and elevated gearing – but JP Morgan notes there’s good progress on securing cost reductions and winning work.

In the not-so-good books

Alacer Gold (AQG) was downgraded to Sell from Hold by Deutsche Bank and to Neutral from Buy by UBS. The result might have surprised on the upside but Deutsch Bank analysts have a problem with the price. Given the declining production profile from the oxide project, on top of ongoing uncertainty around sulfide development parameters, the stock appears overvalued. The full year pre-tax profit was in line with UBS forecasts and Alacer declared a US2c final dividend, which UBS did not expect. UBS’s concern is also with the share price which has had a 45% increase since the beginning of 2014. Despite this, the stock is one of the broker’s preferred gold exposures for low-cost production and a strong balance sheet.

See also AQG upgrade above.

Energy Resources of Australia (ERA) was downgraded to Underweight from Neutral by JP Morgan. The longer-term fundamentals are positive for price appreciation but the broker notes spot uranium prices are still weak. While the broker has lowered uranium price forecasts for the short term, given inventory overhang, demand is expected to recover in time, with China continuing to import large quantities and Japan reiterating its commitment to nuclear power.

The Reject Shop (TRS) was downgraded to Sell from Neutral by UBS, following the resignation of the managing director who will leave in June.

UBS thinks the store rollout could come to an end in coming months, with new management likely to move the focus to network optimisation. There is a risk that during the leadership vacuum the company becomes a takeover target.

Wesfarmers (WES) was downgraded to Underperform from Buy by BA-Merrill Lynch. Merrills has revised earnings forecasts, taking into account a more subdued outlook for the industrial businesses such as coal, industrial supply, chemicals and Target. The forecast for FY14 is reduced by 5% and FY15 by 7%. The broker thinks Wesfarmers currently faces a challenge because it has four businesses, out of eight, where earnings are either going backwards or underachieving relative to recent investment.

 

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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