Stockbrokers remain reluctant to reduce valuations and targets, unless they are forced to do so following a company profit warning, or yet another round of downgrades to commodity prices, as has been the case for Whitehaven Coal. But there was some good news in the REITs sector. Stockland’s build up of a stake in Australand drove upgrades in both those trusts.
Pending adjustments to commodity prices forecasts may potentially put resources back in focus. CIMB and BA-Merrill Lynch have already taken the knife to their forecasts, predominantly for coal, copper and iron ore. No doubt, others are about to follow.
In the good books
Australand (ALZ) was upgraded to Buy from Underperform by BA-Merrill Lynch and to Outperform from Neutral by Credit Suisse. CapitaLand has sold down its stake and Stockland (SGP) has taken up 19.9% of the company. Merrills expects Stockland will move beyond this stake, justified on both financial and long-term strategic merits. Merrills notes the interests of the two companies are aligned, operating in complementary sectors of the market. The risk to the Buy call is if Stockland stays a passive stakeholder. In this event, Merrills does not think the company’s presence on the register would have a meaningful impact on valuation. Credit Suisse also would not be surprised if a full bid follows and assumes greater divisional level synergies under a Stockland bid.
Source: FN Arena
Commonwealth Bank (CBA) was upgraded to Outperform from Neutral by Macquarie. The broker cites data that shows the recovery in housing investment is being driven by middle to high income, young individuals rather than older speculators. The broker thinks first home buyers are choosing to invest rather than occupy properties and CBA is believed to be the best placed to take advantage of this younger mid to high income demographic, with a market share of 36%.
Lend Lease (LLC) was upgraded to Buy from Neutral by Citi. Lend Lease is the preferred tenderer in a joint venture with Bouygues on the NorthConnex road design/construction, with the contract having an estimated value of $2.65 billion and due to start in 2015. The broker thinks, in addition to this win, the company’s bid for several large road projects is likely to contribute to strong engineering growth from FY16. Citi also expects Lend Lease may benefit from the restructure of Leighton (LEI), given potential management distraction.
Myer (MYR) was upgraded to Neutral from Sell. Myer’s first half margin decline has resulted in Citi downgrading earnings forecasts by 10% for FY14 and by 4% for FY15. The broker thinks sales growth is still challenged and the prospects for a merger with David Jones (DJS) are dim, given Myer will need to offer at least 20% more than its first offer, thereby trading off any synergies.
Stockland (SGP) was upgraded to Outperform from Neutral by Credit Suisse, after its acquisition in Australand. Credit Suisse expects a full bid will follow. The broker believes the acquisition offers potential earnings accretion and Stockland should be able to add value beyond yield spread investing, given the synergies.
In the not-so-good books
Incitec Pivot (IPL) was downgraded to Hold from Add by CIMB Securities. The share price has rallied along with a stronger Diammonium phosphate DAP fertiliser price and CIMB has adjusted earnings estimates across the company’s businesses, but at a group level the forecasts are largely unchanged. With the DAP price above the broker’s long-run forecasts, CIMB is reluctant to capitalise the current price. The stock is considered fully valued.
Source: FN Arena
Kathmandu (KMD) was downgraded to Underperform from Neutral by Credit Suisse. The broker thinks trading conditions in the first half have been more challenging when compared to the momentum in the prior corresponding half, particularly as it relates to consumer confidence and disposable income in Australia.
Sydney Airport (SYD) was downgraded to Neutral from Outperform by Macquarie. February traffic data showed a continuation of January’s theme – strong international and soft domestic. Passenger growth was ahead of capacity growth and that will generate minor upgrades to Macquarie’s forecasts, but the broker still finds the outlook challenging. Upside remains but the broker thinks the core business is capturing much of the value at current assumptions.
Whitehaven Coal (WHC) was downgraded to Neutral from Buy by BA-Merrill Lynch, as the broker’s base case and long-term coal price forecasts are reduced. Softness in coal prices will subdue any positive announcements surrounding the Maules Creek project. Earnings forecasts are downgraded by 50% for FY15 and by 28% for FY16.
The above was compiled from reports on the FNArena database, which 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.
Source: FN Arena
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Also in the Switzer Super Report:
- Peter Switzer – What’s wrong with our stock market? [1]
- Peter Switzer – From the top – Gerry Harvey [2]
- Paul Rickard – Super cap increases – no deal done [3]
- James Dunn – Five education and training must-have companies [4]
- Penny Pryor – Shortlisted – Toll Holdings and property picks [5]
- Gary Stone – Primary Health primed for breakout [6]
- Staff Reporter – Property revival heads into second year [7]