Buy, Sell, Hold – what the brokers say

Founder of FNArena
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Changes to stockbroker valuations and ratings during the week ending Friday, April 4, were all about resources stocks, as both Credit Suisse and Deutsche Bank published major sector updates. While such updates always tend to have noticeable impacts both in negative and positive ways, this time the underlying message seems to be of a predominantly positive nature.

In the good books

Evolution Mining (EVN) was upgraded to Hold from Sell by Deutsche Bank after the broker’s update to commodity price forecasts. It expects gold and iron ore to slide over the medium term while base metals prices should pick up. The rating is upgraded to Hold from Sell on valuation.

Fortescue Metals (FMG) was upgraded to Hold from Sell by Deutsche Bank. Following the same valuation change, the broker expects iron ore prices will improve in the second quarter but weaken over the medium term. The rating is upgraded to Hold from Sell based on valuation.

New Hope (NHC) was upgraded to Neutral from Underperform by Credit Suisse. First half earnings were in line with the February guidance but Credit Suisse shares the view that coal markets are oversupplied and prices will be soft in the near term. However, the rating was upgraded, given recent share price weakness.

Panoramic Resources (PAN) was upgraded to Outperform from Neutral by Credit Suisse, given the retreat in the share price in recent weeks on exploration disappointment. The price target is reduced to 50c from 60c. Credit Suisse thinks the sell-off was overdone. There’s gold upside from Gidgee and a modest reserve increase at Savannah that could add value.

Primary Health Care (PRY) was upgraded to Buy from Neutral by UBS. UBS believes some sort of means test being recommended in the federal budget as highly probable and suspects more detail may be forthcoming after Western Australian elections. Given the uncertainty over what Medicare reforms will be made, the broker has devised a worst and best case scenario. The upshot is that reform risk is priced in and the current price implies a 25% discount to peer multiples.

Regis Resources (RRL) was upgraded to Outperform from Underperform by Credit Suisse and to Buy from Hold by Deutsche Bank. Under new quarterly gold and currency price assumptions, Credit Suisse has raised the target to $2.75 from $2.60 and upgraded the recommendation. Deutsche Bank has also updated commodity price forecasts and expects gold to weaken over the medium term. Its rating is upgraded to Buy from Hold based on valuation.

In the not-so-good books

Aquila Resources (AQA) was downgraded to Neutral from Outperform by Credit Suisse. The broker struggles with the valuation and retains a $2.60 target. Coking coal prices have hit record lows and the appetite for new projects is limited. Still, Credit Suisse thinks this is the best time to construct a major coal project as depressed prices are shaking out the high cost players and construction costs are coming down in Australia. The rating is lowered to Neutral from Outperform.

BT Investment (BTT) was downgraded to Underperform from Neutral by Credit Suisse. The broker has increased FY14 estimates by 23%, largely because of strong performance fees. There’s positive momentum in JO Hambro but Credit Suisse considers the stock expensive at current levels.

Endeavour Mining (EVR) was downgraded to Neutral from Buy by UBS. The company has reported a 2013 loss of $322 million in line with the broker’s expectations. The company reiterated production guidance for 2014. While the growth profile, cash costs and diversified operating base remain compelling, elevated gearing and limited free cash flow increase the risk in an uncertain gold price environment.

Goodman Fielder (GFF) was downgraded to Underperform from Buy by BA-Merrill Lynch and to Hold from Add by CIMB Securities. Goodman Fielder has revised down earnings guidance and Merrills thinks the cost reduction strategy is faltering. Aggressive reductions in the number of production facilities have strained the remaining network and the broker suspects this is leading to a need for reinvestment. Over the next 12 months, the broker considers the downside risks will weigh. CIMB analysts are also disappointed. The turnaround program still has 24 months to run and further disappointments cannot be excluded. CIMB expects some growth in FY15.

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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