Buy, Sell, Hold – what the brokers say

Founder of FNArena
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Changes in broker ratings and estimates continue to be dominated by miners and oil and gas stocks, as the industry updates commodities price estimates.

FNArena registered six upgrades and seven downgrades last week and in both cases it was mostly about resources stocks. Retailers, David Jones and Myer, featured on the positive side while AUD victim CSL joined in on the negative side.

In the good books

Atlas Iron (AGO) was upgraded to Buy from Neutral by UBS. The broker prefers iron ore over coal going into the second quarter amid expectations construction activity will continue to lift in China. The company’s valuation includes no value for Horizon 2, which could benefit from the funding of the Roy Hill project.

David Jones (DJS) was upgraded to Neutral from Sell by Citi. DJs has recommended a cash proposal from Woolworths SA for $4.00 a share. Citi anticipates annual synergies of $50 million are available, as Woolworths has a significant private label range in both food and non-food. Citi is not ruling out a bid from elsewhere, suspecting other global department stores may take notice.

Myer (MYR) was upgraded to Buy from Hold by Deutsche Bank. Deutsche Bank believes the bid for David Jones (DJS) does not suggest Myer will also become a target but does highlight the department store’s attractive valuation, while removing the acquisition risk that has weighed on the share price. Myer has withdrawn its proposal to merge with David Jones.

In the not-so-good books

CSL (CSL) downgraded to Hold from Buy by Deutsche Bank. Deutsche Bank observes CSL has been a beneficiary of competitor supply disruption in recent years but this has also opened the door to smaller players. A return to price volatility seems unlikely to the broker, but the competitive dynamics have undoubtedly risen. With the threat from new extended half-life haemophilia therapies, the broker sees fewer catalysts for above-market growth in the next couple of years.

Whitehaven Coal (WHC) was downgraded to Neutral from Buy by UBS. The broker expects coal prices to remain under pressure until producer cuts are evident. As a result, Whitehaven has been downgraded to Neutral from Buy and the target reduced to $1.80 from $2.30 to reflect a 40% discount to net present value for market risk.

Western Areas (WSA) was downgraded to Neutral from Buy by UBS. UBS has upgraded nickel price forecasts for 2014 by 14%. The company’s consistent production has made it the broker’s default nickel stock for some time but despite free cash flow lifting by 16% and 30% in FY14 and FY15 respectively, the valuation has only lifted by 5% because of the relatively long mine life.

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.

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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