Coca Cola was the centre of broker’s attentions this week after it announced a downgrade in earnings and a strategic review. It received both upgrades and downgrades, as did Bank of Queensland after it released its interim financial results.
In the good books
CIMB Securities upgraded Telstra (TLS) to Add from Hold. CIMB now thinks NBN payments may accelerate more sharply than previously estimated. The broker values the asset sales component of the NBN deal at $11.4 billion, with payments peaking in FY19 at over $2.0 billion. Separating asset sales from ongoing operating income and using a lower discount rate for related government guaranteed payments means the broker’s valuation has increased.
CIMB Securities upgraded Coca Cola Amatil (CCL) to Add from Hold and Credit Suisse upgraded to Outperform from Underperform after the company downgraded first half earnings. The company has guided to a 15% reduction in first half Australian beverages earnings. The rating is upgraded to Add from Hold, as risk is now seen moving to the upside. Credit Suisse thinks the challenges in the Australian beverages business can be overcome, via reduced overheads, narrowing the business to core non-alcoholic beverages and improving the relationship with The Coca-Cola Co. See downgrades below.
Macquarie upgraded Bank of Queensland to Neutral from Underperform following the company’s result. The acquisition of Investec should provide some growth but the broker is concerned the group is becoming more complex rather than less, and a riskier proposition given reliance on trading profits and corporate lending. The Queensland recovery will nevertheless assist and growth may continue if BOQ pushes on with its acquisition spree.
In the not-so-good books
Coca Cola Amatil was downgraded to Sell from Hold by Deutsche Bank, Neutral from Overweight by JP Morgan and Sell from Neutral by UBS. Deutsche has made a deeper downgrade to 2015 forecasts, to allow for further margin impact stemming from the price investment that is likely to be needed. JP Morgan says the issue now for CCL is the stock will be perceived as less defensive as it once was and thus could well be de-rated further, with management strategy unclear at this point. UBS thinks CCL and its parent have failed to get on top of changes in consumer preferences and too much earnings growth has been coming from price.
BA Merrill Lynch downgraded Bank of Queensland to Neutral from Buy. The first half result was broadly in line with the broker’s forecasts. The intention to acquire Investec’s financial and asset finance and leasing businesses is a solid deal but not likely to drive significant upside in the broker’s opinion.
Citi downgraded Sigma Pharmaceuticals to Sell from Neutral. Sigma shares have rallied 30% in recent sessions and Citi analysts cannot by the love of god comprehend why that has happened. Their remedy is rough and straightforward: downgrade to Sell. Citi analysts highlight industry dynamics remain tough and Sigma will be spending some $50 million over the next three years, which will initially dilute earnings. Making matters worse, Citi is anticipating no growth in FY15 and only 5% growth in FY16. On this basis, the shares are seen as expensive.
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.
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