Buy, Sell, Hold – what the brokers say

Founder of FNArena
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Broker activity in the shortened Easter week was mainly driven by analysts’ earnings revisions and share price falls, which improved valuations. Market darling Carsales.com.au is back in at least one broker’s good books and Woolworths also got an upgrade on the back of expectations for better grocery earnings.

As this is also the time when updates and re-assessments are being released for commodities prices, much of the overall activity is focused on local mining stocks, at least when it comes to adjustments in earnings estimates and valuations/price targets.

In the good books

Credit Suisse upgraded Carsales.com.au (CRZ) to Outperform from Neutral. Credit Suisse observes the share price is now below the level prior to its announcement to buy South Korean automotive trading business SK Encarsales and this provides a fresh opportunity to buy into Carsales.com’s offshore expansion story at a reasonable valuation. The broker believes the acquisition was important as it bulks up the international portfolio and growth options.

BA-Merrill Lynch upgraded Bendigo and Adelaide Bank (BEN) to Buy from Neutral. Merrills observes the stock has traded sideways since February and underperformed rival Bank of Queensland (BOQ) by 13%. The stock now looks better than BOQ in the broker’s view and the rating is upgraded. The broker also thinks the outcome of the financial systems inquiry is likely to be positive for regional banks.

Citi upgraded Western Areas (WSA) to Neutral from Sell. Citi has rolled forward earnings-based multiples and incorporated a bullish view on nickel, based on the likelihood that Indonesia’s ore export bans will be enforced. Profit forecasts for Western Areas are raised to $54m in 2015 and $131m in 2016, based on forecast annual production of 25,000t nickel in concentrate for the next five years.

Macquarie upgraded SP AusNet (SPN) to Outperform from Neutral. Ahead of SPN’s result next month, the broker has increased its forecast FY15-16 earnings to reflect higher income from electricity distribution. The broker suggests the regulated utility sector is now fully valued but SPN’s conservative balance sheet protects it from any surprises. Macquarie expects SPN to maintain its steady dividend growth path.

UBS upgraded Woolworths (WOW) to Buy from Neutral on expectations for Woolworths to outperform over the next 12 months due to stronger growth in grocery earnings and easing concerns over the Masters business. Based on better trends in Masters, the broker thinks the implied valuation should improve. UBS has upgraded FY15-17 forecasts by 2-5% based on higher food and liquor inflation and cost cutting.

In the not so good books

CSL (CSL) was 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.

BA-Merrill Lynch downgraded Aristocrat Leisure (ALL) to Underperform from Neutral. The market may like the offshore earnings and scope for capital returns but the broker remains concerned about cash flow. Specifically, more widespread use of vendor financing in Australia, and a capex drain from participation units in the US, does not inspire the broker. Merrills suspects this could undermine the potential to return capital.

UBS downgraded Oz Minerals (OZL) to Sell from Neutral, following its quarterly result. OZ Minerals has reported March quarter production of 18,200 tonnes at a US$1.22/lb cash cost. This is better than UBS expected and ahead of guidance. Copper sales of 15,000 tonnes were below expectations. The broker forecasts a significant reduction in cash at the end of June, with a forecast outflow of $110 million in the March quarter and $50 million estimated for the June quarter, resulting in an interim cash position of around $210 million.

FNArena 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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