Buy, Sell, Hold – what the brokers say

Founder of FNArena
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A shortened, holiday dominated, quiet week predictably delivered no dramas. Resources stocks continue to dominate, predominantly on the back of analysts re-assessing the outlook for supply/demand and prices.

In the good books

Asciano (AIO) was upgraded to Buy from Neutral by BA-Merrill Lynch based on valuation and the easier comparatives that are being cycled in the fourth quarter. Merrills observes the share price is factoring in some probability of an FY14 earnings downgrade but considers this unlikely. Container movements are improving, coal volumes are solid and the broker is not aware of any major contract losses with PN Rail.

Toll Holdings (TOL) was upgraded to Buy from Neutral by BA-Merrill Lynch. Current pricing is suggesting some probability of a FY14 earnings downgrade but Merrills thinks this is less likely than at the start of 2014. Structural challenges persist, but the broker thinks the cyclical argument is improving. The stock is traditionally correlated with consumer confidence and retail sales and Merrills envisages these two indicators improving over 2014.

In the not-so-good books

Aurizon Holdings (AZJ) was downgraded to Neutral from Buy by BA-Merrill Lynch. The stock is close to an all-time high and the positives are considered priced in. That said, the broker considers the stock is attractive in terms of its growth profile, with the drivers over the next three years relatively low risk. Over time Merrills thinks the stock may grind higher but in the short term there’s more value from cyclical exposures such as Asciano (AIO) and Toll (TOL).

Mincor Resources (MCR) was downgraded to Sell from Neutral by UBS. The weather was among other incremental factors behind Mincor’s 20% quarter-on-quarter fall in production, which fell 3% short of the broker’s forecast. Costs were 15% higher than expected. The nickel price, to which Mincor is highly leveraged, has rallied 32% this year, while the share price is up 62%. This forces the broker to downgrade to Sell on valuation with the caveat that, were the nickel rally to continue, driven by the Indonesian ban, tension in Eastern Europe and recovering demand, the share price will stay supported.

Newcrest Mining (NCM) was downgraded to Sell from Neutral by UBS following its March quarterly report. Newcrest’s 11% quarter-on-quarter fall in production was not unexpected, but is disappointing nevertheless. Costs were broadly in line with the broker’s expectation. Formal FY15 guidance was not provided but management implied further weakness. Lihir provides 35% of output, the broker notes, but Newcrest has no long-term plan for operations.

QRxPharma (QRX) was downgraded to Underweight from Neutral by JP Morgan. A knock-back from the FDA takes the US market out of the picture for now for pain killer opioid MoxDuo-IR, and reduces the likelihood of success in other regions. The delay in commercialisation and increased risk weighting means the broker cuts the target to 6c from 92c and downgrades to Sell.

Earnings Forecast

FNArena, 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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