Buy, Sell, Hold – what the brokers say

Founder of FNArena
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Conflicting signals from the US and Europe and growing concerns about the negative undertone in Chinese property markets have seen the Australian share market struggle to keep positive momentum alive this month. Not helping matters, the underlying trend in stockbroking analysts’ assessment appears to now have made a turn for the worse.

In the good books

Commonwealth Bank (CBA) was upgraded to Neutral from Sell by UBS. UBS found the March quarter trading update repeated prior updates, which is a positive when the business is going well. Cash profit of $2.2 billion was slightly higher than expectations. Consistent with the other banks CBA is reporting low bad debt charges. The Sell rating that was in place was based on stretched absolute valuations but UBS notes the stock continues to outperform and unless there’s higher interest rates, an economic shock or a broad based correction CBA could stay expensive. There’s limited upside but it’s attractive.

CSR (CSR) was upgraded to Hold from Reduce by CIMB Securities. The FY14 result was in line with the broker’s expectations. Going forward, housing activity should boost volume and earnings. CIMB’s one concern is valuation and the pace of recovery that’s factored into expectations. With the stock coming back to more reasonable levels, the broker thinks CSR is now fair value.

Transfield Services (TSE) was upgraded to Outperform from Neutral by Macquarie. Transfield has completed its debt refinancing and reconfirmed second half guidance. The latter is a particular relief for a market concerned about TSE’s big second half earnings skew, and confirms contract execution is going reasonably well. TSE needs to confirm more secured revenue going forward but renewed financial flexibility, positive execution and the promise of more private sector infra outsourcing in the budget provide a more positive outlook. See also TSE downgrade.

In the not so good books

Primary Health Care (PRY) was downgraded to Hold from Buy by Deutsche Bank. The cut in the budget to Medicare rebates will be offset by co-payments to some extent and Primary should be able to maintain earnings, but the bulk-billing model is now dead. Despite changes likely to be required by the Senate, the uncertainty now created is enough to see the broker pull back to Hold. At least initially, there will be an abrupt drop-off in GP visits and thus flow-through pathology etc, the broker predicts, before things normalise again in about a year.

Sonic Healthcare (SHL) was downgraded to Hold from Buy by Deutsche Bank. The broker suggests pathology visits could fall further than GP visits, given a reassessment of the need for blood work if it is no longer free. Approximately 50% of SHL earnings is impacted by the budget. The Senate may yet have a say, but on the uncertainty the broker has cut its target to $17.50 from $19.25 and its rating to Hold.

Southern Cross Media (SXL) was downgraded to Sell from Neutral by Citi. Kyle and Jackie O did a runner from 2DayFM and Southern Cross has suffered more than expected. Ratings for the group as a whole have fallen 18% and not just in the breakfast slot, the broker notes. SXL’s combination of 2Day and TripleM has now lost its number one east coast position for the first time in five years.

SP AusNet (SPN) was downgraded to Neutral from Outperform by Macquarie. The FY14 results were ahead of Macquarie’s forecasts but distribution guidance for FY15 was flat. The broker believes infrastructure valuations are stretched and while SP AusNet’s multiples are more modest, they carry greater uncertainty regarding tax disputes and litigation. The broker prefers Spark Infrastructure (SKI) where the tax issues are nearing resolution.

Tabcorp (TAH) was downgraded to Hold from Buy by Deutsche Bank and to Sell from Neutral by UBS. Deutsche Bank estimates an increase in the race fields product turnover fees to 2.5% from 2.0% standard and 2.0% from 1.5% premium would cost Tabcorp 8% of earnings and thus reduce valuation by 8%. This is the worst-case scenario and the states may not take up the model, or Tabcorp might be able to get something back. UBS thinks the Victorian report could be a precursor to further changes in industry funding requirements. This would mean an increased cost for Tabcorp and UBS thinks the company will try and offset this by increasing yields, encouraging betting on local production and reducing operating expenditure.

Transfield Services was (TSE) downgraded to Underperform from Neutral Credit Suisse. Transfield has completed $745 million in debt restructuring and Credit Suisse is upgrading the target to $1.15 from 92c to reflect a lower risk premium. While this refinancing is an incremental positive, the broker finds there are challenges still. The stock appears slightly expensive and Credit Suisse is downgrading the rating to Underperform from Neutral. See also TSE upgrade.

Earnings Forecast

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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