Buy, Sell, Hold – what the brokers say

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Broker activity was dominated by actions on insurance and mining companies this week. Some of this was partly due to falls in the share price, which pushed stocks towards fair valuation but others – such as the Tower upgrade – were due to better than expected first half results. Regis Resources also disappointed with its FY15 guidance and scored four downgrades as a result.

In the good books

Macquarie upgraded QBE (QBE) to Neutral from Underperform. While there are plenty of issues facing QBE going forward – North American uncertainty, premium rate cycle pressure, moderating US reserve trends, macro headwinds and equity dilution drag – the broker has upgraded the stock to Neutral from Underperform as Macquarie believes the issues are now all, more than adequately, reflected in the share price.

Credit Suisse upgraded Tower (TWR) to Outperform from Neutral. The first half results were stronger than the broker expected, with higher catastrophe claims offset by higher investment income. Tower has a simpler and cleaner business now and is in a position to capitalise on growth opportunities in a consolidating market.

In the not-so-good books

UBS downgraded Envestra (ENV) to Neutral from Buy. At first glance, the CKI consortium’s $1.32 indicative non-binding cash offer looks appealing to the broker, compared with APA’s (APA) majority scrip offer. UBS does not doubt CKI’s intent, but notes the requirement for approval from all the consortium directors could be a convenient way out. APA’s scheme vote is adjourned until June 13 and it is unclear to UBS in whose court the ball really is. To avoid basing a recommendation on potential counter bids, the broker reflects current valuation and moves to Neutral from Buy.

JP Morgan downgraded Suncorp (SUN) to Neutral from Overweight. In a third quarter trading update, Suncorp signaled a $500 million non-cash write down in the life company and favourable claims trends in general insurance. The insurer downgraded growth targets to 4-6% from 7-9%. The positive aspect for JP Morgan was that capital management is still very much likely. But on balance, there were more negatives than positives.

JP Morgan downgraded National Australia Bank (NAB) to Underweight from Neutral. The broker notes NAB’s margins have been flat since FY07, shifting from an average above peers of 20 basis points to an average of 20 basis points below. While this can, to some extent, be explained by a greater liquidity ratio than peers, the real problem lies in the bank’s business mix and that needs fixing. This will take quite some time, and in the meantime the broker has downgraded NAB to Underweight on a sector basis.

Regis Resources (RRL) got four downgrades following a disappointing FY15 guidance. Credit Suisse downgraded to Neutral from Outperform, Deutsche Bank to Hold from Buy, JP Morgan to Neutral from Overweight and UBS to Neutral from Buy. For UBS, Regis’ FY15 production and cost guidance led to a significant downgrade to forecasts, with production lowered and costs raised. The downgraded production guidance also fell well short of Deutsche Bank’s forecasts with poor grades at Rosemont now reminiscent of the problems first reported at Garden Well. Given the company has had the same problem it now has at Rosemont at Garden Well, JP Morgan feels investor confidence will be further damaged. And Credit Suisse also found the FY15 guidance disappointing, with production revised down to well below the broker’s projections.

Citi downgraded Woodside Petroleum (WPL) to Neutral from Buy following an investor briefing. Citi believes Woodside is delivering on a good strategy. That said, Citi considers there is a disconnect between the industry’s confidence in FLNG technology and market sentiment. The broker envisages the potential upside from further acquisitions or additional special dividends, but will not include these in the target price until announced.

The above was compiled from reports on 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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