Buy, Sell, Hold – what the brokers say

Founder of FNArena
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The week past, ending Friday May 30th, saw a significantly larger number of downgrades to ratings for individual stocks, but the finer detail continues to suggest investors should not fret about it as the majority for both downgrades and upgrades ends up in the Neutral/Hold basket.

In the good books

ALS Limited (ALQ) was upgraded to Neutral from Underperform by Credit Suisse and to Hold from Sell by Deutsche Bank. Credit Suisse upgraded after an extended downgrade cycle and subsequent share price underperformance. The FY14 result revealed management is now more optimistic, and the broker thinks a higher degree of earnings predictability warrants a re-rating. Deutsche Bank found a number of positive aspects to the FY14 result with conditions seeming to improve. Cash flow generation remains strong. The mining market may be challenging and there are risks to the expectations for a second half FY15 recovery in geochemistry sample flows but the broker thinks the investment risk profile is now balanced.

 

 

Drillsearch Energy (DLS) was upgraded to Neutral from Underperform by Macquarie. Macquarie has used a general update on the Cooper basin to raise its rating to Neutral from Underperform, pointing out the company’s wet gas strategy seems to be playing out. With up to 19 conventional wells anticipated over the next 12 months, successful drilling results could help justify the premium valuation that is currently baked into the share price.

New Hope (NHC) was upgraded to Hold from Reduce by CIMB Securities. The company has reported quarterly saleable coal production of 1.5mt, 11% ahead of CIMB’s estimate. Sales were actually down 17% on the prior corresponding quarter because of the uneven timing of shipments. CIMB upgrades to Hold from Reduce after the fall in the share price but prefers Whitehaven Coal (WHC) given its more certain production growth profile.

Stockland (SGP) was upgraded to Buy from Hold by Deutsche Bank. The broker estimates that the revised takeover proposal for Australand (ALZ) remains value destructive for Stockland. At least now that the offer is declared final, Stockland has provided some certainty on its position. Deutsche Bank still prefers a sale of Stockland’s stake. The stock has underperformed and is now attractively priced, even allowing for the value erosion, so the broker upgrades to Buy from Hold.

Wesfarmers (WES) was upgraded to Add from Hold by CIMB Securities. The past 12 months have been uncertain for the company. CIMB observes unscheduled outages, divestments and a deteriorating coal price. But the latest strategy briefing has provided clarity on a number of issues and, as a result, CIMB upgrades to Add from Hold.

In the not-so-good books

Challenger (CGF) was downgraded to Sell from Hold by Deutsche Bank. The strong performance over the past year was driven by the growth in lifetime annuities. This may be appealing but the broker believes the company runs the risk of underestimating funding costs and overstating profits. Taking this into account, the spread margins look like continuing to fall and constraining free cash-flow growth as capital intensity rises.

Leighton Holdings (LEI) was downgraded to Underweight from Neutral by JP Morgan. The broker has been restricted on making a recommendation given its involvement in the Hochtief bid but is now back to downgrade Leighton to Underweight from Neutral. On the one hand, the business faces challenges provided by high gearing in a weakening Australian resources spending environment and on the other, Hochtief control adds uncertainty. The broker does not believe shareholders are being fairly compensated for the risks at the current share price.

National Australia Bank (NAB) was downgraded to Underweight from Neutral by JP Morgan. The broker notes NAB’s margins have been flat since FY07, shifting from an average above peers of 20bps to an average of 20bps 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.

SAI Global (SAI) was downgraded to Reduce from Hold by CIMB Securities. Pacific Equity Partners has made an indicative proposal for SAI Global at $5.10-25 a share. The company’s CEO has also been terminated following differences of opinion with the board. CIMB believes the PEP offer looks appealing on the surface but, given the small upside on offer and the fact that several medium-term earnings risks are still in place, there is large downside if the bid does not proceed.

Skilled Group (SKE) was downgraded to Hold from Add by CIMB Securities. CIMB has reviewed the drivers of revenue across each of the company’s three divisions. Expectations for marine earnings are lowered. Growth appears harder to achieve as the broker thinks the scaling back of the work related to Gorgon will not be fully replaced by a ramp up in the Saipam/Inpex contract. FY15 earnings forecasts are cut by 19%.

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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