Buy, Sell, Hold – what the brokers say

Founder of FNArena
Print This Post A A A

Mining and resources stocks dominated the downgrades in the later part of last week with Downer EDI getting three downgrades after it lost a major source of business. Kathmandu received an upgrade after at least one broker found renewed confidence in the retail outlook and Invocare received an upgrade on the unhappy news that the number of deceased should revert to trend.

In the good books

Orora (ORA) was upgraded to Buy from Neutral by Citi. A combination of earnings stability, limited capex and strong cash flow should allow the stock’s leverage ratio to fall sharply. As the longer-term agenda is yet to be determined, the broker thinks this should provide an ideal opportunity for capital management. Citi has reduced FY14 and FY15 profit forecasts and adjusted risks, leaving open the potential for an upside surprise.

 

 

Invocare (IVC) was upgraded to Neutral from Sell by Citi. Over the past 12 months the stock has declined 17% in absolute terms and underperformed the S&P/ASX200 Healthcare Index by 21%. Citi expects, after a weak FY13, the number of deaths will revert to trend in FY14 and earnings growth should improve accordingly.

Kathmandu (KMD) was upgraded to Outperform from Underperform by Credit Suisse. Credit Suisse has revisited the outlook for Kathmandu, which suggests the company is benefiting from the resilience of the outdoor sector and is increasingly emphasising brand, ranges and quality. These supporting factors lend more confidence to the broker’s view and the rating is upgraded to Outperform from Underperform, taking into account the recent fall in the share price.

Ramsay Health Care (RHC) was upgraded to Outperform from Neutral by Credit Suisse after the company provided more details about the acquisition of 83.43% of Generale de Sante. Credit Suisse thinks the metrics are reasonable and, strategically, the acquisition provides longer-term exposure to a hospital system with a number of attractions such as universal health care coverage and choice public and private.

In the not-so-good books

ALS Ltd (ALQ) was downgraded to Sell from Hold by Deutsche Bank. The FY14 result revealed improving organic revenue growth but Deutsche Bank believes this is more than reflected in the share price. There is also the risk of disappointment in management’s expected recovery of geochemistry volumes.

 

 

Downer EDI (DOW) was downgraded to Neutral from Buy by Citi, to Underperform from Neutral by Credit Suisse and to Neutral from Buy by UBS.

BHP-Mitsubishi’s early termination of Downer’s Goonyella coal contract not only wipes out 7% of mining work in hand and 2% of group earnings but Citi notes it brings into question the future of the company’s contract at the similarly sized Blackwater mine. The broker has cut forecast earnings by 6% and 9% in FY14-15. In the absence of a material recovery in the coal price, Credit Suisse suspects the trend to in-house operations and a reduction in pre-stripping could become more broadly based, which implies ongoing risk to Downer’s contract mining. While accepting that Downer has executed strongly in a difficult environment and there are opportunities inherent in a strengthening balance sheet, UBS thinks the trend of taking jobs in house and scope reductions will continue.

Skilled Group (SKE) was downgraded to Neutral from Outperform by Credit Suisse. The broker has reduced FY15 earnings estimates by 14%, based on a more cautious view on both workforce services and engineering and marine. Credit Suisse acknowledges the valuation is undemanding but remains torn between two views. These are “Buy, with time on your side” or “Hold on and wait for the upside”. Current operating conditions mean the rating veers to the latter.

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.

Follow the Switzer Super Report on Twitter

Also in the Switzer Super Report:

Also from this edition

View More Articles