Buy, Sell, Hold – what the brokers say

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There were more upgrades than downgrades in the first half of the week with the retail sector and IT getting some positive re-ratings.

JB Hi-Fi was upgraded on expectations that the company will be able to handle the challenges ahead while iiNet was also upgraded to Buy partly based on its M&A potential.

In the good books

Macquarie upgraded JB Hi-Fi to Outperform from Neutral. Macquarie has looked at the issues affecting the company over the next few years. While near-term sales are likely to remain under pressure, the broker thinks the group is well placed to grow earnings with the store roll-out and incremental earnings from HOME.

Citi has upgraded iiNet to Buy from Neutral. Citi thinks iiNet is benefitting from positive momentum as the fixed broadband market continues to grow. The broker upgrades earnings forecasts by 7% for FY15 and 15% for FY16. Citi previously hesitated on the stock because of a lack of subscriber growth but the company appears to have addressed this. The broker considers the stock attractive with positive free cash flow and potential upside from M&A.

Credit Suisse upgraded Super Retail (SUL) to Neutral from Underperform. The company is downgrading expectations for FY14, because of a sharp downturn in sales in the fourth quarter. Credit Suisse thinks the slowing momentum is suggesting downgrades to FY15 forecasts of 5-10% but has downgraded its target to $8.60 from $9.50 and the stock is now sitting at $8.40.

JP Morgan upgraded Worley Parsons (WOR) to Overweight from Neutral. JP Morgan believes the company now presents a clear path to earnings growth in the medium term and investors are being more than compensated for the near-term risks, despite the near-term pressures on spending. The broker considers the engineering base and history of working on complex projects leaves the company well placed to win new work over time.

In the not-so-good books

Deutsche Bank downgraded Arrium (ARI) to Sell from Hold because of the significant iron ore price risk, and risk to the balance sheet associated with reduced earnings. The steel manufacturing business is also continuing to underperform. The target is lowered to 65c from $1.00. Deutsche Bank’s FY15 iron ore price expectations have declined 10% to US$89.3/t, 4.5% below the current spot price. The broker does not think Arrium is at risk of breaching covenants but an iron ore price of US$75/t would require an equity raising.

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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