Buy, Sell, Hold – what the brokers say

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Commodity prices dominated broker activity this week as the iron ore price continued to fall. Credit Suisse downgraded its iron ore forecasts across the industry but the outlook for Nickel is much more encouraging.

In the good books

UBS upgraded Coca Cola Amatil (CCL) to Neutral from Sell. The broker has reviewed its valuation of the company’s Indonesia & PNG business and despite weakness execution by CCL, has upgraded by 36% on an increased enterprise value multiple. That said, the broker expects CCL to post a weak FY14 result and notes the need for the company to cut costs, get its pricing right and diversify away from fizzy drinks.

Credit Suisse upgraded Panoramic Resources (PAN) to Neutral from Underperform. The stock has plenty of nickel leverage given a relatively high cost position. Credit Suisse has made significant upgrades to nickel price forecasts and this means FY14 earnings forecasts swing from a modest loss to a modest profit.

Macquarie has upgraded Westfield Corporation (WFD) to Outperform from Neutral. Westfield Corporation is the new look Westfield Group post the Scentre Group (SCG) restructure. The focus on offshore assets will increase WFD’s return on equity above that of the old WDC, although in the near term the market will still have to digest dilutive asset sales. WFD is not a compelling proposition, the broker admits, but offers a return profile sufficient to prompt an “upgrade” to Outperform.

In the not-so-good books

Credit Suisse downgraded Atlas Iron (AGO) to Underperform from Outperform. The broker slashes the valuation because of the fall in the iron ore price and the expansion of quality discounts. The twin impacts reduce earnings forecasts by 60%. The broker has revised iron ore price forecasts down by 7-10% and expects Atlas will incur net debt in FY15 but, provided it withholds dividends and does not incur additional capex, it should return to net cash in FY16.

Arrium (ARI) was also downgraded to Underperform from Neutral by Credit Suisse on downgrades in earnings and valuation, driven by lower iron ore price assumptions. The broker also reduces the steel segment earnings forecasts and mining consumables tonnage. Cash realisation from continuing asset sales is now even more important.

And Fortescue Metals Group (FMG) also got the downgrade treatment from Credit Suisse – to Neutral from Outperform – in the face of falling iron prices and expanding quality discount. The broker’s new iron ore price forecasts are 7-9% lower. Credit Suisse cannot see any catalyst to lift the share price in this environment and downgrades the rating. The price target is lowered to $5.00 from $7.00.

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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