Buy, Sell, Hold – what the brokers say

Founder of FNArena
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Resources (and related) stocks feature prominently on both positive and negative sides of reviews and re-assessments. Remarkable is that overall changes to price targets remain overwhelmingly positive and the same goes for earnings forecasts ex-resources with the likes of Lend Lease, Scentre Group, Sirtex Medical and Brickworks – all industrials! – enjoying ongoing improvement.

In the good books

OZ Minerals (OZL) was upgraded to Outperform from Neutral by Credit Suisse. The first reserve estimate from Malu underground drives a modest positive upgrade to the broker’s valuation. The reserve grade of 1.5% copper is above the broker’s estimates but the reserve gold grade of 0.6g is lower. First stope (stage) ore is expected in the December quarter with ramp up to full production to take 12 months. See also OZL downgrade.

Resolute Mining (RSG) was upgraded to Buy from Neutral by Citi after transferring coverage to another analyst. The rating is upgraded to Buy and the High Risk removed because of increased political stability in Mali, where the delivery of the Syama expansion project could push the production rate up substantially in FY15. Valuation has increased because the broker applies a lower discount rate of 10% compared with 14% previously, to reflect the de-risking in Mali and to align the stock with other gold company valuations.

Santos (STO) was upgraded to Buy from Neutral by UBS after the tour of the GLNG operations. The broker is more confident in the delivery timeframe and capex estimates after 2015. More gas purchases coming through should also enhance cash flow. Meanwhile, the share price has significantly underperformed peers. The broker thinks the stock has more upside to the target than either Oil Search (OSH) or Woodside (WPL).

Tatts (TTS) was upgraded to Outperform from Neutral by Macquarie and to Buy from Neutral by UBS. The company has reached an in-principle agreement with the Queensland government over a new framework for race and sports betting. Macquarie had expected a less favourable outcome but the earnings upside from the deal outweighs the fees it has paid for extending wagering-related licences. The announcement comes a day after the company won in the Victorian Supreme Court and the broker’s rating is upgraded to Outperform from Neutral. This issue has been a drag on the company’s share price and UBS believes the outcome of the agreement is significantly better than expected. The stock is trading at a slight premium to the market, which UBS thinks is justified. The rating is upgraded to Buy from Neutral. (see Shortlisted).

WorleyParsons (WOR) was upgraded to Buy from Neutral by BA-Merrill Lynch. The broker is aware of the risks in calling an end to the three-year downgrade cycle but more positive about the outlook for hydrocarbons investment in the next five years. Merrills also notes a greater reliance on engineering expertise to deliver more complex projects, as well as structural margin improvement. The broker’s forecasts incorporate a sustainable margin improvement, highlighting that every 50 basis points of improvement adds $1.50 to valuation.

In the not-so-good books

Fortescue Metals (FMG) was downgraded to Neutral from Outperform by Macquarie, citing an underwhelming reserves report, slower pace of de-gearing and exposure to larger 58% discounts.

National Australia (NAB) was downgraded to Neutral from Outperform by Macquarie, given the material risk to its IT delivery time lines and risk to banking revenue from these delays.

Orotongroup (ORL) was downgraded to Neutral from Buy by Citi, as the stock is no longer a bargain, having rallied 22% over the past four months. The FY14 result is unlikely to push the shares any higher, in the broker’s opinion, as the latest season has been tough. While sales trends have been solid enough, the company has had to promote to achieve a result. Citi observes total sales for FY14 will also be affected by refurbishments. The broker wants to see more evidence of success with new brands.

OZ Minerals (OZL) was downgraded to Sell from Hold by Deutsche Bank. The maiden reserve for Malu underground largely supports the previously released development plan and the majority of the parameters are similar to Deutsche Bank’s assumptions. Operating costs and ongoing development capex are higher than initial estimates and further reduce the broker’s negative valuation on the project. See also OZL upgrade.

ResMed (RMD) was downgraded to Hold from Buy by Deutsche Bank. US Medicare has issued the competitive bidding round three proposals. Deutsche Bank thinks, while there is the possibility the proposals will be knocked back, if implemented widely they could materially slow mask sales growth in the medium term. The broker reduces the rating, given the shares are trading near the price target and valuation.

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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