Buy, Sell, Hold – what the brokers say

Founder of FNArena
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Strong share market gains have been met by a wave of downgrades in ratings for individual stocks by securities analysts. The market is pricing in future growth, while analysts are being left with a general feeling that growth is not yet materializing.

The tension between these two opposing forces is also apparent in responses to local bank results. While price targets for ANZ Bank and National Australia Bank have moved higher, alongside increased estimates, both banks received downgrades in ratings on the back of strong share price gains.

In the good books

Kingsgate Consolidated (KCN) upgraded to Neutral from Sell by Citi. September quarter production was in line with the broker’s expectations. FY14 guidance of 190-210,000 ounces implies no growth on FY13 and the broker thinks that getting the Thai IPO away on attractive terms will be hard. Hence, the planned debt restructure and funding for growth at Nueva Esperanza and Bowdens is uncertain but the recommendation was upgraded as reasonable valuation support is seen emerging.

Woolworths (WOW) was upgraded to Neutral from Underperform by Credit Suisse and to Overweight from Underweight by JP Morgan. First quarter sales in food and liquor were solid, but Credit Suisse thinks the September result was mixed. Discretionary business was poor, although unlikely to negatively impact FY14. Woolworths is seen juggling a number of challenges and opportunities across the discretionary retail business. Credit Suisse upgraded to Neutral from Underperform after valuation adjustments. Woolies’ September quarter sales growth fell short of JP Morgan, but was of good quality with a solid performance from food and liquor. Issues still remain with weak hotels and Big W, a struggling Masters and competition from Aldi, but food and liquor momentum is improving and that’s 83% of earnings, the broker notes.

In the not-so-good books

Asciano (AIO) was downgraded to Underperform from Neutral by Macquarie. The message Macquarie received from the first quarter update is that there’s little sign of an economic recovery. Management did maintain guidance for positive underlying earnings growth but below FY13, implying 0-13%. The weak outlook points to a downside risk to expectations.

BT Investment Management (BTT) was downgraded to Neutral from Buy by UBS. The FY13 result showed the strong growth trajectory and UBS expects the breadth and quality of the fund offering should support flow and FUM momentum. This is now factored into forecasts so there’s little room for disappointment.

Fortescue Metals (FMG) was downgraded to Sell from Hold by Deutsche Bank. The broker has undertaken a comparison of Pilbara iron ore majors Fortescue, BHP Billiton (BHP) and Rio Tinto (RIO). Using numerous financial metrics, the broker concludes FMG is expensive on a net present value basis given long-run earnings margin expectations. FMG is de-gearing rapidly but financial risks remain.

Lend Lease (LLC) was downgraded to Neutral form Outperform by CIMB Securities and to Neutral from Buy by UBS.

CIMB agrees with peers elsewhere and with management at Lend Lease that the future looks bright and solid growth should be on the horizon. Unfortunately, the sale of its stake in the Bluewater Project is likely to be deferred to FY15, which triggers an adjustment in forecasts. CIMB has come to the conclusion that investors are likely going to remain cautious until a clearer picture emerges on what FY16 is going to look like. UBS expects Lend Lease to benefit from the improving macro environment but it will take some time.

National Australia Bank (NAB) was downgraded to Neutral from Outperform by CIMB Securities. CIMB was positioned above consensus and thus NAB’s FY13 report fell short. Making matters worse is that the analysts see limited scope for upside surprises and/or further re-rating for the shares. CIMB has cut EPS forecasts by 3.2% in FY14 and 4.0% in FY15. The stockbroker’s “blended target” falls 3.7% to $34.40. CIMB thinks the market will start focusing on the “worries” again, including life insurance in Australia, on the other hand, NAB’s growth should outpace the peers. ANZ Bank is preferred in the sector.

Stockland (SGP) was downgraded to Hold from Buy by Deutsche Bank. The AGM commentary confirmed further residential volume improvement in the September quarter. Deutsche Bank believes the company is on track to slightly exceed the top of the guidance range of 4% to 6% earnings growth in FY14. The rate of growth is considered priced into the shares and the rating is downgraded to Hold from Buy.

Transfield Services (TSE) was downgraded to Neutral from Outperform by Macquarie. Transfield has had a good run in the last two months and Macquarie thinks some profit taking might be in order. The company reiterated guidance at the AGM for profit of $65-70 million and the broker believes a big second half is required even more so this year because of the timing of restructuring costs. The rating is downgraded to Neutral from Outperform and the price target is raised to $1.58 from $1.16.

The FNArena database 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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