Buy, Sell, Hold – what the brokers say

Founder of FNArena
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Above the surface, last week was all about brokers adjusting for lower-than-expected bulk commodities prices in the first two quarters of the calendar year.

On the positive side, equities remain supported by ongoing positive developments at companies accompanied by turnaround fortunes for energy stocks and selected miners.

In the good books

Crown Resorts (CWN) was upgraded to Neutral from Underperform by Credit Suisse. Declining Macau revenues have sent Crown’s share price south of late and the broker has lowered earnings forecasts by 4-9% but expects MPEL to rebound after overcoming a bad debt situation and as gambler focus redirects from the World Cup. In Australia, VIP has not seen the same weakness as in Macau but soft consumer sentiment has hit mass gaming. A drop in price down to close to the broker’s target has prompted an upgrade to Neutral.

Credit Suisse upgraded Myer (MYR) to Outperform from Neutral, believing the stock to be inexpensive with a defensible dividend yield. The broker also expects the financial performance will improve in FY15. The target is raised to $2.40 from $2.25. Credit Suisse thinks recent management changes provide an opportunity to create more proactive and internationally benchmarked merchandise and marketing strategies, as well as elevate e-commerce.

Nufarm (NUF) was upgraded to Neutral from Sell by Citi. The broker has changed analysts for Nufarm and has increased the target to $4.65 from $4.20. Earnings forecasts have been trimmed to reflect US weakness but balance sheet improvements and the prospect of solid FY15 growth, particularly in Latin America, should offer share support.

Wotif.com (WTF) was upgraded to Neutral from Sell by Citi and to Neutral from Underperform by Credit Suisse following the bid by Expedia. Expedia has offered $3.30 a share for Wotif.com and secured an option to acquire 19.9% from the founders in the case that a rival bid is made and Expedia matches the offer. Citi thinks the likelihood of a rival bid is low. The broker thinks it is a good time for Expedia to increase its investment in Australia when domestic tourism is at cyclical lows, given the strong Australian dollar. Credit Suisse believes the board and key shareholder support for the Expedia offer and the trading update confirms the increasing competitive pressure on Wotif.com. It thinks the bid is opportunistic, given Wotif.com was trading at over $4.00 a share back in December.

In the not-so-good books

Acrux (ACR) was downgraded to Underperform from Neutral by Macquarie. Competition is intensifying, generics are entering the testosterone market and Macquarie has decided to downgrade to Underperform from Neutral. Generics that are entering the market will not be exactly interchangeable with Axiron but Macquarie suspects they will be used as a bargaining tool to reduce branded prices.

Energy Resources (ERA) was downgraded to Underperform from Outperform by Credit Suisse. ERA’s production report revealed results for Ranger Deeps drilling that the broker considers to be poor. It appears that mining Deeps will be more expensive than earlier assumed and the broker suggests upside potential from the project now appears to have “vanished”. ERA is a binary call, the broker points out, hinged on whether Deeps goes ahead or it doesn’t. The latter is becoming increasingly more likely, hence the broker has double downgraded to Underperform from Outperform and dropped its target to 50c from $1.50.

Iluka Resources (ILU) was downgraded to Underperform from Neutral by Macquarie. Macquarie thinks Iluka is poorly placed in a rapidly evolving market where large scale, upstream ilmenite producers are set to benefit. The broker acknowledges there is a lot to like about the stock, as it offers leverage to rising mineral sands prices, but envisages significant risk to medium-term earnings estimates.

Pacific Brands (PBG) was downgraded to Sell from Neutral by UBS. Pacific Brands’ CEO has quit over strategic differences with the board. The broker wonders whether more executives might follow him out the door. Meanwhile PBG has sought outside advice, and the broker believes it will press on with cost restructuring and other strategies while courting takeover suitors before appointing a new leader. The broker can’t see anyone stepping up, and has downgraded to Sell as the business deteriorates.

Regis Resources (RRL) was downgraded to Underperform from Neutral by Credit Suisse. Ahead of the company’s quarterly update, although no date has been set, Credit Suisse aligns long-term grade assumptions with FY15 guidance and adds a notional $20 million transaction value for McPhillamys. Credit Suisse expects the next reserve statement to reflect a decline in reserve grades to those outlined in the FY16 guidance.

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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