Buy, Sell, Hold – what the brokers say

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A mixed bag from the brokers this week, with downgrades continuing for a number of resources companies, and upgrades for companies in the consumer discretionary sector. Woolworths was a notable downgrade, on valuation grounds and ongoing concerns about its Masters hardware business.

In the good books

Village Roadshow (VRL) was upgraded by Macquarie from Neutral to Outperform, noting the company has an enviable portfolio and remains the market leader in each of its businesses. 2015 is expected to be a significant year for the box office and the outlook for Village Roadshow’s distribution business is improving. The stock is now trading at more than a 20% discount to peer Ardent Leisure (AAD) and the broker thinks this is a buying opportunity. The price target is raised to $8.50 from $7.60.

Credit Suisse upgraded Aristocrat Leisure (ALL) to Neutral from Underperform. The broker admits it has erred to the conservative side on gaming stocks to date, favouring lower PEs and lower growth, but strong cash flow, over high growth risks. But the broker believes Aristocrat’s VGT acquisition is transformational, being highly accretive and allowing ALL to harvest cash flow to pay down debt. A potential risk is VGT’s high profit margin on a low customer base, given one little change in gaming machine yield assumption can affect an exponential change in value, but the broker assumes short term yield trends will be benign. Target rises to $6.00 from $4.80.

Webjet (WEB) was upgraded by JP Morgan to Overweight from Neutral. The target is reduced to $3.00 from $3.30. JP Morgan envisages upside risks to earnings if the company is successful with ZUJI and Lots of Hotels. Some of this risk is mitigated by the longer-term structural risks in the sustainability of the business model. Many investors have raised concerns about consumers eventually refusing to pay the high services fees, especially with new entrants providing alternatives. JP Morgan agrees with this and thus factors in declines in the core Webjet branded business, as well as attributing only 10% probability to the stock surviving past 10 years.

Going against the trend for resource stocks (see below), PanAust (PNA), Credit Suisse upgraded PNA to Neutral from Underperform. The broker notes 2014 production guidance is maintained, despite weaker June quarter production, as initiatives are continuing to increase the annualised mill rate. There was no meaningful update on the GRAM offer in the broker’s view, other than the fact that due diligence is continuing. Credit Suisse upgrades the rating to Neutral and raises the target to $2.30 from $2.20.

The other brokers are generally more bullish on PNA, with JP Morgan, Macquarie and UBS reaffirming Overweight, Outperform and Buy ratings respectively.

In the not so good books

Woolworths (WOW) was downgraded to Neutral from Outperform by Credit Suisse. Masters JV partner Lowe’s holds a put option, implying Lowe’s can sell its share to Woolies. This is always a risk, the broker notes, but unlikely to occur while Masters is performing so poorly. The risk is for further underperformance. Woolies’ recent rally has been all supermarket-led, the broker suggests, without much consideration given for the Masters drag and potential further cost required to do something about it. Valuation is now sufficient for the broker to pull back to Neutral. Target retained at $38.25.

Fortescue (FMG) was downgraded to Hold from Add by CIMB Securities. Fortescue’s pre-released production report showed 124mt shipped in the June Q at an average realised price US$22/t below the benchmark fines price, although the broker expects that discount to reduce over the medium term. Higher depreciation sees the broker trim its earnings forecasts. Target is nevertheless unchanged at $4.35 and given FMG’s recent share price bounce, the broker has downgraded to Hold suggesting the risk/reward is evenly balanced.

Brokers remain very positive about Fortescue, with BA-Merrill Lynch, Citi and UBS maintaining a Buy rating, and JP Morgan an Overweight call. Credit Suisse is Neutral.

Sirius Resources (SIR) was downgraded by Citi to Neutral from Buy. The broker initiated coverage of Sirius in May with a Buy rating, and since then the share price has appreciated. The Definitive Feasibility Study provides the broker with the assumption of a 70/30 debt/equity split on project funding, so incorporating this and the share price run, the broker has decided SIR is now fairly valued, notwithstanding exploration upside. The broker thus downgrades to Neutral. Target falls to $3.70 from $3.90.

Macquarie reaffirmed an Outperform rating for Sirius, and UBS a Buy rating.

BA-Merrill Lynch downgraded Perseus Mining (PRU) to Underperform from Neutral, retaining a $0.40 target. The price has run up strongly in recent months because of improving gold sentiment but the high costs, admin and tax rate mean margins remain negative, in the broker’s view. Merrills wants to see more runs on the board before becoming comfortable the company has overcome its production challenges.

Maverick Drilling and Exploration (MAD) was downgraded to Hold from Add by CIMB Securities. The asset review has concluded the best path is to acquire and develop new assets to best use funds, rather than pursue growth from the existing portfolio. Longer term, the broker backs the new management team to create value. Until there is greater clarity regarding growth options, CIMB moves to a Hold rating. The target is downgraded to 19c from 60c.

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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