Buy, Sell, Hold – what the brokers say

Founder of FNArena
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The story for the Australian share market remains the same as investors and analysts start looking forward towards the upcoming reporting season. Incorporating lower estimates for commodity prices, in some cases, leads to downgrades in ratings, but outside this specific adjustment, the underlying picture remains supportive of ongoing strength.

In the good books

Macquarie Atlas Roads (MQA) was upgraded to Hold from Sell by Deutsche Bank. The company will acquire an extra 0.7% stake in APRR. Additionally, the distribution guidance of 8.3c for the second half is higher than the broker expected. Given the company is trading at a 5% yield and over an 8.3% rate of return, Deutsche Bank is upgrading.

Sonic Healthcare (SHL) was upgraded to Add from Hold by CIMB Securities. CIMB expects further synergistic acquisitions in Germany and has performed a scenario analysis to better determine the financial impact. The broker also believes the FY14 earnings guidance is achievable with abating FX headwinds. While acknowledging upside risk to forecasts, estimates are not changed based on the re-analysis. However, valuation metrics have been rolled forward and the target increases to $18.89 from $17.04

In the not-so-good books

AGL Energy (AGK) was downgraded to Underperform from Neutral by Macquarie and to Neutral from Buy by UBS. The company expects to achieve the lower end of its FY14 guidance of $560-610 million and has indicated FY15 results will be affected negatively by the withdrawal of the carbon tax subsidy and LPG. This should be offset by strong growth in the rest of the business. Macquarie observes the retail market is weak and forward electricity prices are falling. LNG delays are also having an impact. Following the revisions, UBS downgrades the rating to Neutral from Buy and the target to $15.56 from $19.14.

Atlas Iron (AGO) was downgraded to Neutral from Buy by UBS. UBS has re-modelled Atlas Iron to incorporate an impurity discount of US$7.00/dmt, although the broker estimates it widened to US$11.00/dmt in the June quarter. The net result is a 37% reduction in FY14 earnings and 155% reduction for FY15. The rating is downgraded to Neutral from Buy, given the drop in valuation and a view that the market is unlikely to ascribe any value to the Horizon 2 project in the current environment.

Macquarie Group (MQG) was downgraded to Underweight from Neutral by JP Morgan. Macquarie’s share price has outperformed international investment banks by some 10% since the FY14 result. But the broker notes FY15 will likely not see another big jump in US gas trading given the unusual 2014 winter, there will be no Sydney Airport distribution this time, and the A$ has crept up.

SEEK (SEK) was downgraded to Neutral from Outperform by Credit Suisse. The broker is surprised SEEK’s share price has held up near its highs despite the lower multiple implied by the Zhaopin IPO. SEEK’s fortunes swing on its international assets and risk around their multiples has now increased. The broker has reduced the valuation premium it assumes for quality online growth stocks.

Virgin Australia (VAH) was downgraded to Sell from Neutral by UBS. The June quarter appears to have been particularly tough and UBS is increasing FY14 pre-tax loss estimates to $240 million. Looking ahead, unit cost control is the major focus but will remain a challenge as capacity growth moderates, in the broker’s opinion. UBS reduces the rating to Sell from Neutral, given the share price has risen above valuation. The target is lowered to 35c from 36c.

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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