Buy, Sell, Hold – what the brokers say

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The health sector was in focus in the early part of this week with Macquarie noting the continued dominance of the supermarkets in the pharmaceutical space and downgrading Australia Pharmaceutical and Sigma. Ramsay was luckier with BA-Merrill Lynch upgrading after a review of its recent French acquisition.

In the good books

Macquarie upgraded fund manager Henderson Group (HGG) to Outperform from Neutral. The broker notes 80% of Henderson’s funds are outperforming over one and three years but this is not reflected in the current share price, given concerns around European political risk. The broker believes performance and inflows offset macro and regulatory risks.

BA-Merrill Lynch upgraded Ramsay Health Care (RHC) to Buy from Neutral after reviewing the acquisition of Generale de Sante. A more positive view of the value of the French business is based on the procurement savings in the next three years and greater margin leverage from volume growth. Merrills thinks Ramsay can leverage a comparable lower cost now that it has purchasing power in France and drive up to $100 million in savings in Ramsay Australia over the next two to three years.

In the not-so-good books

Macquarie downgraded Australia Pharmaceutical Industries (API) to Neutral from Outperform. With supermarkets moving more aggressively into the health and beauty space, which the broker estimates represents around 30% of pharmacy sales, more pharmacy insolvencies and distributor bad debts may result and Aust Pharma’s own Priceline franchises will come under increased competitive pressure. Cost controls and sales growth mean API should hit the top end of guidance in the short term, the broker notes, but longer term the outlook is less certain.

Macquarie downgraded Sigma Pharmaceutical (SIP) to Neutral from Outperform for the same reasons that it downgraded Australian Pharmaceutical. Sigma has reduced the potential impact of supermarket dominance through various measures including tighter credit controls. The broker remains positive on SIP’s longer term outlook but near term structural headwinds are making current valuation look a bit stretched.

Iluka Resources (ILU) was downgraded to Underperform from Neutral by Credit Suisse. Disappointing sales in the first half have led Credit Suisse to downgrade its rating to Underperform from Neutral. The company has advised that 2014 sales may only match 2013’s 370,000t. The broker slashes zircon sales forecasts across the forward estimates with a view that 300-500,000 tonnes per annum is looking like the new norm.

Seek (SEK) was downgraded to Sell from Neutral by UBS. UBS has initiated coverage of Seek’s 67% owned Chinese subsidiary Zhaopin following its IPO. The broker has put a Buy rating on Zhaopin, but has downgraded parent Seek to Sell on the local market. The Zhaopin IPO has left Seek in a stronger position to drive growth, but it failed to crystallise value for shareholders.

The above was compiled from reports on FNArena, which 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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