Buy, Sell, Hold – what the brokers say

Founder of FNArena
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At face value, the story for the Australian share market remains one of noticeably more downgrades than upgrades. But look beyond the persistent negative trend in stock ratings and a decidedly supportive picture emerges. In terms of price targets, increases were mostly significant with stocks like Panoramic Resources, Ardent Leisure, Treasury Wine Estates and Caltex all enjoying solid increases in their broker price targets during the week of at least 5% (and as high as 10% for Panoramic).

Even the number eight on the list, Alacer Gold, still enjoyed an increase of 1%.
As a comparison, Henderson Group tops the target list on the negative side with a reduction of less than 2%.

In the good books

Alacer Gold (AQG) was upgraded to Overweight from Neutral by JP Morgan. The broker believes Alacer to be the standout in the Australian gold sector, despite share price falls. Some risks remain around the Copler sulphide project but this is partly offset by corporate appeal and the long life of the mine. Despite June quarterly production falling 6%, management has reiterated full year guidance.

Ardent Leisure (AAD) was upgraded to Overweight from Neutral by JP Morgan. The company continues the roll out of Main Event – which is the main contributor to the broker’s increased valuation – and has acquired a further eight clubs in WA. The company has raised $50 million from an institutional placement and could raise up to $15 million from a share purchase plan to fund the purchase and roll out. Pre-released FY14 results are above the broker’s forecasts.

Credit Corp (CCP) was upgraded to Overweight from Neutral by JP Morgan. FY14 profit was broadly in line with the broker’s forecast. JP Morgan expects the company to maintain earnings growth in the consumer lending business but envisages some near-term risks to industry returns in the Pay Day Loan (PDL) market.

James Hardie (JHX) was upgraded to Overweight from Neutral by JP Morgan. JP Morgan has revised US forecasts for the building materials sector to account for an expected short-lived hiatus in activity. The investment proposition is now, more than ever, a play on whether the company can reach its target of 35% market share and maintain a 90% fibre cement category share.

Tabcorp Holdings (TAH) was upgraded to Outperform from Neutral by Credit Suisse. Second half earnings were very strong and Credit Suisse has upgraded FY15-16 by 3-4%. The broker observed wagering revenue momentum was excellent and good growth is still expected in FY15. Tabcorp has raised its payout ratio to 90% but will continue with its dividend reinvestment plan. (See also TAH downgrade)

In the not-so-good books

Adelaide Brighton (ABC) was downgraded to Underperform from Neutral by Credit Suisse, to Sell from Hold by Deutsche Bank and to Neutral from Overweight by JP Morgan. The actions follow the company’s acquisition of two concrete businesses and a quarry. Credit Suisse believes the acquisition of the company’s largest independent cement customer is a defensive move to protect its most profitable South Australian market. The balance sheet is now fully utilised and the broker suspects special dividends are becoming more unlikely in the near term. Adelaide Brighton’s acquisitions of concrete and aggregate businesses in SA and Queensland are dilutive and expensive, in Deutsche Bank’s view. There may be some synergies but the broker is not prepared to factor this in and downgrades to Sell from Hold. And JP Morgan says Adelaide Brighton has paid a full price for its recent defensive acquisitions. Risks still linger from the Cement Australia decision not to renew the supply contract from Port Kembla.

Henderson Group (HGG) was downgraded to Neutral from Outperform by Credit Suisse. First half results were below the broker’s forecasts, largely because of a higher tax rate and lower contributions from discontinued operations. Earnings growth is more uncertain, despite strong funds under management growth. The broker has downgraded profit expectations by 11% for FY14 and by 7-8% for the outer years.

Tabcorp Holdings (TAH) was downgraded to Neutral from Overweight by JP Morgan. The FY14 result was marginally ahead of the broker’s forecasts with cash flow stronger than expected. JP Morgan has increased earnings forecasts for FY15 by 2.7%. Despite a solid result, JP Morgan has made a valuation call and downgraded the rating to Neutral from Overweight. The stock is now trading 2% below the broker’s valuation. The price target is raised to $3.70 from $3.65. (See also TAH upgrade)

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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