Buy, Sell, Hold – what the brokers say

Editorial director of Switzer
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Brokers were much more positive this week with retailers like David Jones and Billabong getting upgrades, after some improvements in sales by the department store and a new debt facility for the surfwear company. DJS first quarter numbers took a couple of brokers by surprise.

In the good books

Citi upgraded Billabong (BBG) to Neutral/High Risk from Sell/High Risk after Billabong announced it had secured a $360 million term loan from Centrebridge and Oaktree. The company has also sold Canadian retail chain West 49. The sales feedback from some customers is mixed, with weaker trends in the Americas. Billabong is not expected to generate meaningful earnings until FY16, given the proposed recapitalisation.

CIMB Securities and Credit Suisse both upgraded David Jones (DJS) to Neutral from Underperform after it announced improved sales in the first quarter. CIMB upgraded expectations by 4% in FY14 and 1% in FY15. The improvement was assisted by a warm start to Spring. Although the stock’s valuation is considered excessive, relative to the discretionary stocks, CIMB has taken the opportunity to raise the rating to Neutral from Underperform.

Credit Suisse analysts were also pleased with the company’s Q1 update, citing “solid sequential improvement in like-for-like sales”. Credit Suisse believes the risks associated with owning equity in the upmarket retailer have shifted into neutral territory, hence the upgrade in rating.

UBS upgraded Downer EDI (DOW) to Buy from Neutral, after upgrading earnings forecasts. The increase of 6-8% in FY14-16 estimates is largely a result of upward revisions to mining margin estimates, and incorporating the $400 million contract at Wheatstone LNG, as well as some small road maintenance contracts. The broker finds the stock compelling value at its current FY14 price/earnings of 10 times.

UBS upgraded Fortescue Metals (FMG) from Neutral to Buy after the company hosted a site visit. While market confidence in China is high, the company sees near-term iron ore price risks. Earnings are expected to ease by 4% in FY14 and 13% in FY15 as a result of higher depreciation and amortisation. Despite this, UBS expects iron ore prices to average above US$100/dmt for the next 18-24 months. This underpins cash flow and should enable de-gearing.

In the not-so-good-books

Credit Suisse downgraded Investa Office Fund (IOF) to Neutral from Outperform, as UBS downgraded the fund to Neutral from Buy. Credit Suisse was disappointed with the price the fund got for its minority interest in Dutch Office Fund. The main positive, in their view, is that IOF is transforming itself into an Aussie-only office REIT.

UBS says the sale price of EUR155 million for Dutch Office Fund reflects a discount to the net asset value of 24% and a 15% discount to the carrying value. Pricing was below UBS’s expectations and the sale has come earlier than expected but, ultimately, it will be what the company does with the proceeds that will be of interest. On UBS estimates, acquisitions of $400 million in Australian assets could offset the earnings dilution.

The above was compiled from reports on the FNArena database, 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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