Things turned noticeably more negative during the week ending Friday 25 August 2014. This as a result of share prices setting new six year highs and the local reporting season unveiling ongoing weakness from the weaker parts in the domestic share market.
FNArena registered no less than 42 downgrades in ratings for the week, significantly outnumbering the 20 registered upgrades. Some companies attracted more than one change in rating and on the positive side we find ARB Corp and Tox Free Solutions in such a position. There are many more in comparable position on the negative side: ASX, BHP Billiton, CFS Property, Mirvac Group, Mt Gibson, Tatts and Wesfarmers.
In the good books
Alumina (AWC) upgraded to Buy from Neutral by UBS.
Accounting for the significant items that led to a loss, Alumina’s underlying earnings solidly beat the broker. Lower costs were nevertheless a result of a timing issue and AWC has not net reinstated its dividend, suggesting more cash flow is needed. The broker was on Neutral, fearing the Indonesian ban on bauxite exports may be removed. But eight months on the ban remains in place despite a change of government. Assuming this continues, the broker suggests it’s only a matter of time before alumina prices rise in concert with bauxite prices. Upgrade to Buy. See also AWC downgrade.
ARB Corp (ARP) upgraded to Hold from Reduce by CIMB Securities and to Neutral from Underperform by Credit Suisse.
FY14 earnings were ahead of the broker. CIMB expects the better-than-expected gross margin can be maintained, despite ongoing revenue headwinds. The broker upgrades FY15 forecasts by 3% but suspects valuation is full, acknowledging the prospect of capital management will provide some support. Rating is upgraded to Hold from Reduce and the target is raised to $12.25 from $11.20. ARB’s FY14 results were just ahead of consensus, with second half earnings not the disappointment Credit Suisse expected. The broker expects capex to remain elevated in the short term, driven by investment in further warehousing capacity and renovation at its Moorebank sales facility. Stock is upgraded to Neutral from Underperform.
CSG (CSV) upgraded to Outperform from Neutral by Macquarie.
FY14 turned out better than expected with restructuring and cost reductions accompanied by improvements for the core operations. Macquarie believes management is making good progress on its turnaround strategy, which means the growth outlook looks strong. Macquarie upgrades the stock to Outperform from Neutral, while bumping up the price target to $1.31 from $1.00. FY15 EPS estimate has gone up by 8%.
PanAust (PNA) upgraded to Buy from Hold by Deutsche Bank.
Interim performance turned out slightly weaker than Deutsche Bank’s expectation. Of more importance, notes the broker, was the news that at least two parties remain actively engaged in due diligence with a resolution possible by early October. Rating upgraded to Buy while the target improves to $2.55 from $2.40.
SMS Management (SMX) upgraded to Add from Hold by CIMB Securities.
FY14 results were weak, but in line with consensus. CIMB notes a stabilising of earnings. A mix of cost savings and renewed discipline on Victorian utilisation rates will drive a return to growth in FY15 for the first time in three years, in the broker’s opinion. The broker upgrades to Add from Hold but emphasises this is not a call on a cyclical recovery, rather just signs of conditions stabilising. Target is raised to $4.30 from $3.98.
Tox Free Solutions (TOX) upgraded to Add from Hold by CIMB Securities and to Buy from Neutral by UBS.
FY14 earnings missed the broker’s forecast. Margin compression was the main reason, driven by a changing mix in the business. The broker would rather wait until infrastructure projects start, but believes the valuation is compelling enough to upgrade to Add from Hold. The result missed UBS as momentum slowed in the second half, partly, but not entirely, due to a timing issue. The ongoing delay to the start up of the Chevron contract and ongoing softness in the Australian economy leads to a cut in earnings forecasts. That said, the broker still expects 17% compound growth over FY14-17. Given the timing issue re Chevron, the broker suggests the share price response was overdone.
In the not so good books
Alumina (AWC) downgraded to Underperform from Outperform by Credit Suisse.
The interim report appeared in line with market expectations but Credit Suisse thought it messy, dominated by the Point Henry smelter closure. There’s lots happening with AWAC but at the end of the day, alumina prices need to rise to make Alumina Ltd a positive investment proposition. CS believes alumina prices look buoyant on the back of Indonesian export restrictions but the share price has rallied hard. As the target is intact at $1.60, there is but one logical decision to make: downgrade to Underperform. See also AWC upgrade.
AMP (AMP) downgraded to Neutral from Buy by Citi.
First half result was a little better than expected. Citi notes wealth protection is stabilising. Cross cycle valuation rises and the broker lifts the target to $6.10 from $5.90. This then suggests there is insufficient upside potential and the rating is downgraded to Neutral from Buy.
ASX (ASX) downgraded to Underperform from Neutral by Credit Suisse and to Neutral from Overweight by JP Morgan.
FY14 results missed the mark for Credit Suisse on both profits and dividend. Estimates are cut on reduced revenues and higher costs plus more depreciation. Partially based upon subdued activity levels, the broker finds the outlook for growth looks quite challenging. Downgrade to Underperform. As the company tries to defend revenues that were once taken for granted, the cost of shifting its business model towards new offerings is increasing amidst a drop off in core revenues, JP Morgan notes. The benefits of elevated capex will take some time to flow through, and in the meantime the broker sees lower levels of market volatility persisting. Downgrade to Neutral.
BHP Billiton (BHP) downgraded to Hold from Add by CIMB Securities and to Neutral from Outperform by Macquarie.
FY14 earnings were slightly below consensus. Confirmation that coal and onshore petroleum are underperforming prior expectations has led CIMB to cut near-term earnings forecasts. Forecasts have not been adjusted to strip out the planned asset spin off, as yet. In light of the uncertainty around the details of a de-merger the broker downgrades to Hold from Add. FY14 was broadly in line with Macquarie, albeit in combination with a tepid increase of 4% in dividends and the absence of a share buyback in return for a spin-off of non-core assets. Macquarie supports the board in making long term oriented decisions and notes that in a cyclical industry such as mining, the board’s objectives of stability can only be achieved through a strong balance sheet. The rating has pulled back to Neutral from Outperform.
Breville Group (BRG) downgraded to Hold from Add by CIMB Securities.
Results were broadly in line with CIMB’s estimates but the headline masked some negative trends in North America. The unexpected departure of the CEO was also a negative surprise. The broker downgrades FY15-16 forecasts by 7% and lowers the target to $7.42 from $9.84. Rating is downgraded to Hold from Add as the broker awaits further clarity around the US business.
CFS Retail (CFX) downgraded to Sell from Neutral by Citi and to Underperform from Neutral by Macquarie.
FY14 results were in line with the broker but FY15 guidance was below. Citi considers the stock to be in a difficult position. Organic growth has slowed and negative leasing spreads in FY15 could represent an even bigger headwind. The stock is trading near multi-year highs with a worsening operating outlook. The rating is downgraded to Sell from Neutral. FY14 distributable income was marginally ahead of Macquarie’s estimates. With a weak outlook, the stock trading at a significant premium to valuation and a distribution policy in excess of free cash flow, Macquarie downgrades to Underperform from Neutral. Target is raised to $2.12 from $2.02.
Coca-Cola Amatil (CCL) downgraded to Underperform from Outperform by Credit Suisse.
First half figures disappointed Credit Suisse. The broker has double downgraded CCL, questioning its strategy of continued commitment to the Indonesian franchise. Earnings are now the focus for Credit Suisse as it can no longer ignore the fact that further downgrades may drag on the share price. Price target is reduced to $9 from $10.80 which is materially below valuation.
Charter Hall Retail (CQR) downgraded to Underperform from Neutral by Credit Suisse and to Underperform from Neutral by Macquarie.
Charter Hall’s FY14 results were just shy of consensus and FY15 guidance was disappointing. Credit Suisse has downgraded the stock to Underperform from Neutral but raised the target price to $3.73 from $3.70. Charter Hall Retail’s FY14 was close to expectations and guidance for the new year confirms growth in FY15 is likely to be modest, comment analysts at Macquarie. The analysts believe CQR offers a relatively defensive yield, supported by neighbourhood shopping malls, but investors have probably been a tad too eager of late. The rating has now been pulled back to Underperform from Neutral.
Mirvac (MGR) downgraded to Neutral from Buy by BA-Merrill Lynch, to Neutral from Outperform by Credit Suisse and to Underperform from Neutral by Macquarie.
Mirvac’s FY14 results were in line with expectations. Merrills has downgraded the stock to Neutral from Buy as, despite the company’s investment portfolio continuing to outperform peers, the broker views this as fully priced in. Growth is likely to be more incremental, with returns from new releases not reaching the bottom line until FY17 or FY18. Credit Suisse has downgraded to Neutral from Outperform following the release of FY14 results in line with expectations. It was the guidance for 1-3% growth in FY15 that disappointed, given the strong conditions in residential markets. CS notes there are several factors impacting on financial performance this year, which explains the tepid growth guidance, and believes the shares remain attractive on a relative comparison with peers. FY14 results were consistent with Macquarie’s expectations. The broker likes the leverage to a strong housing market but finds the value proposition a hurdle. Macquarie believes the expansion in commercial development will keep making it harder for overall earnings to grow substantially. The broker downgrades to Underperform from Neutral.
Retail Food Group (RFG) downgraded to Neutral from Buy by UBS.
The broker had a Buy rating on Retail Food ahead of the result, expecting guidance to be met. However, the stock has been rallying ahead of the release, bringing the share price in line with the broker’s target. The broker has lifted its target to $4.75 from $4.70 but downgraded to Neutral.
Roc Oil (ROC) downgraded to Neutral from Buy by UBS.
Roc’s result solidly beat the broker on lower operating and exploration costs. Focus is nevertheless on the takeover bid on the table from the Chinese, which killed off the proposed Horizon Oil merger. The question for shareholders is thus: will another competitive bid emerge? ROC confirmed it did get another approach, since withdrawn. The broker downgrades to Neutral as the chance of another bid seems low. Target rises to 69c from 65c.
SEEK (SEK) downgraded to Sell from Neutral by Citi.
FY14 results were in line. Citi notes the impressive profit growth but is cautious regarding the ramp up in capitalised expenses. The broker downgrades to Sell from Neutral on valuation, struggling to justify current multiples. Assets appear well positioned to deliver robust earnings growth but Citi considers this priced in. Target is lowered to $15.50 from $16.25.
Southern Cross Media (SXL) downgraded to Neutral from Outperform by Macquarie.
Southern Cross’ result was in line with guidance. Trends deteriorated in the second half, the broker notes, reflecting weaker radio/TV ratings, a weak ad market and higher spend on marketing to launch new metro radio programming. SXL remains focused on cutting costs and reducing gearing but the broker has dropped its target to $1.20 from $1.25 and downgraded to Neutral.
Stockland (SGP) downgraded to Neutral from Outperform by Credit Suisse.
FY14 was in line. Stockland offers discipline (see Australand) and above sector growth and Credit Suisse positions at the top end of guidance, expecting the company will be a likely beneficiary from a stronger-for-longer recovery in the residential market. On a relative basis, against its peers, CS finds Stockland offers compelling value. Nevertheless, the rating has been pulled back to Neutral from Outperform. Target rises to $4.40 from $4.25. No dividend increase is anticipated.
Sonic Healthcare (SHL) downgraded to Hold from Buy by Deutsche Bank and to Neutral from Outperform by Macquarie.
Sonic’s revenues were in line but earnings fell short of expectations given a weak result from pathology. It all comes back to co-payment fears, and management is remaining cautious. Pressure on SHL’s funding is seemingly perpetual, the broker notes. The broker has cut its rating to Hold. Cash on the balance sheet suggests potential acquisitions but the broker is not factoring this in. FY14 earnings were below Macquarie’s forecasts. Weak Australian pathology was partly offset by a recovery in the US. The stock is now trading in line with the broker’s valuation and, while there is some buffer in the guidance, Macquarie believes risks from potential co-payments weigh on the outlook. Rating is downgraded to Neutral from Outperform.
Tatts Group (TTS) downgraded to Underperform from Neutral by Credit Suisse and to Neutral from Buy by UBS.
FY14 came in below expectations and Credit Suisse’s estimates have been reduced by 6% for the years ahead. Tatts is investing heavily in new initiatives in Queensland and, assuming it will prove beneficial on top line, CS thinks this means operations will remain flat for a while. Price target loses 15c to $3.30. Rating downgraded to Underperform from Neutral. The stockbroker anticipated the payout of a special 26c dividend in FY16. UBS notes the devil in the detail was the Lotteries division, which saw a return to more normal jackpot payouts after FY13 conceded relatively few. The final dividend of 5.5c also missed the broker’s’ 7.0c forecast. TTS has announced a step-up in operating expense in order to re-launch the brand. While the broker believes this follows years of underinvestment, the cost will eat into earnings and UBS does not forecast a positive return on opex spend. Downgrade to Neutral.
Transpacific Industries (TPI) downgraded to Hold from Add by CIMB Securities.
Transpacific’s result only fell slightly short but a stronger than expected performance from NZ offset a weaker than expected performance domestically. NZ has now been sold, and competition in Australia has clearly been fierce, the broker suggests. Throw in landfill remediation costs and shorter landfill site life, and the broker has reduced its FY15 profit forecast by 29%. The broker likes the long-term story but has downgraded to Hold. Target falls to $1.00 from $1.25.
Wesfarmers (WES) downgraded to Hold from Add by CIMB Securities, to Underperform from Neutral by Credit Suisse and to Underperform from Neutral by Macquarie.
FY14 earnings were slightly ahead of CIMB’s forecast. FY15 earnings forecasts are lowered and the broker suspects FY15 will be the low point for growth, reflecting the loss of insurance earnings and contraction in resources. The broker notes a decision to return $1.1bn to shareholders leaves the company with debt-funded acquisitive potential up to $3bn. CIMB downgrades to Hold from Add, given recent share price strength. FY14 results were in line with Credit Suisse’s expectations. A $1 per share capital return was announced, subject to shareholder approval. As Wesfarmers appears fully valued, Credit Suisse has downgraded the stock to Underperform from Neutral. Wesfarmers produced a positive surprise for Macquarie, with all retail businesses beating slightly and resources beating significantly. Despite softening expectations for Coles, Macquarie envisages accelerating growth from FY16. The extra hand-outs were more than twice the broker expected, which suggests WES is a bit light on for meaningful M&A options. The medium term outlook remains strong but the stock is now trading well over the broker’s valuation. Target rises to $44 from $42 but rating downgraded to Underperform.
The FNArena database 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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