Buy, Sell, Hold – what the brokers say

Founder of FNArena
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Last week marked the final episode in the local reporting season. While the picture remains skewed to the negative for stockbroker ratings, the undercurrent looks decisively more positive when we focus on valuations/price targets and earnings estimates.

In the good books

Bank of Queensland (BOQ) was upgraded to Buy from Neutral by Citi. The financial system inquiry raises the prospects of better returns from the regional banks. The broker believes, for the first time since the GFC, long-term returns for the regionals are at, or just below, the cost of capital.

Evolution Mining (EVN) was upgraded to Outperform from Neutral by Macquarie. FY15 looks comfortable and EVN should generate enough cash flow to fund its capital commitments, exploration program and dividend, the broker believes.

Flight Centre (FLT) was upgraded to Overweight from Neutral by JP Morgan. Flight Centre’s FY14 results were in line with the broker’s expectations. JP Morgan has upgraded the stock to Overweight from Neutral, citing the conservative guidance provided by the company and the upside presented by a revised price target, which has been raised to $52.60 from $51.00.

Macquarie Atlas Roads (MQA) was upgraded to Add from Hold by CIMB Securities and to Overweight from Neutral by JP Morgan. Interim performance was strong, in line, and yet more evidence that management can deliver on its targets, according to analysts at CIMB. First half results were largely in line while dividends increased, reflecting stronger operating cash flows, and JP Morgan observes dividends will be boosted further by any weakness in the Australian dollar.

Perpetual (PPT) was upgraded to Buy from Neutral from Citi and to Outperform from Neutral by Macquarie. Perpetual’s underlying earnings were in line, with higher remuneration, interest and D&A costs leading to a miss at the headline number. Citi believes the outlook is improving at long last, with management targeting a 25-30% profit margin beyond FY15. The market’s weak reaction to this miss provides an opportunity, Macquarie suggests, given a strong start to FY15 funds flows, the delivery of the Trust Co acquisition and the optionality provided by execution on PPT’s global equities capability.

Qantas Airways (QAN) was upgraded to Add from Hold by CIMB Securities. It wasn’t pretty but underlying Qantas’ loss for FY14 was smaller than expected, comment analysts at CIMB. The analysts believe operations have now stabilised and the outlook is improving. All this provides enough reason to get on board the Qantas plane.

Seven Group (SVW) was upgraded to Neutral from Underperform by Macquarie. Seven Group’s result was slightly ahead of the broker. It was a very tough year for WesTrac and doesn’t look like it’s getting much better, the broker suggests. However, there may be signs of a bottom having been reached. It’s enough for the broker to upgrade to Neutral, despite the risk of franchise dilution from the proposed Nexus (NXS) acquisition.

In the not-so-good books

Air New Zealand (AIZ) was downgraded to Underperform from Neutral by Credit Suisse. Air NZ released a strong FY14, as expected, with the analysts commenting the surprise came in the form of a fully imputed special dividend of 10c on top of increased dividend. Guidance for the year was slightly disappointing and led to mild cuts to forecasts. CS is positive about management’s cost control, strategic know-how and the outlook, but it’s the valuation that has become a problem.

Boral (BLD) was downgraded to Neutral from Buy by Citi. FY14 results beat the broker’s forecasts. However, the result lacked quality. The stock is being constrained by the FY15 construction materials earnings being conditional on positive pricing outcomes.

Fleetwood (FWD) was downgraded to Underperform from Neutral by Credit Suisse. CS saw yet another weak result and though there were some positives, overall visibility remains low and the analysts believe the risk remains to the downside. Downgrade to Underperform from Neutral.

New Hope (NHC) was downgraded to Reduce from Hold by CIMB Securities. The company performed better than CIMB expected in the July quarter, but the analysts point out the numbers are below comparable period last year. They believe the shares are overvalued and hence the decision was made to downgrade to Reduce from Hold.

Ramsay Health Care (RHC) was downgraded to Neutral from Outperform by Credit Suisse. Credit Suisse believes the seemingly insatiable demand for Australian private hospital services will be a key contributor to earnings growth over the longer term. In France, the broker believes Generale de Sante provides the scale necessary to build a successful franchise, despite the muted tariff environment. But based on strong relative share price performance the rating is reduced to Neutral from Outperform.

Seven West Media (SWM) was downgraded to Hold from Add by CIMB Securities and to Neutral from Buy by Citi. FY14 results were 1% above forecasts and CIMB downgrades to Hold from Add given recent share price strength and a weaker outlook. The broker envisages no improvement for the print businesses and has downgraded expectations further on that front. Citi suspects another tough year is on the way with the return of cost inflation, driving earnings downgrades of 12% for FY15. The broker does not expect earnings growth over the next three years.

Whitehaven Coal (WHC) was downgraded to Neutral from Outperform by Credit Suisse. The statutory loss for FY14 turned out not as bad as expected and management remains confident Maules Creek will be operational within budget and on time, implying coal shipments will commence in March next year. The rating has been downgraded in response to share price rally.

WorleyParsons (WOR) was downgraded to Underperform from Neutral by Credit Suisse. Credit Suisse analysts are still scratching their heads on what caused a rally in the shares. CS cannot find any justification in the FY14 report, labeled “weak”, and there’s absolutely nothing to suggest that FY15 should see a resumption of strong growth. CS sticks to a negative view for FY15, arguing a turnaround will arrive, at some point, but before it happens there’s very little incentive to own shares in WorleyParsons.

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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