Broker activity is quietening down now reporting season is over but results, and positive results, dominate the moves on the positive side of the ledger. Some former laggards, like Billabong and Harvey Norman, got upgrades as Woolworths failed to inspire JP Morgan.
In the good books
Deutsche Bank upgraded Billabong (BBG) to Hold from Sell. The return to like-for-like sales growth in Asia Pacific and Europe pleased the broker. The Americas remain tough and gross margins weakened considerably in the second half. At current levels, the broker believes a turnaround is being priced in.
UBS upgraded Harvey Norman (HVN) to Buy from Neutral. FY14 results were well ahead of UBS estimates. Australian franchises stood out but New Zealand was also strong. UBS had made material upgrades to earnings forecasts, raising FY15 estimates by 11% and FY16 by 13%. Still, only a modest recovery is assumed in franchisee margins. The lift in the second half dividend was a signal for the broker that the board is more confident about returning cash, as well as franking, to shareholders.
Deutsche Bank upgraded Transfield Services (TSE) to Buy from Hold. Finally, the company’s transformation program is starting to deliver, according to analysts at Deutsche Bank. They point at improving margins for the company’s core operations. Despite the positive reception of Transfield’s FY14 report by investors, the stockbroker continues to see value.
In the not-so-good books
BA Merrill Lynch downgraded Duet Group (DUE) to Neutral from Buy. The broker has concluded that the existing capital and distribution structure looks tight, albeit sustainable. Merrills is downgrading to Neutral from Buy because of the heavy reliance on the distribution profile and the fact that two of the three assets do not generate enough cash to fund maintenance capex requirements.
UBS downgraded Tiger Resources (TGS) to Neutral from Buy. The company will acquire the remaining 40% interest in the Kipoi mine in the DRC for US$111 million. To fund the deal, the company needs to conduct a placement, an underwritten entitlement offer and enter a bridging finance facility. This means a material amount of high cost, short-term debt. The stock remains cheap, relative to the broker’s valuation, but UBS is downgrading to Neutral from Buy, based on the increased risks.
JP Morgan downgraded Woolworths (WOW) to Underperform from Outperform, while six other brokers kept their ratings unchanged following FY14 results. Woolworths’ FY14 report was in line with guidance but JP Morgan analysts found it less than inspiring. The analysts express their concern about the slowdown in Food & Liquor LFL sales growth and about the risk that strong EBIT margin expansion may not be sustainable.
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.
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