Buy, Sell, Hold – what the brokers say

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Brokers were mostly negative in the early part of the week with more downgrades than upgrades. Resources companies features on the downside as commodity prices dropped. However, BHP did get an upgrade, but that was mostly due to the recent share price rout.

In the good books

CIMB Securities upgraded BHP to Add from Hold. Notwithstanding reductions to earnings from cuts in iron ore price forecasts, CIMB upgrades in part due to the 9% fall in the share price since the result. The broker now reverts to a 100% net present value target derivation, in line with the Rio Tinto model. CIMB retains a preference for Rio Tinto, based on its more attractive earnings multiples and valuation.

CIMB Securities upgraded Sandfire Resources (SFR) to Hold from Reduce along with increases in the long-term copper price forecasts. Although the shorter mine life at DeGrussa captures less of this upside, from 2018 higher costs create greater leverage to the increased copper price.

In the not-so-good books

Credit Suisse downgraded Amcor (AMC) to Underperform from Neutral after migrating its model to US dollar forecasts from Australian dollar reporting (from FY15 Amcor will report in US dollars). The broker’s target price is unchanged at $11.25. The rating is reduced to Underperform from Neutral on the share price appreciation, 4.2% since the FY14 result.

UBS downgraded Australian Pharmaceutical Industries (API) to Sell from Neutral. UBS believes API is the net loser in market share, as better-capitalised distributors are prepared to use balance sheet strength to acquire customer banner groups. This assessment follows Sigma’s (SIP) recent acquisition of Discount Drug Stores (see below). Further degradation of API’s market share risks a tipping point against its fixed cost base, which UBS suspects will be difficult to unwind without impacting service quality.

CIMB Securities downgraded Fortescue Metals Group (FMG) to Reduce from Hold due to lower forecast iron ore prices. Despite cutting forecast cash costs, valuation remains below the current share price. The broker suspects the company may struggle to reduce gearing.

Credit Suisse downgraded Sigma Pharmaceuticals (SIP) to Underperform from Neutral. Sigma has acquired the Discount Drug Store banner group, providing wholesale services to 121 branded pharmacies. The acquisition will be funded with cash and is expected to be immediately earnings accretive. Credit Suisse has incorporated higher earnings and upgraded forecasts. The target price is raised to 73c from 69c but, based on relative share price performance, the rating is downgraded.

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.

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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