Buy, Sell, Hold – what the brokers say

Founder of FNArena
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Falling share prices in September have triggered a “let’s go bargain hunting” response from local stockbrokers. Beaten down resources stocks and popular industrials that have been pushed back these past weeks in particular featured heavily in recommendation upgrades.

In the good books

Bank of Queensland (BOQ) was upgraded to Buy from Hold by BA-Merrill Lynch on the back of recent share price weakness. BA-ML points out the current regulatory background should favour the regionals vis-a-vis the Big Four in Australia. Small upgrades have been put in place for cash EPS estimates. Also, dividend estimates for the years ahead have been lifted.

Dexus Property (DXS) was upgraded to Outperform from Neutral by Macquarie. Despite Dexus’ underlying business is struggling to grow against a backdrop of challenging market conditions, the broker has closely reviewed the group’s property portfolio and has decided there are 16 assets that could deliver trading profits, beyond the seven already identified by DXS. The broker thus believes DXS can continue to deliver growth in distributions and on the basis of the fall in share price, has upgraded to Outperform.

Goodman Group (GMG) was upgraded to Buy from Underperform by BA-Merrill Lynch. BA-ML has revisited forecasts for Goodman Group and at the end of the exercise has come out with a higher price target, to $5.80, and an upgrade in rating. Amongst the factors mentioned in support of these moves are a robust growth profile for the year ahead (6-7%), financial de-risking and growth in development work. Goodman Group is now one of the stockbroker’s top picks in the sector, along with Stockland (SGP) and Federation Centres (FDC).

Lend Lease (LLC) was upgraded to Buy from Neutral by BA-Merrill Lynch. The broker notes continued Australian housing strength means upcoming launches of product at Darling Square and Barangaroo, as well as recent infrastructure wins, underpin the company’s capacity to make market share gains. Upcoming investments in the US and Kuala Lumpur will also provide greater diversity of development earnings, leading the broker to expect Lend Lease to outperform the Australian focused developers, should domestic residential demand slow.

Tatts Group (TTS) was upgraded to Buy from Neutral by UBS. The broker has decided a discounted cash flow model is more appropriate than an earnings multiple model in valuing Tatts’ lotteries business, given the long-dated nature of licences. The switch results in an increased net valuation. Taking this into account and noting the company has underperformed the index this past month, the broker has upgraded to Buy, suggesting TTS is a high quality defensive with an attractive yield.

Western Areas (WSA) was upgraded to Buy from Hold by Deutsche Bank. Deutsche Bank has updated views and projections for bulk commodities and metals. The underlying theme is that while bulks may see some support from restocking in Q4, any sustainable cyclical turnaround in the Chinese property market may take another six months. Deutsche Bank prefers base metals and remains cautious on high cost iron ore producers and on gold producers.

Woolworths (WOW) was upgraded to Outperform from Underperform by Macquarie. Fourth quarter comparative sales growth disappointed the broker, but Macquarie’s recent analysis of headline inflation across a basket of supermarket goods supports an improvement in the outcome for the first quarter of FY15. The near term news on Big W and Masters is subdued but Macquarie believes the decline in the share price has resulted in an improved value proposition.

In the not-so-good books

BT Investment (BTT) downgraded to Neutral from Outperform by Credit Suisse. Credit Suisse has lowered earnings estimates driven by weak equity markets in the September quarter. The target is reduced to $6.55 from $7.30 because of the roll off of the FY14 earnings in the valuation, which benefitted from very high performance fees. Hence, the rating is lowered to Neutral from Outperform.

Grange Resources (GRR) was downgraded to Underweight from Overweight by JP Morgan. JP Morgan has factored in lower iron ore price estimates for 2015/16 on the back of demand-side softness and higher than expected supply. The recommendation is downgraded on a sector relative basis, given Grange Resources’ high cost structure, continued deferral of sales and operational risks at Savage River.

Orora (ORA) was downgraded to Underperform from Neutral by Credit Suisse. If the Australian dollar moves another 10% against its US, NZ and euro counterparts, it will be neutral for Orora’s accounts. Transaction revenue exposures offset procurement exposures.

Recall Holdings (REC) was downgraded to Sell from Neutral by Citi. Media is speculating that Iron Mountain is in talks to acquire Recall for US$2-2.5 billion. Recall has denied the talk. Citi points out the difficulty in determining any future offer is the likelihood of regulatory restrictions, given market concentration issues. Despite a higher valuation based on new FX assumptions, Citi considers the current share price is above fair value.

Earnings Forecast

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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