Buy, Sell, Hold – what the brokers say

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Brokers were a lot more active this week but are still finding bargains in the reduced share prices that volatility has brought. At least one broker is also a lot more optimistic about the retail outlook too.

In the good books

Macquarie upgraded Coca Cola Amatil (CCL) to Neutral from Underperform. The broker remains cautious on Coke, given the ongoing trend of lower local fizzy drink consumption and sugar pricing pressures. However longer term, the broker sees earnings forecasts as no longer demanding, given Coca Cola’s cost-cutting efforts and the upside potential in Indonesia.

Downer EDI (DOW) got three upgrades this week, from Neutral to Buy by Citi and UBS, and from Neutral to Underperform by Credit Suisse. Citi sees positives from Downer EDI’s intention to acquire Tenix, which specialises in the provision of operations and maintenance services to the utilities sector. The analysts see the deal as EPS accretive in FY15, plus it also improves the quality of earnings, expands DOW’s range of capabilities and comes with further attractive growth prospects. Credit Suisse considers the acquisition of Tenix Australia for $300 million shows financial discipline has been relaxed to allow for an offensive move to capitalise on the privatisation of state-owned power distribution assets. UBS estimates the acquisition to be 6-9% accretive in FY15-16, largely attributable to the low cost of debt from Downer EDI’s new committed bank facility.

Morgan Stanley upgraded Fortescue Metals Group (FMG) to Overweight from Equal-Weight. Morgan Stanley now suspects too much conservatism is priced into Fortescue Metals. The broker expects iron ore prices to stabilise above US$85/t and forecasts debt reduction and increased dividends on this basis.

Citi upgraded Myer (MYR) to Neutral from Sell, Oroton Group (ORL) to Buy from Neutral and Premier Investments (PMV) to Neutral from Sell on an improved overall environment for retails in Australia. Analysts say this seems to be happening at a time when most retailers are suffering weak share prices. On Citi’s estimates, lower oil and tax burdens that haven’t gone through parliament should improve overall retail spending by some 1.7% annualised. This is seen as sufficient to lift ratings for retail stocks under coverage.

Macquarie upgraded Newscorp to Neutral from Underperform. Foxtel will turn defence into attack from next month as it introduces a big pricing shake-up to head off competition, resulting in anticipated subscriber increases at much lower margins. The broker has downgraded its Foxtel valuation but this is more than offset by increases to News Corp’s core businesses.

UBS upgraded Southern Cross Media (SXL) to Buy from Neutral. The company issued a profit warning at its AGM, downgrading first half guidance because of weaker share and ad markets. First half earnings will now be down 18-20% against prior guidance of down 10-15%. UBS believes the stock is inexpensive and upgrades to Buy from Neutral, given a 28% fall since its results in August.

In the not-so-good books

Deutsche Bank downgraded Ausdrill (ASL) to Hold from Buy. The company’s profit warning and subdued FY15 outlook reveals the challenges facing the business and the broker has materially reduced near-term forecasts as a result. Ausdrill has flagged potential asset impairments but Deutsche Bank expects it to remain in compliance with debt covenants.

UBS downgraded WorleyParsons (WOR) to Sell from Neutral. UBS has lowered FY15-17 profit forecasts by 4-19%, largely because of a slower capex environment from major oil customers but also to reflect increasing risks around the gas and oil outlook on the back of lower prices. The broker remains attracted to WorleyParsons track record, balance sheet strength and exposure to global hydrocarbons spending but has downgraded to Sell from Neutral as the stock is trading at a premium to revised valuation and to peers.

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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