Brokers continued to look for unloved favourites to upgrade this week with AMP and Qantas getting upgrades. Disappointing announcements drove downgrades.
In the good books
Credit Suisse upgraded AMP to Outperform from Neutral. AMP continued to enjoy strong funds flows into its North platform during the September quarter, exceeding outflows in legacy platforms. But for the broker, the big news was on the insurance side where lapse experience is matching assumptions and claims experience is performing ahead of assumptions. Given it is the September quarter when AMP has typically announced a “life downgrade”, the broker sees this as very positive. With AMP now trading in line with the market and below its historical PE, the broker upgrades to Outperform.
Credit Suisse upgraded JB Hi-Fi (JBH) to Outperform from Neutral. The sell off in the stock has come to a point where Credit Suisse believes it is too low. The broker expects the recent improvement in trading conditions to be maintained and the valuation is now compelling. (See downgrade.)
UBS upgraded Qantas (QAN) to Buy from Neutral. The stock has retraced despite evidence of positive earnings momentum. Jet fuel prices in Australian dollar terms have fallen and the domestic market recovery is underway. UBS calculates a net $270 million annualised benefit from fuel and currency moves over the past two months will be spread across FY15 and FY16. Free cash flow generation should drive a reduction in capital employed and improve the balance sheet and gearing.
In the not-so-good books
JP Morgan downgraded Ardent Leisure Group to Neutral from Overweight and UBS to Neutral from Buy. The first quarter was weaker than JP Morgan expected, although there was strong growth at Main Event and health clubs. JP Morgan adds all factors in, but only comes up with the current price as a valuation. UBS says a solid increase in revenue was not matched by earnings in the September quarter given ongoing investment in various areas including new MainEvent centres. MainEvent has been well-received by the market, but further upside for Ardent will depend on more confidence in Australia growth, particularly for bowling and theme parks. The broker believes Ardent’s strategy is sound, but will take time to pay off.
JP Morgan downgraded JB Hi-Fi (JBH) to Neutral from Overweight. Trading is ahead so far in FY15 and the company has reiterated guidance at its AGM. Nevertheless, JP Morgan downgrades, noting operating costs and capex are likely to rise, and gross margins remain in line rather than expanding. JP Morgan would become more constructive on the stock when the costs growth is clearer. (See upgrade)
The following 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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