Rallying share prices and profit reports that mostly beat or meet expectations, with resources stocks having been relegated to the back row. This has been the picture for the Australian share market thus far in 2015 and it should therefore not come as a surprise stockbroking analysts have been united in reducing their ratings for ASX-listed stocks more than they have been prepared to lift them.
In the good books
Charter Hall Retail (CQR) was upgraded to Neutral from Sell by Citi. Management retained guidance, believing the stock will benefit from lower interest costs and higher property values over time.
Evolution Mining (EVN) was upgraded to Buy from Hold by Deutsche Bank. Deutsche Bank believes the company has further cost cutting potential and will not pay cash tax until 2020. Cash flow was 43% higher than the prior half and net debt continues to improve.
Fletcher Building (FBU) was upgraded to Neutral from Sell by Citi and to Equal-weight from Underweight by Morgan Stanley. Citi has upgraded in recognition of a higher PE multiple for the sector given strong demand for industrial cyclical companies. Morgan Stanley says that ongoing improvement in New Zealand and the outlook for earnings to stabilise in Australia in FY16 suggests an acceleration is likely over the next 12 months.
Investa Office (IOF) was upgraded to Neutral from Underweight by JP Morgan. Investa Office Fund’s first-half result romped in 4% ahead of the broker’s forecast as earnings unexpectedly skewed into the first half. The company slightly upgraded earnings and dividend guidance. But JPMorgan says Investa’s exclusion from Morgan Stanley’s asset sale, and management’s comment that a third-party bid would be unlikely to trigger pre-emptive agreements, increase the chances of a third-party bid for IOF.
Webjet (WEB) was upgraded to Outperform from Neutral by Credit Suisse. The interim report showed continued disappointment from Zuji, but also resumption of growth for the Webjet core operations, as well as in B2B.
Wesfarmers (WES) was upgraded to Hold from Sell by Deutsche Bank. Wesfarmer’s first half results were just ahead of the broker’s estimates. Coles was broadly in line, but Target fell below expectations, while office supplies and Kmart’s earnings were better than expected. See also WES downgrade.
In the not-so-good books
AMP (AMP) was downgraded to Neutral from Buy by Citi and to Neutral from Outperform by Credit Suisse. With robust flows continuing, AMP offers a scarce combination of growth and yield but Citi does not think PE can keep rising and downgrades. The results missed Credit Suisse’s forecasts.
Ardent Leisure (AAD) was downgraded to Hold from Buy by Deutsche Bank. Operating results in the first half disappointed the broker. Near-term earnings forecasts are materially reduced and the rating is downgraded
Crown Resorts (CWN) was downgraded to Neutral from Overweight by JP Morgan. Crown romped in with its first-half result, outpacing the broker by 18.5%, courtesy of VIP with Melbourne revenue soaring 86% The broker downgrades the rating to Neutral from Overweight, believing Macau expectations peaked in February.
Dexus Property (DXS) was downgraded to Sell from Neutral by Citi. Lower than expected profits on asset sales, a higher tax bill and flat income growth led Dexus to miss the broker’s forecast.
Drillsearch Energy (DLS) was downgraded to Neutral from Buy by UBS. The result was impacted by impairments in the first half, with reported profit well above the broker’s forecasts and underlying profit below.
Evolution Mining (EVN) was downgraded to Underweight from Equal-weight by Morgan Stanley. First half results were better than expected. However, the broker considers the stock has had a solid run and moves to Underweight from Equal-weight. See also EVN upgrade.
Fairfax Media (FXJ) was downgraded to Neutral from Buy by UBS. Fairfax Media’s first-half result fell 10% shy of UBS’ estimates, thanks to post-tax impairments and redundancy charges. Revenue and earnings fell and the company announced a 5% one-year buyback starting March 23. UBS believes all positives are now factored in.
Independence Group (IGO) was downgraded to Neutral from Buy by Citi, to Neutral from Outperform by Credit Suisse, to Hold from Buy by Deutsche Bank and to Neutral from Buy by UBS. FY15 guidance was increased at all three operations although Citi conservatively expects a less spectacular second half and downgrades to Neutral on a full valuation. Credit Suisse observes marginally higher production and lower costs are offset by assumptions for higher exploration/development expenditure. Deutsche Bank downgrades to Hold from Buy on valuation and UBS has downgraded the stock to Neutral from Buy, due to the recent strong share price performance.
Investa Office (IOF) was downgraded to Underperform from Neutral by Credit Suisse. Credit Suisse saw a result of low quality, indicative of tough market dynamics and driven by non-cash incentive amortisation. Among office space landlords, they prefer Mirvac (MGR) instead. See also IOF upgrade.
Origin Energy (ORG) was downgraded to Neutral from Outperform by Macquarie. Interim earnings were below the broker’s forecasts and cash flow is considered a challenge.
Pacific Brands (PBG) was downgraded to Sell from Neutral by UBS. First half results were poor but ahead of the broker’s forecasts based on a recovery in Sheridan margins. However, underwear gross margins fell significantly and UBS believes the currency headwinds will cause FY16 earnings to fall. See also PBG upgrade.
Platinum Asset (PTM) was downgraded to Neutral from Outperform by Macquarie. B/H/S: 1/2/1. First half results were in line with forecasts but management fees were a key miss on expectations. Macquarie transfers coverage to a new analyst. While fundamentals are solid the current valuation metrics appear full and the broker downgrades to Neutral from Outperform.
Seven West Media (SWM) was downgraded to Neutral from Outperform by Credit Suisse. First half results were mixed and in line with forecasts, with TV earnings better and newspapers and magazines worse than expected. The broker expects the TV ad market to decline slightly with newspapers to continue the current trend.
Super Retail (SUL) was downgraded to Underperform from Outperform by Credit Suisse and to Underweight from Neutral by JP Morgan. The underlying interim result fell short of Credit Suisse’s expectations. Moreover, the timeframe for benefits from supply chain changes is going to be pushed out. Credit Suisse has implemented a double downgrade following a share price rally. The first-half result met consensus and the company announced a fully franked interim dividend of 18.5c which was 3.5c ahead of JP Morgan’s estimate. But the broker downgraded because it believes the leisure division restructure is insufficient and a lack of valuation support means downside risk is accentuated.
Wesfarmers (WES) was downgraded to Underperform from Neutral by Credit Suisse and to Underperform from Neutral by Macquarie. In the absence of a fundamental change to the industrial outlook, mid-single digit growth in group earnings is considered likely and Credit Suisse downgraded following share price appreciation. Wesfarmer’s first half earnings were just shy of Macquarie’s expectations. Coles continues to perform well, with nine new supermarkets opened in the period, and Bunnings recorded an 11.8% growth in sales. See also WES upgrade.
Woodside Petroleum (WPL) was downgraded to Underperform from Neutral by Macquarie. Macquarie downgrades to Underperform from Neutral as the company is still struggling with fixing its growth profile, while dividend yield support is about to evaporate.
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.
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