In the good books
Credit Suisse upgraded the ASX (ASX) to Neutral from Underperform. Buy/Hold/Sell 0/5/3 After another strong month of activity Credit Suisse has maintained earnings forecasts. Still, the share price is down 12% since the FY15 result so the rating is upgraded to Neutral from Underperform. While the company faces structural headwinds it does have good cash generation and a relatively low risk to dividends and earnings.
Credit Suisse upgraded Graincorp (GNC) to Outperform from Neutral and Deutsche Bank to Buy from Hold. Buy/Hold/Sell 2/1/2 East coast production is expected to be up 7.0% on FY15, with most of the increase from NSW where Graincorp has higher market share. Credit Suisse actually downgrades earnings forecasts to bring this in line with the ABARES forecast. The forecast has reduced the risk associated with the FY16 earnings year and the broker expects additional benefits from Australian dollar depreciation. Deutsche Bank believes better prospects are ahead. Winter crop production is expected to be up 8.0%.
Deutsche Bank upgraded Myer to Hold from Sell. Buy/Hold/Sell 1/3/3 Deutsche Bank believes the environment for the Australian consumer is the best it has been for some time. Still, execution is crucial and not all categories are equal. Myer has fallen 25% since its results and the capital raising announcement and, while substantial execution risk remains, there is some headroom in the balance sheet.
Morgans upgraded Westpac to Add from Hold. Buy/Hold/Sell 6/1/1 Westpac reaffirmed its customer focus at its recent strategy update. The bank aims to reduce its cost-to-income ratio to under 40% over the next three years. Morgans believes the stock is starting to look like better value with the recent pull back in the shares, but the bank should go harder on costs as the target will be challenging.
In the not-so-good books
Citi downgraded Oil Search (OSH) to Sell from Neutral. Buy/Hold/Sell 6/1/1 Woodside has made an approach to Oil Search with an opportunistic scrip offer of 0.25 Woodside shares for each Oil Search share. The non-binding offer is conditional on a period of exclusivity and agreement from the PNG government. Citi considers the deal full value and continues to envisage uncertainty for LNG growth in PNG because of marketing, appraisal and execution risk.
Morgan Stanley downgraded Virgin Australia to Underweight from Equal-weight. Buy/Hold/Sell 1/4/1 Morgan Stanley continues to envisage a stable operating outlook but, relative to Qantas the valuation looks full, particularly with signs that Jetstar is taking non-peak share.
Citi downgraded Woodside Petroleum (WPL) to Neutral from Buy following its bid for Oil Search. Buy/Hold/Sell 1/4/3 Citi estimates the transaction would be 8-9% dilutive to earnings in 2016-18. The broker suspects a counter offer would be hard as there are few high quality operators likely to gain approval from the PNG government. The bid brings into question the premium investors have been willing to pay for Woodside’s capital discipline.
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.
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