Buy, Sell, Hold – what the brokers say

Founder of FNArena
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The local reporting season continues to generate a large number of stockbroker rating changes. One straightforward observation is that resources stocks continue to be absent when it comes to recommendation upgrades, which remains largely an industrials affair, and resources and banks continue to dominate the downgrades section.

In the good books

APN News & Media (APN) was upgraded to Neutral from Sell by UBS. A 7% jump in APN’s first-half net profit, thanks to gains in market share and cost execution, has prompted UBS to boost its earnings estimates by about 15%. It has upgraded its rating to Neutral from Sell but notes debt remains an issue.

Brambles (BXB) was upgraded to Outperform from Neutral by CIMB. Brambles posted a solid FY13 result in tough conditions. The market was disappointed with softer than expected FY14 guidance but the broker believes expectations were overly ambitious in the first place. The subsequent sell-off has thrown up a good buying opportunity and a realignment to more realistic expectations means BXB is now offering value.

Challenger Group (CGF) was upgraded to Buy from Neutral by Citi. CGF has delivered on the promise of improved Life margins and funds management has turned the corner. CGF has reaffirmed its buyback and increased its payout with higher franking. The stock shot up but the broker upgraded to Buy anyway, increasing its target to $5.25 from $4.10.

Dexus Property (DXS) was upgraded to Buy from Hold by Deutsche Bank. The FY13 result confirms deteriorating office fundamentals in Deutsche Bank’s view. Despite this, the full benefit of buy-back activity and acquisitions, plus higher trading profits, is expected to underpin guidance for FY14. The broker thinks upside to free funds growth and a further 5% buy-back, as well as a disciplined approach to corporate activity, warrants an upgrade to Buy from Hold. The price target is raised to $1.08 from $1.06.

GWA (GWA) was upgraded to Buy from Neutral by UBS and to Neutral from Sell by Citi. GWA’s result met guidance and expectations and UBS notes good business fundamentals, core brands gaining market share and staffing down 14%, allowing a margin recovery. UBS revised core EBIT for FY14, anticipating price rises and continued gains in market share. UBS increased the target price to $3.10 from $2.55. Citi has upgraded to Neutral from Sell, given quarter-on-quarter improvement in the profitability of the business.

Iluka (ILU) was upgraded to Outperform from Neutral by Credit Suisse. Headline first half earnings of $34 million beat the broker’s estimate because of a non-cash inventory build up of $38 million versus the expected $4 million. The rating is upgraded to Outperform from Neutral and the target price increased to $13.00 from $12.00 on improved confidence in 2014 zircon sales.

Investa Office (IOF) was upgraded to Buy from Neutral by UBS. Investa Office Fund marginally outpaced its estimates, turning in a “strong” result. Acknowledging a “difficult” office market, UBS reckons IOF capacity to add value to assets and de-risk its income has been underestimated, and flags positive news over FY14.

Trade Me (TME) was upgraded to Outperform from Neutral by CIMB and to Neutral from Sell by UBS. Investors clearly didn’t like the FY13 report, but CIMB retains a positive outlook for the company, in particular for the classifieds operations. Share price weakness is seen as offering an attractive entry point. Supporting the broker’s view, earnings estimates have been increased.

In the not-so-good books

Alumina (AWC) was downgraded to Underperform from Neutral by BA-Merrill Lynch. While regulating US banks out of commodity warehousing will prove beneficial in the long run, the short term impact on aluminium should be significant as increased supply forces prices lower. The broker has cut Alumina forecast earnings, dropped its target to 80c from $1.10 and downgraded to Underperform.

Atlas Iron (AGO) downgraded to Neutral from Outperform by CIMB and to Neutral from Buy by Citi. As far as misses go, CIMB thinks this was a whopper, some 67% below consensus on rising costs and exploration expenses. Atlas burnt cash in the period. AGO has provided FY14 production guidance but nothing beyond. FY13 results were disappointing and Citi has made earnings downgrades.

Ausenco (AAX) was downgraded to Neutral from Buy by UBS. First-half profit was at the top of guidance but earnings were hit by sluggish contract growth and underperforming contracts. UBS slashed its FY13 earnings per share forecast 49%, FY14 21% and FY15 9%, to reflect lowered guidance.

Boral (BLD) was downgraded to Neutral from Outperform by Credit Suisse and to Underperform from Neutral by Macquarie. The FY13 profit came in at the top end of the previously announced target range. While the result was impaired by various one-off impairment charges, Credit Suisse thinks a number of operational and financial initiatives should start to bear fruit in a stronger FY14. Macquarie has cut Boral’s forecast earnings following its result. Conditions in Australia remain weak and a return to profitability in the US remains elusive.

Commonwealth Property Office (CPA) was downgraded to Underperform from Neutral by Credit Suisse. Noting recent takeover speculation, the broker suggests no more than the current price will be paid and possibly no full bid will be forthcoming, rather a pitch for the rights.

Insurance Australia Group (IAG) was downgraded to Underperform from Neutral by CIMB. IAG had pre-released and the result hit the top end of that guidance range. It was very strong across the board, the broker suggests. So strong, in fact, that broker doubts it could ever happen again. FY13 was assisted by numerous tailwinds and the broker believes things will get tougher from here.

Macmahon Holdings (MAH) was downgraded to Neutral from Buy by UBS. McMahon Holdings full-year result fell well short of expectations and turned in a “messy” result, says UBS. The broker sees no relief in margin pressure or operating conditions and downgrades its FY14, FY15 and FY16 earnings per share estimates 56%, 55% and 43% respectively. Little love lost here as broker cuts rating from a Buy to Neutral and slashes the target price from 31c to 14c.

Paladin Energy (PDN) was downgraded to Neutral from Buy by UBS. UBS has downgraded to account for the dilution of the share price arising from its announcement to raise 15% of its capital in an issuance. The full valuation of Paladin drops 10% to $2 per share.

Webjet (WEB) was downgraded to Neutral from Buy by UBS. Broker says Webjet’s underlying result appears in line but given a different accounting model for ‘Lots of Hotels’ start-up costs, it fell short. The big negative is a tough-operating-conditions forecast for FY14 in the core air business, and UBS revised down its rating and cut the target price to $4.45 from $5.00.

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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