In the good books

Commonwealth Bank (CBA) Upgraded to Neutral from Underperform by Macquarie B/H/S: 1/6/1

Macquarie upgrades to Neutral from Underperform, given the stock’s recent de-rating and the fact the bank has greater cost management flexibility compared with peers.

The broker continues to envisage, and acknowledge, risks around the bank’s overweight exposure to Western Australia and further return-on-equity convergence with peers. Yet, at current levels, the stock offers a 6% dividend yield.

JB Hi-Fi (JBH) Upgraded to Add from Hold by Morgans and Buy from Neutral by UBS B/H/S: 3/2/2

JB Hi-Fi will acquire The Good Guys for $870m. Morgans likes the deal and expects the power of the combined group’s increased scale will become evident in coming years.

The broker acknowledges the risks in the transaction, particularly in the case of the joint venture stores which were dissolved ahead of the merger, with 30 retiring and the remaining 25 staying on a store managers.

Morgans assumes the company’s synergy target of $15-20m is achieved progressively over three years.

The company will acquire The Good Guys for $870m and expects the deal to be around 12% accretive, funded by equity and debt. UBS upgrades estimates to incorporate the acquisition and assumes a 3-year sales compound growth rate of 3%.

UBS expects the acquisition will provide upside risk to forecasts in coming years via upside to synergies and a more rational market.

Orica (ORI) Upgraded to Neutral from Underperform by Macquarie B/H/S: 2/4/2

The company is guiding to flat second half ammonium nitrate volumes which implies for Macquarie a 9% reduction over the FY16 year.

The broker continues to highlight a range of structural pressures and competitive pressures from new entrants. Still the risk/return is considered more balanced now with the business stabilising. Global commodity prices have rallied and the rate of decline in US coal has eased.

Rio Tinto (RIO) Upgrade to Accumulate from Hold by Ord Minnett 

Ord Minnett has revised its iron ore supply and demand outlook, which suggests the market will only be modestly over supplied in the near term.

On this basis the broker’s forecasts are upgraded for 2017 and 2018 by 26% and 21% respectively for Rio Tinto’s earnings per share.

Ord Minnett upgrades to Accumulate from a Hold rating. Price target is raised to $54 from $51. The broker acknowledges there are no stock-specific catalysts but expects Rio Tinto to re-rate over time as the upgrade cycle plays out.

Syrah Resources (SYR) Upgraded to Outperform from Neutral by Macquarie B/H/S: 3/0/1

The company has advised that construction of the Balama project is on schedule and on budget. Macquarie analysts point out the project is now 43% completed.

Post the recent raising, the analysts believe the company is now sufficiently cashed up until revenues start flowing in, not expected before FY18. The analysts remind investors commercial production is expected towards the end of CY17.

The Reject Shop (TRS) Upgraded to Overweight from Equal-weight by Morgan Stanley B/H/S: 2/1/0

The stock has fallen 32% since the FY16 result, which was in line with Morgan Stanley’s estimates but below the market’s “lofty” expectations.

The broker believes the turnaround in the business is continuing and, despite tough comparables in the first quarter, considers the stock a buying opportunity.

The stock has been oversold, in the broker’s view, and margin improvement and sustainable revenue growth are forecast over the next two to three years.

Hence, rating is upgraded to Overweight from Equal-Weight.

In the not-so-good books

APA Group (APA) as Downgrade to Underperform from Neutral by Credit Suisse B/H/S: 3/4/1

Credit Suisse believes the Council Of Australian Governments’ meeting in December is looming as a negative catalyst. The group is considering replacing the coverage test that determines whether pipelines qualify for full regulation.

Credit Suisse believes it is now probable that COAG adopts ACCC findings and lowers the threshold for full regulation of APA’s pipelines, calculating the company is over-earning the theoretical regulated revenue level by 1.8 times.

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