In the good books
AGL (AGL) Upgraded to Buy from Neutral by Citi and Outperform from Neutral by Credit Suisse B/H/S: 5/0/1
Citi analysts believe the case for higher electricity prices has strengthened and this has pushed up their estimates for AGL by 14/25% for FY18/19. The analysts observe the share price has disconnected from electricity prices recently.
AGL has announced a 5% on-market buy-back and an increase in the distribution pay-out ratio to 75%. FY17 profit guidance of $720-820m is in line with Credit Suisse’s expectations.
The broker estimates the company will generate $600m in free cash flow pre-growth and $400-500m per annum after growth capex in FY17-19. With the company pursuing a capital-light approach to renewables and limited other opportunities this suggests more room for buy-backs, in the broker’s opinion.
Vocus Communications (VOC) Upgraded to Buy from Neutral by UBS B/H/S: 3/2/0
The ACCC has approved the NextGen transaction and Vocus has also announced it has exceeded its first quarter corporate/wholesale new sales target. NBN subscribers have grown 21.7% since June 30.
UBS notes investors have little visibility regarding the shape of FY17/18 growth which could limit a re-rating of the stock. A lack of transparency, lacklustre organic growth in FY16 and general conservatism leads the broker to reduce FY17-18 earnings per share estimates by 10-14%.
In the not-so-good books
Fortescue Metals (FMG) Downgraded to Underweight from Equal-weight by Morgan Stanley B/H/S: 2/3/2
Morgan Stanley’s quarterly update on commodity prices brings better bulks into the base case.
The most notable forecast changes are hard coking coal, up 18% for 2016 and 29% for 2017 followed by iron ore up 11% in 2016 and 27% in 2017 then thermal coal, up 13% in both years.
Morgan Stanley tosses up between the robust free cash flow with ongoing debt reduction and the potential for iron ore to drag the equity lower in the near term, and opts for the latter.
Rating is downgraded to Underweight from Equal-weight, with the broker looking to take the opportunity to turn positive again. Attractive industry view retained.
Resolute Mining (RSG) Downgraded to Equal-weight from Overweight by Morgan Stanley and Neutral from Buy by Citi B/H/S: 1/1/0
Confirmation of the company’s mine plan in Queensland has brought value to the base case for Morgan Stanley, but the equity has had a strong run up and the metrics are looking fair, so the broker downgrades to Equal-weight from Overweight.
The stock has been a stand-out in the sector and execution is now key for the broker.
Resolute Mining has raised $150m to fund capex and working capital, for the Ravenswood Expansion Project. Citi analysts note the share price has gained 500% over the past twelve months.
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