As far as broker ratings go in Australia, the week past delivered yet another week of more downgrades than upgrades, while the share market as a whole seems to have stopped trending. In other words: it’s not rising share prices that are doing any of the damage to corporate valuations and to broker ratings. It’s all related to disappointing financial performances and/or bloated expectations.
This week, we focus on those companies that got more than one action from a broker. There were a few of those but property group Charter Hall was a very pleasant surprise, receiving four upgrades.
In the good books
Charter Hall (CHC) was upgraded to Neutral from Underperform by Credit Suisse, to Hold from Sell by Deutsche Bank, to Buy from Neutral by UBS and to Buy from Neutral by Citi. Charter Hall’s result beat Credit Suisse by 2% and although the broker expects FUM growth to slow after a solid period, it believes CHC still has room to improve its return on equity. CHC has been underperforming the REIT sector of late but a 6.1% yield limits downside. The FY13 result was 2% above Deutsche Bank’s estimates, despite being at the top end of guidance. The broker thinks FY14 EPS growth guidance of 7%, coupled with a 3-year CAGR of 5.2% justifies current pricing. UBS cites solid support from capital partners, growth in investment yields of 12%, the redeployment of legacy investment funds, AUM growth, and a steady fall in debt costs. In Citi’s view the FY13 earnings growth of 11.3% was the best in the ASX200 A-REIT sector, and guidance for 7% growth in FY14 is also strong. The broker likes the business and lifts estimates for FY14-16.
[1]Perpetual (PPT) was upgraded to Neutral from Sell by Citi and to Outperform from Neutral by Macquarie. In the wake of the FY13 results, Citi has lifted FY14 earnings expectations by 2% and made only compositional changes to FY14. No changes are made to the $38.00 price target but, as the stock has fallen below that level, the rating is raised to Neutral from Sell. The broker thinks the stock looks fully valued but the Trust Company (TRU) transaction would be significantly accretive if Perpetual is allowed to carry it off. Perpertual delivered on Macquarie’s expectations in the FY13 results, with the major cost cutting program and increased operating leverage to improved equity markets. The share price is now materially below the broker’s unchanged $40.00 price target and the rating is upgraded to Outperform from Neutral.
Telecom NZ (TEL) was upgraded to Neutral from Underweight by JP Morgan and to Neutral from Sell by UBS. JPMorgan says the key elements of Telecom’s result met expectations. The broker notes conditions remain tough but believes margin re-basing risk is falling. It upgrades the stock to Neutral from Underweight, citing a low market valuation, strong prospective yield and receding risk. UBS says strategy looks to be on track but tinkers with estimates to reflect the good and bad of lower mobile services growth, improved labour costs, lower depreciation and stronger capital expenditure. UBS lifts earnings estimates in FY14 and FY15 4% and 2% respectively.
Transfield Services (TSE) was upgraded to Buy from Hold by Deutsche Bank and to Outperform from Neutral by Macquarie. The FY13 result revealed strong cash flow generation and debt reduction, which has lowered the risk of the company breaching debt covenants. Deutsche Bank likes the low exposure to the resource construction market, the overweight position in the recurring infrastructure, property and hydrocarbon maintenance markets. Macquarie upgrades the rating to Outperform from Neutral, with balance sheet concerns allayed in the short term. Cost cutting and a more conservative approach to setting guidance should help the company deliver on expectations in FY14.
In the not-so-good books
David Jones (DJS) was downgraded to Underperform from Neutral by BA-Merrill Lynch and to Underweight from Neutral by JP Morgan. The company reported a 2.9% decline in like-for-like sales growth for the fourth quarter, weaker than Merrills expected. The rating is downgraded to Underperform from Neutral and the price target is lowered to $2.50 from $2.60. JP Morgan says softer-than-expected fourth quarter sales from David Jones suggest FY14 risk, with competition activity and weak consumer traffic outweighing sentiment around an improved margin mix. JPMorgan cuts FY13, FY14 and FY15 earnings per share forecasts 1.4%, 6.6% 7.2% respectively. The broker notes risks outweigh rewards, and downgrades to Underweight from Neutral.
[2]Drillsearch (DLS) was downgraded to Neutral from Outperform by Macquarie and to Neutral from Buy by UBS. Adjusted earnings were 33% ahead of forecasts with the major reason being the lower depreciation and low effective tax rate. The stock has rallied 50% from the June lows and is now trading at a 20% premium to core net asset value. Macquarie downgraded its rating to Neutral from Outperform and the price target was reduced to $1.55 from $1.60. UBS is awaiting Acer results before factoring in full value and downgrades the stock to Neutral from Buy to account for the recent share price rally.
Mount Gibson Iron (MGX) was downgraded to Underperform from Neutral by Credit Suisse and to Underweight from Neutral by JP Morgan. Credit Suisse has raised the target price to 70c from 65c following the FY13 results. The share price has staged a 75% rally since late June on the back of the iron ore price to reach 72c, ahead of the target price, and the broker thinks it’s overdone. The rating is downgraded to Underperform from Neutral. Mount Gibson’s profit fell short of expectation but JP Morgan saw a few bright spots – EBITDA rose 26% in the second half and cash flow was healthy. JP Morgan notes the stock has rallied 40% in three months, outpacing its peer by a healthy clip and cuts the rating to Underweight from Neutral.
Qantas (QAN) was downgraded to Underperform from Neutral by Credit Suisse and to Underweight from Neutral by JP Morgan. Qantas’ result missed consensus. Credit Suisse says the international business still has a long road to profitability, but cash flow has improved, so a possible return to dividend payments could provide stock support. In the meantime, competition, higher oil and a weaker A$ are all providing headwinds. JP Morgan found little to impress in Qantas’s result, noting strong headwinds and excess domestic capacity, taking little heart from improvements in the international business. The broker downgrades the airline to Underweight from Neutral in line with valuation, expecting a recovery is still a way out – after FY14 when the broker flags rosier gearing, cash flow and coverage metrics.
[3]The FNArena database 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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Also in the Switzer Super Report:
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