Buy, Sell, Hold – what the brokers say

Founder of FNArena
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The past week showed a marked turnaround in stockbroker sentiment towards ASX listed stocks, with twice as many recommendation upgrades as downgrades.

It’s possible that the positive investor sentiment that has taken hold of equity prices in September is also being reflected in sentiment among securities analysts.

Another easy conclusion to draw is that yield is not completely out of fashion (see Peter Switzer’s story today) and it probably won’t be for a while as last week half of all upgrades (four) involved yield stocks.

In the good books

Boart Longyear (BLY) was upgraded to Neutral from Sell by Citi, on the back of its debt-restructuring plan. The issuance of US$300 million of US senior notes will be used to pay down the $450 million bank facility. The likely debt restructure removes the risk of a near-term rights issue to avoid a covenant breach. Still, Citi notes, net debt will remain elevated, meaning an equity raising further down the track can’t be ruled out.

Insurance Australia Group (IAG) was upgraded to Outperform from Neutral by Macquarie. Macquarie has reviewed the reserving adequacy as a key driver of profitability. The broker prefers Insurance Australia to Suncorp (SUN), given the level of reinsurance protection, zero exposure to life insurance and discounted P&C (property and casualty) valuation. This is despite the broker’s expectation that IAG will continue to invest in markets in Asia that do not return the cost of equity of the group.

Wesfarmers (WES) was upgraded to Outperform from Underperform by Credit Suisse after the broker upgraded the outlook for retail earnings. FY14 and FY15 earnings have been upgraded by 2% and 4% respectively. Discretionary retail accounts for around 40% of FY14 earnings, with supermarket retailing another 40%. Wesfarmers is leveraged to changes in the consumer environment and industrial earnings are at the bottom of the cycle and stand to benefit from any broader improvement in domestic activity. The broker also thinks resources earnings are at a bottom in the cycle for coal prices and this should drive a strong improvement in earnings in FY15.

In the not-so-good books

Blackthorn Resources (BTR) was downgraded to Neutral from Buy by UBS. Blackthorn has released the Kitumba pre-feasibility study. UBS found the study underwhelming and the project likely to return unfavourable economics under the broker’s price deck, which assumes a long term copper price of US$2.55/lb (compared to the company’s assumed price of US$3.50/lb). Nevertheless, the study is preliminary and likely to be optimised with further technical work.

Myer Holdings (MYR) was downgraded to Sell from Neutral by Citi after Myer reported FY13 like-for-like sale growth of just 0.4%. Citi notes, in FY13, costs rose faster than sales and the same outcome is likely in FY14. The broker thinks earnings in FY14 will fall by 5%. The rating is downgraded to Sell from Neutral as Citi believes the recent run in the share price looks unjustified based on the earnings trajectory. Citi considers Myer’s saving grace is a better price/earnings relative valuation compared with other large ASX-listed discretionary retailers.

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.

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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