Buy, Sell, Hold – what the brokers say

Founder of FNArena
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Last week saw a number of fourth quarter and half year results from the materials space and analysts were not only met with below expectation reports, but also the need to rebase estimates in the face of still falling prices for most commodities. Thus, the list of downgrades reads like a who’s who of the materials sector. Upgrades were dominated by Commonwealth Bank’s proposals for its retail trusts.

In the good books

CFS Retail Property Trust (CFX) was upgraded to Neutral from Underweight by JP Morgan. Commonwealth Bank (CBA) has a proposal, incomplete, to internalise the management of both CFS Retail and Commonwealth Property (CPA). There’s no word on the obvious question of price, but JP Morgan estimates the entire platform generates $70 million in annual earnings and could sell for $650 million. JP Morgan said this is step one. Step two would be for CBA to sell out of the real estate investment trusts. For the broker, this is game-changing news. M&A activity is not seen likely for CFX, given four interested parties control 34%.Commonwealth Property Office Fund (CPA) was upgraded to Neutral from Underperform by Macquarie and to Overweight from Underweight by JP Morgan. Macquarie noted Dexus Property (DXS) has acquired a 14.9% interest in CPA by way of a forward contract. This revealed corporate appetite for CPA sooner than expected, after the announcement of a planned internalisation of management. The broker said that, whilst it could be difficult for competing bidders to enter the playing field and generate pricing tension, Dexus won’t necessarily be limited to paying the value of net tangible assets for CPA if it has the backing of a wholesale capital provider.

Stockland (SGP) was upgraded to Buy from Neutral by UBS. The broker is expecting 8% EPS growth in FY14, which should flow through to an improving DPS payout ratio. The broker also noted low interest rates are starting to feed housing activity, and a resilient retail portfolio. Non-discretionary retail and residential are now preferred by the broker going into reporting season, with SGP seen as a key pick in the AREIT sector.

In the not-so-good books

Atlas Iron (AGO) was downgraded to Neutral from Overweight by JP Morgan and to Neutral from Outperform by Credit Suisse. Guidance for FY14 was underwhelming, as it reflected reduced reserves and a shortened mine life at Pardoo. There is also significant uncertainty about how Atlas will unlock the value of its port allocation beyond Horizon 1.GUD Holdings (GUD) was downgraded to Underperform from Neutral by Macquarie, Underperform from Neutral by Credit Suisse and to Sell from Neutral by Citi. FY13 results were disappointing, particularly those from the consumer and industrials divisions. The consumer division reported the fourth successive year of sales declines. While the Asian business is reported to have grown, the commercial business was considered loss making and margins in the Australian racking business remain under pressure. There was little improvement in the operating environment expected in FY14.

McMillan Shakespeare (MMS) was downgraded to Sell from Neutral by Citi and to Underperform from Buy by BA-Merrill Lynch. The company pre-announced its unaudited FY13 result, reporting revenue of $331 million to bring in a $62 million net profit. The company also said it was not in a position to provide guidance for the 2H13 dividend due to the proposed changes to fringe benefit taxes on autos. FY13-15 EPS forecasts were cut by 4%, 37% and 38% on the FBT ambiguity, which served to pull the price target lower. Brokers opted to get ahead of the swing, downgrading their recommendations.

Santos (STO) was downgraded to Neutral from Buy by UBS and to Underperform from Neutral by Credit Suisse. June quarter production may have come in 2% higher than the March quarter, but it still fell well short of UBS’ expectations. Sales revenue missed by 13%. The 2013 production guidance was cut by 3% due to production issues in Vietnam, Bangladesh and the Carnarvon Basin.

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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