The Australian share market is being hit, with stockbroker downgrades for individual stocks. No doubt this contributed to the rather lacklustre performance as the end of October approached.
In the good books
AUSNET SERVICES (AST) Upgrade to Buy from Neutral by UBS B/H/S: 2/6/0. The regulator’s draft decision for the Victorian regulated business was better than UBS expected and confirmed the broker’s suspicions that market risk is often higher than regulatory risk. Revenues are basically locked in for the next five years. UBS upgrades Ausnet to Buy from Neutral given the attractive yield on offer. Target is raised to $1.52 from $1.43.
TELSTRA CORPORATION LIMITED (TLS) Upgrade to Add from Hold by Morgans B/H/S: 1/5/2. After the investor briefing, Morgans considers most of the bad news is now priced in and the outlook has stabilised. Any investment in a joint venture in the Philippines is not expected to be as much as previously feared. The company suggests less than US$1bn would be needed to put the JV in a positive position for cash flow. Morgans believes the risk/reward is positively skewed for Telstra and upgrades to Add from Hold. Target is steady at $5.93.
In the not-so-good books
AUSTRALIA & NEW ZEALAND BANKING GROUP (ANZ) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Neutral from Overweight by JP Morgan .B/H/S: 3/4/1. FY15 results were modestly disappointing to Credit Suisse. The broker downgrades estimates by 1.0% and moves its rating to Neutral from Outperform. Target is lowered to $30 from $31.
Credit Suisse now prefers the domestic and consumer oriented major banks, being Commonwealth Bank (CBA) and Westpac (WBC), particularly for their Australian mortgage re-pricing leverage. The FY15 result suggested to JP Morgan it is time to downgrade to Neutral from Overweight. FY16 forecasts are downgraded by 3.0%. The broker supports the decisions to prioritise profitability over growth but expects it will take time to turn around.
The broker is positive on the margin stability exhibited in the second half but suspects recent divestments, difficult trading conditions and elevated cost growth have taken a toll on returns. Target is lowered to $31.59 from $33.82.
BT INVESTMENT MANAGEMENT LIMITED (BTT) Downgrade to Sell from Neutral by UBS B/H/S: 3/2/1. The company is seen executing well with FY15 cash profit ahead of UBS forecasts. With equity markets up 5-10% in the year-to-date, the broker acknowledges the near-term trends could remain positive. Still, UBS does not believe the current elevated level of earnings should be capitalised on peak multiples. Hence, the rating is downgraded to Sell from Neutral. Target is raised to $9.75 from $8.50.
DRILLSEARCH ENERGY LIMITED (DLS) Downgrade to Neutral from Buy by UBS B/H/S: 2/2/0. Drillsearch Energy and Beach Energy (BPT) have announced a merger agreement. Drillsearch shareholders will receive 1.25 Beach shares for each share they own and will own 30% of the merged entity.
UBS notes Seven Group (SVW), which has a 19.9% stake in both companies, has signaled it supports the merger. The broker downgrades to Neutral from Buy on the news and increases its target to 81c from 80c.
DORAY MINERALS LIMITED (DRM) Downgrade to Neutral from Outperform by Macquarie B/H/S: 0/1/0. Doray has already pre-released production numbers but the official report confirmed costs were in line with expectation. The Deflector project is on track, Macquarie notes, and mining has commenced at Judy Lode. It was a solid quarter but Doray has rallied strongly in recent weeks to catch up to its peer group. Hence the broker pulls back to Neutral. Target unchanged at 60c.
DUET GROUP (DUE) Downgrade to Neutral from Buy by UBS B/H/S: 1/5/1. The regulator’s draft decision for the Victorian regulated business was better than UBS expected and confirmed the broker’s suspicions that market risk is often higher than regulatory risk. Revenues are basically locked in for the next five years. The broker downgrades DUET to Neutral from Buy following recent moves in the security price. Target is raised to $2.41 from $2.39.
ERM POWER LIMITED (EPW) Downgrade to Hold from Add by Morgans B/H/S: 0/3/0. The mid point of guidance for FY16 provided at the AGM is around 8.0% below FY15, Morgans observes. The broker notes financing costs are also expected to rise. Morgans reduces earnings estimates to align with guidance. Rating is downgraded to Hold from Add. Target is reduced to $1.96 from $2.64.
EVOLUTION MINING LIMITED (EVN) Downgrade to Neutral from Outperform by Macquarie B/H/S: 1/5/0. Evolution had already pre-released better than expected Sep Q production numbers, so no surprises from the official release. The company will review production guidance in January, at which point Macquarie believes cost forecasts will be lowered. Exploration continues to impress but given the stock’s 70% rally in two months on an unchanged A$ gold price, Macquarie is downgrading to Neutral. Target rises to $1.60 from $1.50.
REA GROUP LIMITED (REA) Downgrade to Hold from Add by Morgans B/H/S: 5/3/0. Ahead of the quarter result, Morgans downgrades to Hold from Add given the recent out-performance of the share price. The quarterly report is considered pivotal, as it should reveal whether or not yields were sacrificed to secure the recent surge in depth ad volumes. Morgans accepts there is some risk of a substantial upgrade to forecasts. Target is steady at $48.32.
TABCORP HOLDINGS LIMITED (TAH) Downgrade to Underweight from Neutral by JP Morgan B/H/S: 3/1/3. The company may be performing well and making sound strategic decisions but revenue growth in the first quarter was below JP Morgan’s expectations.
The broker suspects the stock may pause after outperforming the market in the year to date. Rating is downgraded to Underweight from Neutral. Target is reduced to $4.29 from $4.51.
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