So far this week there has been a bit of broker activity around financials with JP Morgan shuffling its Big Four ratings around. The broker rates stocks relative to its sector, so an upgrade for one, usually means a downgrade for another.
In the good books
JP Morgan upgraded Westpac (WBC) from Underweight to Overweight on the back of its underperformance of the bank index by 5% and underperformance of 7% compared to CBA since May. As WBC has the highest capital ratio of the group, another special dividend could be on the cards. JP Morgan is forecasting a full year FY13 dividend of 174 cents.
UBS upgraded medical group Resmed (RMD) to Buy from Neutral as it believes the recent focus on price decline has distracted the market from the reality that earnings drives valuation. The broker says that Resmed could release around 500 basis points of earnings margin over the next 24 months through savings, to offset the price decline.
In what appears to be a contrarian view, Macquarie upgraded Flight Centre (FLT) to Outperform from Neutral. It might be one of the most shorted stocks on the market but Flight Centre continues to increase earnings and contributions from the offshore businesses are lifting. Expectations are for a slow start to the financial year but it still has a strong net cash position. Macquarie based its upgrade on the potential for an increased dividend or growth via acquisitions.
In the not-so-good books
To balance out its upgrade to Westpac, JP Morgan dropped its rating on CBA (CBA) from Overweight to Underweight. Its relatively better performance than rival Westpac is probably due to strong dividend expectations, which are now factored into the price. JP Morgan is forecasting a full year FY13 dividend of 369 cents.
Another financial to come under the broker spotlight was Suncorp (SUN), which was downgraded to Hold from Buy by Deutsche Bank. The broker expects underlying profitability to peak in FY14 and sees downside risks to the sustainability of returns in home insurance.
Low levels of corporate activity remain a downer for share registry business Computershare (CPU), which was downgraded to Neutral from Outperform by Credit Suisse. There might be some upside coming from acquisitions, according to the broker, but it wants to see some signs that the corporate actions cycle is turning before it changes its view.
Citi downgraded Kingsgate (KCN) to Sell from Neutral following its June quarter results as two other brokers – BA Merrill Lynch and Macquarie – maintained their Underperform ratings. The June quarter was pretty much in-line with Citi’s expectations, but the lower gold price is beginning to have an impact, and FY14 guidance implies no growth. Citi also does not believe the scheduled Thai listing of Kingsgate’s operating subsidiary, Akara Mining Ltd, will go ahead in the current environment. Question marks therefore remain over funding for projects in Chile and NSW.
The above was compiled from reports on the FNArena database, which 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:
- Charlie Aitken: Why Woodside is a yield play [1]
- Olivia Long: My SMSF [2]
- Roger Montgomery: Blackmores – not quite what the doctor ordered? [3]
- Gavin Madson: Are ETFs the way to invest in bonds? [4]
- Tony Negline: SMSF assets and ownership [5]
- Paul Rickard: Question of the week – Safe investments [6]