Rallying share prices triggered more stockbroker downgrades than upgrades. If it wasn’t for Deutsche Bank upgrading three gold miners during the week, the numbers would have looked even more polarised.
In the good books
Alacer Gold Corporation (AQG) Upgrade to Buy from Hold B/H/S 3/2/1; Evolution Mining (EVN) Upgrade to Buy from Hold B/H/S: 2/4/0; and Newcrest Mining (NCM) Upgrade to Hold from Sell by Deutsche Bank: B/H/S /1/4/3. The broker observes the gold sector remains volatile and, with a US rate hike imminent, both US and Australian dollar priced gold have retreated. Hence, valuations for equities are more interesting. On the other hand, the broker notes cost reductions are largely done and dusted and higher all-in costs will be emerging in 2016.
James Hardie Industries (JHX) Upgrade to Buy from Neutral by Citi B/H/S: 4/2/1. The company has issued a profit warning and Citi analysts are happy because they see a chance to (finally) raise their recommendation to Buy. Citi analysts explain, the US housing market is operating at circa 1 million housing starts, some 30% below mid cycle levels. The company management is also focused on restoring PDG (property development growth) growth to trend. The combination provides the analysts with enough confidence and provides investors with a buying opportunity. Price target has been raised to $18.70 from $18.40. See also JHX downgrade.
[1]Mineral Resources Limited (MIN Upgrade to Outperform from Neutral by Macquarie B/H/S: 3/1/0. Mineral Resources’ annual general meeting delivered 2016 profit guidance of $250-290 million, ahead of Macquarie’s $224.5 million forecast. The broker concurs with the assumptions management is making with regard average iron ore prices and the A$, forecast exports and crushing. Target rises to $5.29 from $5.07.
In the not so good books
ALS Limited (ALQ) Downgrade to Hold from Buy by Deutsche Bank B/H/S: 0/6/2. Recent trading updates from minerals drilling companies reveals conditions have deteriorated in the September quarter and, consequently, Deutsche Bank does not expect ALS will re-rate until minerals conditions stabilise.
The broker remains attracted to the long-term fundamentals and acknowledges the life sciences division has a positive outlook, but downgrades the stock given the uncertain outlook for the next 12 months. Target is reduced to $5.10 from $7.13.
Challenger Limited (CGF) Downgrade to Neutral from Outperform by Macquarie B/H/S: 4/4/0. Challenger has outperformed the market by 37% over twelve months and 28% over the last quarter but the earnings outlook has not changed over that period from steady, high single-digit growth, Macquarie notes. While the removal of legislative barriers should prove supportive and Challenger is beginning to expand its product suite, strength has come more from a positive theme than the numbers themselves. The broker has lifted its target to $9.03 from $7.97.
Fortescue Metals Group (FMG) Downgrade to Equal-weight from Overweight by Morgan Stanley B/H/S: 2/5/1. Morgan Stanley has come away from a trip to the mine sites with greater confidence in the cost cutting benefits already achieved as well as the potential for more to come. The broker downloads the company, given the recent price rally. Target is raised to $2.50 from $2.30.
[2]James Hardie Industries (JHX) Downgrade to Neutral from Overweight by JP Morgan B/H/S: 4/2/1. JP Morgan is clearly disappointed that James Hardie had to issue a profit warning. Moreover, the analysts suspect it’s going to take longer to fix, hence why they decided to downgrade the business. Price target tumbles to $17.30 from $18.70. See also JHX upgrade.
Pact Group Holdings (PGH) Downgrade to Hold from Buy by Deutsche Bank and Downgrade to Neutral from Outperform by Credit Suisse B/H/S: 1/4/0. Deutsche Bank considers the trading update to be consistent with expectations, albeit subdued, with full-year guidance maintained. Still, the company does expect lower demand from agriculture in Australasia and global dairy. The broker downgrades the business as the stock is now trading at a 4.0% premium to valuation. Target is $4.95.
Credit Suisse downgrades the company, as the share price has rallied over the past few months. Target is raised to $4.90 from $4.80.
Programmed Maintenance Services Limited Downgrade to Neutral from Outperform by Credit Suisse B/H/S: 2/3/0. First half profit was below Credit Suisse’s forecasts. The property & infrastructure and workforce divisions offset a weak resources division while management noted the outlook for marine is very weak. The broker believes the stock is fairly valued until visibility on the marine segment improves. Target is steady at $3.03.
SpeedCast International Limited (SDA) Downgrade to Neutral from Outperform by Macquarie B/H/S: 0/2/0. SpeedCast has made its fifth acquisition in 2015, acquiring Singapore-based ST Teleport for S$18.5 million. It provides SpeedCast with a large teleport and data centre in an important hub for maritime and oil & gas movements, the broker says.
The deal stretches the balance sheet somewhat but debt is expected to quickly reduce over 12-18 months. Macquarie continues to be a fan of the underlying theme of growing demand for bandwidth, but sees near term growth now captured in the share price, hence the broker pulls back to Neutral. Target rises to $4.70 from $3.91.
Sims Metal Management (SGM) Downgrade to Neutral from Buy by Citi B/H/S: 4/3/0; Downgrade to Equal-weight from Overweight by Morgan Stanley and Downgrade to Hold from Add by Morgans B/H/S: 0/4/0. Citi has taken a two-tier approach to updating on Sims’ annual general meeting profit warning. This is the second response with the price target tumbling to $8.30 from $12.20. Rating is therefore downgraded. Earnings estimates have been slashed (not an exaggeration). A resumption in growth back to the EPS level of fiscal 2015 is anticipated in fiscal 2017.
Morgan Stanley analysts lament the absence of organic growth post yet another profit warning from the company. The analysts do believe the balance sheet keeps the company in a good position to benefit through M&A, but the absence of organic growth has triggered a downgrade. This pulls back the price target to $4.30 from $5.50.
Morgans reduces fiscal 2016 forecasts by 33% and fiscal 2017 by 38%. Target is reduced to $3.36 from $4.75.
Earnings Forecasts
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