It turns out some of the local yield stocks might have risen a tad too far, while ongoing reductions to commodity prices forecasts continue to impact. Plus some sectors/companies are experiencing various forms of negative news, ranging from healthcare reforms in Australia to soft commodities and the weather, to a reshuffling of major bank preferences by the Macquarie brokers.
In the good books
Australia & New Zealand Banking Group (ANZ) upgrade to Outperform from Neutral by Macquarie B/H/S: 5/2/1
Macquarie brokers acknowledge ANZ faces more risks than its peers because of the exposure to slowing Asian markets and an overweight position in the resources sector.
Still, its valuation discount to peers appears increasingly difficult to ignore and the broker upgrades the bank.
ASX Limited (ASX) Upgrade to Neutral from Sell by Citi B/H/S: 0/5/3
Citi brokers are anticipating rather benign growth at the interim report as price discounts negate double-digit growth in derivatives. Fiscal 2016 cost guidance should be maintained, even though the analysts see a longer term benefit developing.
They suggest the solid balance sheet and dividend yield should provide support.
Beadell Resources Limited (BDR) Upgrade to Neutral from Sell by Citi B/H/S: 1/1/1
Commodity analysts at Citi are in full catch-up mode, further cutting forecasts, as January 2016 has been much worse than anticipated. Call it a mark-to-market exercise. The main beneficiary has been gold, with Citi neutralising its prior negative outlook. Beadell Resources has therefore been upgraded.
National Australia Bank (NAB) Upgrade to Buy from Neutral by Citi B/H/S: 2/5/0
Citi analysts note how investors have started to price Australian banks differently, with CommBank leading the pack in terms of relative valuation. The analysts argue this sector bifurcation doesn’t appear justified. In their view, current circumstances are making operational performances more uniform across the sector.
Negative capital generation is driving CET1 ratios lower for all banks with little or no buffer, point out the analysts. They believe share price falls add to valuation support for the sector in general.
The stockbroker has upgraded NAB to Buy and this impacts on its sector preferences.
Rio Tinto (RIO) Upgrade to Add from Hold by Morgans B/H/S: 6/2/0
The December quarter production numbers were strong in operational terms, although iron ore was slightly disappointing to Morgans. The broker has upgraded the global miner following recent share price weakness. See also RIO downgrade.
In the not-so-good books
Commonwealth Bank of Australia (CBA) Downgrade to Neutral from Outperform by Macquarie B/H/S: 2/6/0
While the bank’s high return on equity justifies a premium valuation, Macquarie believes its outperformance relative to peers limits further upside.
The broker suspects mortgage re-pricing has been overstated by the market. Rating for the bank is therefore downgraded.
Healthscope Limited (HSO) Downgrade to Neutral from Outperform B/H/S: 2/5/1 and Ramsay Health Care (RHC) Downgrade to Underperform from Outperform by Macquarie B/H/S: 2/3/3
Macquarie observes the uncertainty that exists surrounding the impact of the Medicare Benefits Schedule (MBS) review on the hospital industry. The broker suspects it could be material and there is little appreciation of the risk.
Hence, a cautious outlook on the sector is warranted until the impact is clearer.
The broker prefers Healthscope to Ramsay Health Care because of a larger brownfield pipeline and less exposure to France.
Iluka Resources (ILU) Downgrade to Underweight from Neutral by JP Morgan B/H/S: 3/3/1
Iluka’s December quarter production performance was in line with revised guidance, note the analysts. They see multiple negatives, including the fact the zircon sales mix is going to include a higher proportion of lower-priced product and the fact that mineral sands prices continue to weaken.
Market consensus projections are also too high, argues the stockbroker. The stock is therefore downgraded.
Rio Tinto (RIO) Downgrade to Neutral from Overweight by JP Morgan B/H/S: 6/2/0
Yet another round of significant cuts to commodity prices forecasts have an important impact on JP Morgan’s projections for Rio Tinto in the years ahead.
The new forecast is for iron ore to average US$40 a tonne in 2016 while the long-term price forecast has now settled at US$50/tonne. Price forecasts for coal have been reduced as well.
The result is that Rio Tinto shares are no longer seen as representing compelling value from a long term perspective. See also RIO upgrade.
Santos Limited (STO) Downgrade to Hold from Add by Morgans B/H/S: 5/2/1
Morgans has downgraded oil price forecasts, lowering earnings estimates for Santos by 17% and 12% for fiscal 2016 and fiscal 2017, respectively. The broker has lost confidence in the robustness of the company’s strategy as it slips into negative free cash flow territory.
With a shortage of potential positive catalysts, continued weakness in oil could trigger large impairments, the broker fears. Morgans was also disappointed in the November equity raising, believing it was the least attractive option.
Westpac Banking Corporation (WBC) Downgrade to Neutral from Outperform by Macquarie B/H/S: 5/3/0
Macquarie notes the bank’s sector leading performance is likely to continue for fiscal 2016, underpinned by its margin outlook. The broker expects Westpac will compete more aggressively for deposits and margin offsets are incorporated into estimates, such that only modest improvement is expected in margins in fiscal 2016.
Hence, there is a potential risk to market expectations and the broker downgrades the bank.
Earnings Forecasts
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