It seems like the world is upside down. Australian equities start recovering from an exceptionally weak opening to the new calendar year, and stockbroking analysts start issuing a flood of recommendation downgrades for individually listed stocks.
Last week, FN Arena registered no less than 23 downgrades against a meagre 8 upgrades.
Reporting season formally starts this week, with Tabcorp and Downer EDI being amongst the first to report on Thursday.
Expectations short term are low, but are they still too high 12 months out?
In the good books
FORTESCUE METALS GROUP LTD (FMG) Upgrade to Outperform from Neutral by Credit Suisse B/H/S: 3/4/1
Credit Suisse is impressed with the cost control witnessed in the December quarter. Capex is lower than expected, with the company now targeting US$250m for FY16.
The broker has revised up FY16 and FY17 earnings estimates by 6.0% and 7.0% respectively. Credit Suisse remains cautious regarding second half 2016 pricing but envisages the risk is to the upside in the near term as China’s construction season gets underway.
Rating is upgraded to Outperform from Neutral. Target is $2.00.
[1]ROYAL WOLF HOLDINGS LIMITED (RWH) Upgrade to Buy from Hold by Deutsche Bank B/H/S: 2/2/0
Factoring in the recent earnings warning on a weaker operating environment and a major client entering voluntary administration, Deutsche Bank now expects FY16 earnings of $18.6m, 26% below its previous estimates. The target falls to $1.70 from $2.70 and the rating is upgraded to Buy from Hold, given the upside to the current price.
SANDFIRE RESOURCES NL (SFR) Upgrade to Neutral from Underweight by JP Morgan B/H/S: 3/5/0
The analysts saw a strong performance in the December quarter. They note the maiden resource release for Monty has the potential to surprise in a positive manner, but investors might have already priced this in, is the analysts’ view. They highlight Sandfire is heading into a net cash position, but commodity prices remain weak. $4.75 target retained. Estimates have been lowered.
TEN NETWORK HOLDINGS LIMITED (TEN) Upgrade to Neutral from Underperform by Macquarie B/H/S: 1/4/2
The latest data show the metro TV market is in modest decline and regional is slipping away, Macquarie notes. The Big Bash is helping Ten Network to a solid ratings resurgence at the expense of Seven West Media and Nine Entertainment. Seven has the Rio Olympics to look forward to while Nine’s cricket offering this season has been weak. Macquarie has upgraded Ten to Neutral and lifted its target to $1.55.
WESTFIELD CORPORATION (WFD) Upgrade to Outperform from Underperform by Credit Suisse B/H/S: 5/1/0
Credit Suisse considers the process of refining the portfolio is largely behind the company. From FY16-20 the broker expects Westfield to deliver the highest rate of operational cash flow growth of any A-REIT, driven by the significant ramp up in development completions. Westfield currently has $3.8bn in major products under construction.
Rating is upgraded to Outperform from Underperform. Target is raised to $10.93 from $9.47.
In the not-so-good books
ALS LIMITED (ALQ) Downgrade to Sell from Hold by Deutsche Bank B/H/S: 0/3/4
The company achieved the lower end of guidance in the December quarter but the composition of earnings is a cause for concern at Deutsche Bank. Geochemistry sample volume growth has turned negative for the first time in 12 months and the energy division is loss making.
This has more than offset the better-than-expected revenues in the life sciences and industrial divisions.
The broker downgrades to Sell from Hold. Target is reduced to $2.93 from $3.78.
AWE LIMITED (AWE) Downgrade to Neutral from Outperform by Credit Suisse B/H/S: 3/3/0
AWE will sell its 10% stake in Sugarloaf for US$190m. Credit Suisse observes that just nine months ago Sugarloaf was considered a core asset. That was until the oil price fell sharply.
The speed at which the sale was undertaken is of some concern to the broker, making it hard to forecast out through the cycle.
The broker believed the stock was oversold but now questions where the next leg of upside will come from. Rating is downgraded to Neutral from Outperform.
Target is reduced to 60c from 95c.
[2]AURIZON HOLDINGS LIMITED (AZJ) Downgrade to Hold from Buy by Deutsche Bank B/H/S: 2/6/0
Deutsche Bank has downgraded coal and iron ore volume forecasts as the latest trading update highlighted uncertain demand. With first half underlying earnings now expected to be $403m and valuation reduced, the broker downgrades to Hold from Buy. Target falls to $4.15 from $5.70.
MAGELLAN FINANCIAL GROUP LIMITED (MFG) Downgrade to Underweight from Equal-weight by Morgan Stanley B/H/S: 1/0/1
Morgan Stanley downgrades to Underweight from Equal-weight, reflecting a less positive bias versus the sector. The broker also has issues with a stretched valuation and considers the bull case is priced into the stock.
The company also lacks diversity and has less flexibility on costs versus its peers, In-Line view retained. Target is reduced to $18.50 from $21.50.
MACQUARIE GROUP LIMITED (MQG) Downgrade to Equal-weight from Overweight by Morgan Stanley B/H/S: 3/3/0
Morgan Stanley suspects headwinds are emerging in four of the operating divisions emanating from a weaker outlook for investment markets. The broker suspects the earnings upgrade cycle is coming to an end and risk of de-rating has increased.
The broker adds that there are no major concerns about the business or the balance sheet. Rating is downgraded to Equal-weight from Overweight. In-Line sector view retained. Target is reduced to $76.50 from $93.00.
NEWCREST MINING LIMITED (NCM) Downgrade to Sell from Hold by Deutsche Bank B/H/S: 0/4/4
The December quarter production report impressed Deutsche Bank, with a standout performance at Lihir and a rapid recovery at Cadia. The broker is concerned about the sustainability of the performance, particularly water availability at Lihir.
FY16 production forecasts are raised by 3.0%. Target is lifted to $11.90 from $11.70 but the rating is downgraded to Sell from Hold based on valuation.
NORTHERN STAR RESOURCES LTD (NST) Downgrade to Sell from Hold by Deutsche Bank and Downgrade to Neutral from Outperform by Macquarie B/H/S: 0/2/1
The December quarter was strong and the company has increased its cash position to $211m at the end of the half year. Despite a healthy balance sheet and cash-generating assets with no debt, Deutsche Bank believes the share price is running too hot.
Following a 30% rally over the last two weeks, the broker downgrades to Sell from Hold on valuation. Target is $2.50. Northern Star had pre-released its Dec Q numbers, so no surprises in a solid official report.
Production and costs were largely in line with Macquarie’s expectation but cash generation came in slightly better.
The stock has rallied 24% year to date, while the A$ gold price has remained flat, and is sitting 6% above the broker’s valuation. Hence a downgrade to Neutral. Target unchanged at $3.10.
PLATINUM ASSET MANAGEMENT LIMITED (PTM) Downgrade to Equal-weight from Overweight by Morgan Stanley B/H/S: 0/2/1
Morgan Stanley envisages lower near-term growth with diminishing uplift from distribution and a more mature retail mix, as well as lower inflows. Still, the broker believes the downside risks are modest and valuation multiples reasonable.
Morgan Stanley downgrades to Equal-weight from Overweight. Target is lowered to $6.90 from $8.30. In-Line sector view retained.
Earnings Forecasts
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