Falling share prices last week finally started to trigger recommendation upgrades from stockbrokers. We registered twice as many upgrades than downgrades for the week: 18 against 9. It was not all purely share price related though with BlueScope Steel and Boral among those receiving upgrades after posting better-than-expected market updates.
In the good books
ASX Limited (ASX) Upgrade to Neutral from Underperform by Credit Suisse B/H/S: 0/6/2
First half results beat Credit Suisse’s forecasts and the broker upgrades fiscal 2016 estimates by 2.0%. The beat was primarily on the back of higher revenue. The result highlights the defensive nature of the stock and the relatively low earnings risk, in the broker’s view.
BlueScope (BSL) Upgrade to Buy from Neutral by UBS B/H/S: 7/0/0
UBS observes regional steel maker spreads have rebounded, with extreme losses by Chinese mills amid declining demand in China, and with global protectionism increasing and working to reduce Chinese steel output.
While UBS considers it too early to call a bottom, recent events suggest the rebound in spreads is sustainable in the near term.
Boral Limited (BOR) Upgrade to Buy from Sell by Citi B/H/S: 4/3/0
The interim result was supported by a tax benefit, thus of low quality, but of more importance, perhaps, is that Citi sees Boral as a relatively defensive safe-haven at a time when investors are jittery about a potential slowdown in Australian housing.
Anticipated infrastructure spending should support growth in the years ahead.

REA Group Limited (REA) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Add from Hold by Morgans B/H/S: 4/4/0
First half earnings were in line with forecasts and Credit Suisse expects Australian revenue growth to remain strong in the second half. Price increases in May/June should support revenue into fiscal 2017.
The only negative, in the broker’s opinion, was the guidance for cost growth to be higher than revenue growth. Full year estimates are trimmed by 2.0% to reflect this.
First half results were above Morgans and the market. The broker notes the market disliked the result because management avoided commenting on the planned May price rise and warned that second half margins would be lower.
Morgans is not bothered by either of these issues and believes the current sell off provides the opportunity to buy a long-term growth story at a discount to intrinsic value, a rare event for REA Group.
Sonic Healthcare Limited (SHL) Upgrade to Accumulate from Hold by Ord Minnett B/H/S: 5/1/2
Ahead of the first half results Ord Minnett notes risks remain regarding the Medicare Benefits Schedule review but on valuation grounds, and with a market craving growth plus some level of certainty, the rating is upgraded by the broker.
A robust first half result is expected, with guidance maintained and regulatory pressure unlikely to impact.
Suncorp Group (SUN) Upgrade to Buy from Neutral by UBS B/H/S: 5/2/1
First half profit was ahead of UBS forecasts. Although the company has guided to a higher margin confidence in a sustained recovery is expected to depend on how it can address the issues in home and motor insurance.
UBS is yet to be convinced that the company has addressed the short-tail claims challenges but believes the balance of risks has tilted and upgrades the insurer.
In the not-so-good books
Newcrest Mining (NCM) Downgrade to Underweight from Equal-weight by Morgan Stanley B/H/S: 0/3/5
The broker believes the current global theme of macro uncertainty due to China and US growth fears and negative rates in Europe and Japan will mean the gold price will remain supported for now, although the market is more balanced in the medium term.
Valuation upgrades for gold miners is on the cards. Industry view: in-Line.
Rio Tinto (RIO) Downgrade to Neutral from Buy by Citi B/H/S: 5/3/0
Post the 2015 financial report, Citi analysts have reduced projected capex & costs as well as the dividend to be paid out in years to come. The immediate result is the company is now expected to be cash flow positive.
On the negative side, Citi remains convinced of yet lower prices for iron ore in the years ahead. This forecast has pulled the balance into neutral territory, offsetting the positives noted above. The analysts are taking notice of the need to continue lowering costs in the face of continued downward pressures on the price of iron ore.
Tassal Group (TGR) Downgrade to Hold from Add by Morgans B/H/S: 2/1/0
First half results were weaker than expected. Morgans expects earnings growth will be stronger in the second half with the De Costi synergies.
The broker suspects the mention of pricing pressure on retail contracts in fiscal 2017 spooked the market and, with less than 10% upside to the price target of $4.20, the broker downgrades the business.

Watpac Limited (WTP) Downgrade to Hold from Add by Morgans B/H/S: 0/1/0
Morgans downgrades to Hold from Add after strong share price appreciation. Operationally, the mining division is expected to be difficult and, with no material contracts won in the first half, the broker suspects asset carrying values are at risk of impairment in fiscal 2016.
Meanwhile, the outlook for the core construction business appears solid and the broker notes the balance sheet is strong, which should enable the company to continue its buy-back program.
Earning Forecasts

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