Buy, Sell, Hold – what the brokers say

Editorial director of Switzer
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We are now well into reporting season, which gives brokers plenty of things to look out for. It’s also a time when companies like to give the market an idea of what’s coming up and Virgin Australia Holdings (VAH) certainly gave the market a surprise when it announced guidance for the financial year on Monday.

As a result of a “difficult economic and competitive environment, one-off pre-tax restructuring and transformation costs and the carbon tax”, Virgin now expects a statutory loss after tax of between $95 million to $110 million.

That announcement led JP Morgan to downgrade it to Underweight from Neutral and UBS to Neutral from Buy.

Also in the not-so-good books

iiNet (IIN) announced a decision early in the week to buy Adam Internet Holdings and associated companies for $60 million in cash consideration. Four brokers maintained their ratings on the announcement – one Buy, two Neutrals or Holds, and one Underweight – but Credit Suisse downgraded it to Underperform from Neutral. Credit Suisse estimates the deal to be only around 3% cash earnings accretive in FY14. Citi also downgraded the company to Neutral from Buy. Although it believes Adam Internet has been acquired at fair value, forecast earnings fell 1% and 5% in FY14-15 and it says the company has run ahead of fair value.

BA-Merrill Lynch is getting a little concerned about the outlook for lotteries and wagering and moved to downgrade Tatts Group (TTS) from Buy to Neutral, following some cautious sector anecdotes. The broker is getting in early.

Paladin (PDN) was downgraded to Sell from Buy by Citi and to Neutral from Overweight by JP Morgan, after the company announced it had terminated negotiations for the sale of a minority interest in its Langer Heinrich Mine. It then announced an institutional placement of shares to shore up the balance sheet. Citi is concerned the share placement wont be enough and JP Morgan has similar worries with an eye on debt refinancing due from 2015.

In the good books

Citi upgraded Amcor (AMC) to Buy from Neutral. The broker likes its decision to split business down global and Australasian lines – see Greg Fraser’s take on it here. Citi believes that the two new entities should provide a more positive earnings outlook and premium multiples, despite the costs involved.

The ASX (ASX) also got an upgrade to Overweight from Neutral by JP Morgan, which likes the revenue potential of central clearing of OTC (over the counter) interest rate derivatives. The broker thinks that market will be worth $47 million by FY15 and is optimistic the ASX could end up with a 50% market share.

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.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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