In the good books
Alumina (AWC) Upgrade to Neutral from Underperform by Credit Suisse B/H/S: 4/2/1. 2015 results were in line with Credit Suisse estimates. The company envisages that, with recent alumina curtailment in China, a tighter market is likely. Project delays have also occurred in Indonesia, given low prices.
Breville Group (BRG) Upgrade to Outperform from Neutral by Credit Suisse B/H/S: 3/1/0. The first half result in Australasia was predictably weak, Credit Suisse maintains, but better than feared. The market appeared braced for a downgrade to earnings that did not materialise. Credit Suisse is increasingly confident in the underlying trends in key businesses, particularly the US.
Caltex Australia (CTX) Upgrade to Buy from Neutral by Citi B/H/S: 3/4/0. Owning Caltex shares is from here onwards all about capital management, suggest Citi analysts. Citi had forecast $1.95/share of special dividends over three years starting in 2H15, and now forecasts an additional $1/share of returns at the end of calendar year in 2016. In addition, the analysts see scope to redistribute a further $500m on the condition that credit metrics are reassessed favourably, a process believed to take 12-24 months.
Ramsay Health Care (RHC) Upgrade to Neutral from Sell by Citi and Upgrade to Outperform from Neutral by Credit Suisse B/H/S: 4/2/2. Not everything was honky dory, with margins in France disappointing, but Citi expects to see improvement in H2. The forecast is for core EPS growth of 13%-17% over FY16-FY18 and on this basis the present valuation is seen as fair. First half results were ahead of Credit Suisse forecasts. The broker believes the company is supported for medium term volume growth, despite the recent contraction in private health insurance participation.
South32 (S32) Upgrade to Buy from Neutral by Citi B/H/S: 3/3/1. Earnings estimates have received an upward boost, following a better-than-expected financial result, say Citi analysts. Given challenging conditions, management’s focus remains on cost reductions and here the analysts continue to be surprised by management’s achievements. Citi thinks management will do a lot better than its own guidance.
In the not-so-good books
APA Group (APA) Downgrade to Neutral from Buy by UBS B/H/S: 5/3/0. APA Group’s first half was disappointing for the broker, but improvement is expected in the second half. UBS sees few long-term catalysts for the company in the gas transport business, but renewable energy could be a potential alternative, as APA already owns one wind farm.
BHP Billiton (BHP) Downgrade to Neutral from Buy by Citi B/H/S: 4/3/1. Earnings estimates look a lot less dismal, in particular for fiscal 2016, after the analysts raised them post the Big Australian’s interim report. The stockbroker argues we’ve now had the “self-help” effect kicking in, the future is now about the macro picture and here Citi’s forecasts are for ongoing low commodity prices. The analysts do acknowledge BHP can probably still look forward to generating some US$4bn in free cash flows, offering options.
BlueScope Steel (BSL) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Hold from Buy by Deutsche Bank B/H/S: 5/2/0. BlueScope Steel’s results were in line with the broker’s estimates. Credit Suisse was pleased to see management’s strategy was paying off. Second half guidance was in line with Credit Suisse assumptions, although weaker steel pricing lagging from 2015 could be a risk. The loss making NZ iron sands business is up for sale. The first half results were in line with guidance. Deutsche Bank considers a large part of the robust result was the cost reductions and increased Australia sales. The broker factors in the 60% earnings growth the management expects to achieve in the second half. Accordingly, the rating is downgraded.
Crown Resorts (CWN) Downgrade to Neutral from Buy by UBS B/H/S: 2/5/0. First half earnings were weaker than UBS expected, driven by lower results from Aspinalls and wagering, as well as a one-off increase in corporate costs associated with recent investments.
Flight Centre (FLT) Downgrade to Hold from Add by Morgans and Downgrade to Hold from Buy by Ord Minnett B/H/S: 2/4/1. First half results were weaker than expected. Morgans is impressed by the increase in revenue margins but investment in the business was higher than expected. The broker believes increased investment will produce modest profit growth in the short term but the company should be well placed in the longer term as it transforms into a world travel retailer. Rating for the business has been downgraded, however, as the share price is now within 10% of the target, which is raised to $43.00 from $41.50. First half results were as expected by the Ord Minnett brokers. Fiscal 2016 guidance was reiterated, but the broker believes it will be hard to achieve and favours the lower end.
James Hardie Industries (JHX) Downgrade to Neutral from Buy by Citi B/H/S: 3/4/0. Citi analysts see headwinds building in the short term and in this contextthe share price valuation is seen as fairly valued. However, the analysts continue to view James Hardie as a quality stock with a sound long-term outlook.
Oil Search (OSH) Downgrade to Neutral from Buy by Citi B/H/S: 4/4/0. Oil Search’s H2 report missed expectations due to higher costs and Citi analysts note management will need to keep a close eye on costs and expenses given ongoing low priced energy markets. The company’s well-documented growth path is probably due some delays, suggest the analysts. This is likely to support the share price in their view, while noting low energy prices are impacting on Oil Search’s pile of cash. The analysts are of the view funding of LNG expansion and M&A looks challenging in absence of higher oil prices or equity.
Earnings Forecasts
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