In the good books
Goodman Group (GMG) Upgrade to Outperform from Neutral by Credit Suisse B/H/S: 3/3/0.
Assuming benign operating conditions, Credit Suisse believes the company is well positioned to generate around 7% earnings growth to FY20.
The appeal to the broker lies more in the ability to sustain earnings in the event of an industrial market downturn. Higher earnings estimates combined with a stronger balance sheet drive an increase in valuation.
Newcrest Mining (NCM) Upgrade to Buy from Neutral by Citi B/H/S: 1/2/4; Northern Star Resources Ltd (NST) Upgrade to Neutral from Sell by Citi B/H/S: 0/2/1; Regis Resources Limited (RRL) Upgrade to Buy from Neutral by Citi B/H/S: 2/2/3.
Citi analysts have turned more positive on gold, for now. They anticipate higher bullion prices in Q2 but also believe that improved risk appetite from mid-year onwards should favour other assets and reduce gold’s attractiveness in the second half of 2016.
That’s the base case scenario. Under a different scenario whereby the global economy worsens in H2 and possibly even faces a recession, gold could average US$1400/oz in H2 on the analysts’ modeling. Lifting forecasts has had a noticeable impact on Citi’s projections for individual gold stocks in Australia. As a result, Newcrest Mining, Northern Star Resources and Regis Resources all receive an upgrade.
[1]In the not-so-good books
Fortescue Metals Group (FMG) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Neutral from Buy by UBS B/H/S: 2/4/1.
Fortescue’s new memorandum of understanding with Vale is ostensibly about blending opportunities, points out Credit Suisse, but the deal does open the door for Vale to take an equity stake of 5-15%. The joint venture will allow both parties to optimise operations, Fortescue suggests, and thus reduce costs. The JV will likely take 6 months to finalise. UBS brokers downgrade the stock as further iron ore price upside is considered limited.
Monadelphous Group (MND) Downgrade to Hold from Buy by Deutsche Bank and Downgrade to Reduce from Hold by Morgans B/H/S: 0/2/5.
The engineers & contractors sector received a significant valuation re-rating post reporting season, with an average doubling of price/earnings multiples, Deutsche Bank observes. The broker attributes this to self-help initiatives and a recovery in commodity prices. That said, this is not expected to lead to the reinstatement of deferred capital expenditure necessarily. The broker downgrades to Hold from Buy, given the stock has risen 30% since February 16 and is now trading close to the broker’s price target.
According to Morgans’ brokers, the share price has rallied strongly since the first half result and this near-term strength presents an opportunity to reduce exposure, Morgans observes a large proportion of the company’s work in the commodities space is mid-to-late cycle. As such, earnings are expected to decline further. The company has guided to FY16 revenue being down 25% on FY15.
[2]Orocobre Limited (ORE) Downgrade to Sell from Neutral by Citi B/H/S: 0/2/1. Reported net loss was a little larger than forecast but nothing to get concerned about, according to Citi analysts. They note the company incorporated some FX-related non-cash adjustments. Citi has nevertheless downgraded the stock due to valuations.
Perseus Mining (PRU) Downgrade to Sell from Neutral by Citi B/H/S: 1/1/2. While Citi analysts have turned positive on gold and upgraded a number of stocks, Perseus Mining is the only gold producer to receive a rating downgrade.
Earnings Forecasts
[3]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.