In the good books
Beadell Resources (BDR) Upgrade to Outperform from Neutral by Macquarie B/H/S 2/1/0
The results of the pre-feasibility study for the Urucum underground mine indicate it is a low capex and relatively low cost and long life proposition.
The broker expects this to extend the life of Tucano and deliver a mine better suited to the variable environmental conditions.
RCR Tomlinson (RCR) Upgrade to Buy from Accumulate by Ord Minnett B/H/S 2/0/0
The company has undergone a major restructure, closing 16 sites which have been marginal or unprofitable for some time. The cost of the restructure is $44m. The main negative is the $34m in cash outflows, Ord Minnett contends, significant for a company with a $170m market cap.
The broker’s recommendation is upgraded to Buy from Accumulate, relying on seeing through the FY16 result with a rebound in FY17 and assuming some of the preferred contracts commence.
In the not-so-good books
Aristocrat Leisure (ALL) Downgrade to Neutral from Outperform by Credit Suisse B/H/S 3/2/1
Credit Suisse offsets FX downgrades with operational upgrades, noting competitors do not have the momentum to unseat the company’s market share in Australia.
Growth is expected to slow significantly in FY17 and FY18 relative to the last two years. Aristocrat has achieved 70% market share in segments of the market in Australia and the broker does not expect material improvement in this area.
Downer EDI (DOW) Downgrade to Equal-weight from Overweight by Morgan Stanley and Downgrade to Lighten from Hold by Ord Minnett B/H/S 3/2/1
Morgan Stanley did not expect Downer would lose its entire Fortescue Metals (FMG) contract. Strategically, the broker believes this calls into question the future of the mining operations.
The broker did not expect Fortescue would take the operational risk of removing Downer from the Christmas Creek mine from October for what is likely to be a limited saving.
Ord Minnett was not altogether surprised by the Fortescue decision but notes the contract loss is material.
The broker suspects earnings were likely to decline even before the loss of this contract.
Estia Health (EHE) Downgrade to Neutral from Outperform by Macquarie B/H/S 2/2/0
The Department of Health is now projecting aged care funding outlays to be 2.1% above forecast in FY16. History suggests that when outlays exceed forecasts, the government introduces measures to recoup some of that amount, Macquarie notes. Last year’s MYEFO included announced savings to come from as yet unknown changes to aged care funding.
The broker has pulled back its earnings forecasts for listed aged care providers, offset to some extent by assumed cost controls measures. Downgrades of 3-5% have been applied for each provider.
Macquarie cannot see a catalyst to re-rate Estia prior to its August result release, and hence downgrades to Neutral.
National Australia Bank Downgrade to Hold by Morgans B/H/S 1/5/1
Morgans suspects the major banks may need to increase provisions for certain single name exposures that are currently in trouble. Stress in the consumer segment is also increasing with the broker noting softness in the economies of Queensland and Western Australia.
Most of the institutional names in trouble belong to the resources sector, which suggests to Morgans a broad-based problem. The broker lowers earnings forecasts for each of the major banks, largely because of higher bad debt charge forecasts and lower net interest margin forecasts.
Nine Entertainment (NEC) Downgrade to Sell from Hold by Ord Minnett B/H/S 4/0/2
Nine Entertainment’s trading update signals a slow start to 2016 Free-To-Air (FTA) TV advertising spending. As a result Ord Minnett lowers second half forecasts to a fall in the market of 2.5% from 1.0%.
The broker envisages FTA audience declining 3.8% in 2016 so far, following the 6.0% decline in 2015. The broker believes this is the beginning of a structural decline in FTA advertising dollars.
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