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.
Evolution Mining (EVN) Upgrade to Outperform from Underperform by Credit Suisse B/H/S: 3/2/0
Credit Suisse updates earnings and valuation in the wake of increases to gold price assumptions, upgrading to Outperform from Underperform.
The broker expects a combination of strong production; falling costs and a high Australian dollar gold price should deliver free cash and a rapid de-leveraging of the Cowal debt.
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.
As the share price has approached the target ($10.50, unchanged). Credit Suisse downgrades to Neutral from Outperform.
Downer EDI (DOW) Downgrade to Equal-weight from Overweight by Morgan Stanley and Downgrade to Lighten from Hold by Ord Minnett B/H/S: 3/2/0
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. The broker forecasts a $54m reduction in Downer’s mining earnings in FY17.
Rating is downgraded to Equal-weight from Overweight.
Ord Minnett suspects earnings were likely to decline even before the loss of this contract. FY17-18 forecasts are reduced by 10%. The broker downgrades to Lighten from Hold.
National Australia Bank (NAB) Downgrade to Hold from Add by Morgans B/H/S: 2/5/1
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 Neutral from Outperform by Credit Suisse and Downgrade to Sell from Hold by Ord Minnett B/H/S: 3/1/2
Credit Suisse interprets management’s profit warning above anything as a company-specific ratings/revenue share issue. Seven West Media should be the prime beneficiary, in the analysts’ opinion.
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%.
In addition, the broker downgrades to Sell from Hold. The broker envisages FTA audience declining 3.8% in 2016 so far, following the 6.0% decline in 2015.
Oz Minerals (OZL) Downgrade to Neutral from Outperform by Credit Suisse B/H/S: 1/5/2
Credit Suisse updates earnings and valuation in the wake of weaker copper price assumptions, downgrading to Neutral from Outperform.
Oz Minerals has the advantage of a strong cash balance and potential development of the long-life Carrapateena project, the broker observes. Moreover, Carrapateena’s conceptual schedule pushes production out to when a higher copper price is envisaged.
Webjet (WEB) Downgrade to Underweight from Equal-weight by Morgan Stanley B/H/S: 2/2/1
The stock has enjoyed a material re-rating, Morgan Stanley observes, despite a shift in the business mix that adversely affects working capital.
Moreover, the broker considers the valuation is stretched and, with intense competition in business-to-business and patchy returns, the broker downgrades to Underweight from Equal-weight.
Earnings Forecasts
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