In the good books
Aristocrat Leisure (ALL) Upgrade to Outperform from Underperform by Macquarie B/H/S 4/2/0
Australian slot machine ship-share data for March indicate Aristocrat Leisure is continuing to take market share from Ainsworth Gaming Technology (AGI) and the trend is set to continue, the broker suggests. Aristocrat’s share rose to 60% in the quarter, up from 45% a year ago, while AGI’s fell to 14% from 19%. Both companies are set to benefit from consolidation in the international market, the broker notes, but patent applications and R&D spend suggest Aristocrat’s dominance is set to continue.
Bluescope Steel (BSL) Upgrade to Outperform from Neutral by Credit Suisse B/H/S 6/1/0
Spot steel spreads have risen materially and Credit Suisse notes this has grossly exceeded the soft increase in the iron ore price. Yet the broker is cautious, as a Chinese export/production response to higher spreads is a key risk that could dent an emerging structural improvement or a short lived seasonal upswing. Credit Suisse increases assumptions modestly.
Origin Energy (ORG) Upgrade to Outperform from Neutral by Credit Suisse B/H/S: 4/2/1
Origin has underperformed relative to the rest of the leveraged sector in Credit Suisse’s opinion, lagging Santos (STO) by 15% since the start of March. The broker upgrades to Outperform from Neutral on the expectation that this situation is normalised. Moreover, the broker has increased confidence in the value of a de-merged entity with a premium for an energy markets stand-alone justified by the level of conglomerate discount that exists. Obscuring the conglomerate discount is the potential dilution from a re-capitalisation, which the broker believes is required.
South32 Limited (S32) Upgrade to Add from Hold by Morgans B/H/S: 4/3/1
Morgans has gained conviction the downturn in the resources sector has matured and the worst is now behind. A bump up in market sentiment has been significant enough to deliver more stable commodity prices. Morgans considers South32 has a strong balance sheet, without the high gearing that burden others. There is also ample scope for a relief rally that may increase cash flow gains from the company’s cost cutting drive.
In the not-so-good books
Ainsworth Game Technology (AGI) Downgrade to Underperform from Outperform by Macquarie B/H/S: 1/0/1
As noted above, Australian slot machine ship-share data for March indicate Aristocrat Leisure is continuing to take market share from Ainsworth Gaming Technology and the trend is set to continue, the broker suggests. Patent applications and R&D spend suggest Aristocrat’s dominance is set to continue. The broker has downgraded AGI to Underperform from Outperform, now abandoning an expectation of market share mean reversion.
Alumina (AWC) Downgrade to Neutral from Buy by UBS B/H/S: 4/2/1
The share price is up 13% in the year to date, supported by a 25% rebound in the spot alumina price, UBS observes. Still despite the price improvement in the March quarter, the broker believes 40-50% of the alumina refining industry remains loss making.
Iluka Resources (ILU) Downgrade to Sell from Neutral by UBS B/H/S: 1/1/5
Year-to-date, the share price has been volatile, UBS observes. The broker considers the outlook is subdued, although potential upside could come from tightening of global supply, particularly rutile, or if demand recovers. UBS downgrades earnings forecasts for 2016 and 2017 and drops the rating to Sell from Neutral, given concerns that the stable pricing regime of the last three years is coming to an end.
Western Areas (WSA) Downgrade to Sell from Neutral by UBS B/H/S: 3/1/3
Nickel is a commodity where much of the industry is loss making, UBS observes. The broker believes shut downs are the most obvious catalyst but another 100-150,000 tonnes per annum is needed to generate supply pressure. UBS forecasts a loss of $52m in FY16 for Western Areas. This extends to smaller losses in FY17 and FY18, while depreciation and amortisation masks underlying profitability in those years. The broker’s valuation has been hit by lower Australian dollar nickel prices and the incorporation of the recent placement.
Earnings Forecasts
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