Buy, Sell, Hold – what the brokers say

Founder of FNArena
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A noticeable schism is opening up between companies in the mining services industry and analysts covering the sector. Analysts are not buying the companies’ mantra that the worst for the sector is now likely behind us. That’ll be one interesting development to watch closely in the year ahead.

In the good books

Brambles (BXB) was upgraded to Neutral from Underperform by CIMB Securities. CIMB upgraded on the back of a falling share price, a weakening AUD and an improving macroeconomic backdrop for the company’s core markets. Since management has guided the market for FY13 results, CIMB is not expecting any major surprises this month.

McMillan Shakespeare (MMS) was upgraded to Buy from Sell by Citi. Citi is banking on a Coalition victory at the upcoming election and the likelihood that the government’s changes to the Fringe Benefits Tax will not come to pass. The broker had assumed that no new novated leases would be written in the first half. As the election date is September 7 this may prove too negative a view and there’s a chance that industry growth could be above average in the short term, because of heightened awareness of novated leasing.

SAI Global (SAI) was upgraded to Outperform from Neutral by CIMB, to Buy from Neutral by Citi, to Outperform from Neutral by Credit Suisse and to Buy from Hold by Deutsche Bank. It has been an excruciating wait for long term, loyal shareholders, but CIMB analysts think the time has arrived to make that big call on SAI Global’s fortune: the tide is turning, risks are skewed in favour of positive surprises from now onwards. There are reasons to think the worst has passed and Citi expects FY13 to represent the bottom of the downgrade cycle. With 40% of group earnings outside of the Australian dollar, the company is also a major beneficiary of the weaker currency. Credit Suisse believes the likely benefit from a weaker Australian dollar in FY14 makes up for forecast risk in other areas and a return to reasonable earnings growth can be expected over the next few years. Deutsche Bank sees the investment case as de-risked and has upgraded to Buy from Hold on risk/reward and valuation.

In the not-so-good books

Arrium (ARI) was downgraded to Neutral from Buy by UBS. The steel turnaround is taking longer than expected and UBS revised earnings forecasts for Arrium is down by 20-30% for FY14-15 to reflect this. This is partly offset by lower AUD estimates. While UBS believes Arrium can maintain its current 65% share of the domestic long steel market long term, near term demand pressures and weakening global spreads mean recovery is pushed out, which absorbs any immediate benefit from a lower Australian currency.

Bank of Queensland (BOQ) was downgraded to Sell from Neutral by Citi. Bank of Queensland has flagged a $46 million pre-tax legacy item related to overcharging customers. This is taken below the line and does not affect cash profit. Citi has upgraded its cash earnings estimate by 5% for FY13 and 3 to 5% thereafter.

Bradken (BKN) was downgraded to Neutral from Buy by UBS and to Neutral from Outperform by Credit Suisse. The FY13 earnings of $214 million was ahead of UBS’ forecasts. Nevertheless, Bradken’s updated guidance may need to be tempered over the year, in UBS’ opinion. Credit Suisse sees the company better positioned than many in the current environment. Despite this, the broker thinks the company needs a bounce in the second half of FY14 to offset what will be a weak first half.

OZ Minerals (OZL) was downgraded to Underperform from Neutral by Macquarie. It was always going to be a weak half for OZ given waste movements, but the loss was not quite as bad as the broker had expected. The dividend was indeed a surprise, given it flies against stated policy. M&A is an option but cash burn is a concern as it will continue through 2014, the broker notes.

Skilled Group (SKE) was downgraded to Underperform from Neutral by Credit Suisse and to Neutral from Outperform by CIMB. The downside is that the employment outlook is particularly challenging in mining, a key growth driver in recent years. CIMB says offsetting the management’s team excellent record in cost cutting, are negative underlying trends, which marked the financial performance in the past six months. These trends are expected to persist in the six months ahead.

WorleyParsons (WOR) was downgraded to Neutral from Outperform by Credit Suisse. The FY13 underlying profit was 3% below the broker’s forecasts and at the lower end of guidance. The broker likes the stock from a medium-term perspective owing to its weighted exposure to hydrocarbons, dominant market position and solid acquisition track record. Nevertheless, execution risk has increased following recent cost over-runs.

The FNArena database tabulates the views of eight major Australian and international stock brokers: BA-Merrill Lynch, CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie and UBS.

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.

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