Computershare and Lend Lease upgraded

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Broker activity on miners faded into the background a little last week. And although the upgrade and downgrade ledgers were mixed, they were joined by a higher proportion of property, infrastructure and consumer stocks. Many of the upgrades were on the back of overdone share price falls.

The good books

Computershare (CPU) was upgraded to Overweight from Neutral by JP Morgan, following the rise in the US dollar, recent share price underperformance and improving outlook for corporate activity. JP Morgan said it has been concerned about Computershare’s acquisition strategy outside its area of expertise in the share registry industry, but does not think this will count in terms of the share price in the near term.

Lend Lease (LLC) was upgraded to Buy from Neutral by Citi. The broker noted the market has grown increasingly concerned about the company’s ability to grow, or even maintain construction earnings in FY14. These fears have seen the share price come off by 25% since the middle of May. On the other hand, Citi thought the company’s main earnings drivers remained intact and pointed to stable construction earnings that are underpinned by an Australian non-residential and a broad based US recovery. The broker said it readily expects development projects to drive solid earnings growth from FY15, with a number of asset’s sale cards up the sleeve in FY14 if needed. Citi lifted FY14-15 EPS by 3-4%, increased its target price and upgraded the recommendation. Citi admitted that near-term catalysts may be thin on the ground, but the valuation looked nice, with shares trading at 9.4 times FY14 consensus EPS and offering 5% per year average earnings growth out to FY16.

Macquarie Group (MQG) was upgraded to Buy from Hold by Deutsche Bank. Deutsche Bank upgraded Macquarie after a detailed evaluation showed substantial upside. In particular, analysis of the annuity businesses has increased the valuation. Valuing the market-leverage business at peer multiples results in 33% potential upside to the share price. The price target was also increased to $56.20 from $43.60, in line with the revised valuation (see James Dunn’s article on Macquarie above).

Macquarie upgraded Tabcorp Holdings (TAH) to Outperform from Neutral. Passage of legislation in Hong Kong is a further step to co-mingling in that market and for Macquarie, it confirmed the trend in the globalisation of tote wagering. Tabcorp is considered well placed to capitalise on this trend and while the near term impact may be small, the medium term upside could be material. The rating was upgraded and the price target was raised to $3.40 from $3.35.

The not-so-good books

Fletcher Building (FBU) was downgraded to Neutral from Outperform by CIMB. It’s not that the broker doesn’t like the company, because it does. It’s not that there isn’t a very positive long-term outlook, because there is. Still, the recommendation was downgraded because the broker thought it was time to take some profits and there are several reasons why. The company has outperformed the S&P/ASX 200 by 37% over the past 12-months. Cost-out work is costing more than expected. The strengthening of the NZD against the AUD is negatively impacting the translation of Australian earnings. Lastly, there is near-term earnings risk, with the broker expecting FY performance at the bottom of the guidance rangeThe price target was also lowered to NZ$8.55.

JP Morgan downgraded iiNet (IIN) to Underweight from Neutral. JP Morgan has remodelled iiNet to reflect a more significant re-basing of margins in an NBN environment and a faster roll-out under a Coalition government. The negative impact of these changes was offset by a lower discount rate assumption. The broker said that the NBN gives iiNet greater scope to grow its subscriber base by making non-metro markets more accessible and raising broadband penetration. Resellers in the fixed-line industry will earn significantly lower margins, but for iiNet, this will be somewhat diluted given the proportion of low-margin off-net customers.

Retail Food Group (RFG) was downgraded to Neutral from Buy by UBS. The broker noted the share price had run 36% since the pull-back in mid-June and was up around 38% since the beginning of the year. The stock has out run the ASX300 Industrials by 35% over the past 12 months on a total return basis as well. But with shares at around 14 times FY14 earnings, the broker reckons the P/E discount to the retail discretionary sector that used to be in place has almost gone. Given it was this discount, and the view of relative value being on offer that had the broker at Buy, the recommendation was taken down a notch. EPS and DPS forecasts were unchanged.

Seek (SEK) was downgraded to Sell from Neutral by Citi.  With employment ad volumes still back-tracking and economic activity stalling in Australia, Citi pushed out its expectations for any sort of hiring recovery until 2015 at least. The broker did think things won’t get much worse and that ad volumes will stabilise at current levels, but even this implies a 5% volume decline in FY14, not the 10% growth Citi used to expect. FY14 EPS was cut by 16%, leaving the broker some 13% short of the market. Citi admitted the company is structurally well placed to take advantage of a volume recovery in FY15, but with shares above fair value, the recommendation was dropped.

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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