Ahead of each season, it’s typical to endure a ‘confession session’ in which those companies expecting to miss guidance decide it’s best to get a warning to minimise the market backlash on the day. Upgrades are rare given upside surprises are well received on the day. Typical of such confessions at Christmas-time were severe warnings from retailers JB Hi-Fi (JBH) and Billabong (BBG) and insurer QBE (QBE).

Deteriorating capital markets, weak commodity prices and sub-par consumer spending over the six months are just some of the elements that might be causing market anxiety, Citi suggests. Even the cold and wet east-coast weather of late will be a point of concern. Yet the strategists don’t believe we’re about to see a bloodbath.

Brokers have displayed some caution leading into the profit reporting season this month, the FNArena database showing brokers have upgraded only eight ratings over the past week compared to 13 downgrades.

Upgrades

A solid quarterly update from Aston Resources (AZT) was enough for UBS to upgrade it to Buy, the broker noting progress at the Maules Creek project continues to be solid. Valuation has also improved in UBS’s view given recent share price weakness.

Automotive Holdings (AHE) was upgraded to Buy by RBS following an acquisition that expands the group’s presence in the Victorian market. An attractive valuation adds weight to the broker’s rating.

Fletcher Building (FBU) was also upgraded to Buy by RBS, reflecting the view the outlook for a gradual improvement in conditions in the construction market should favour the value plays into the second half of this year.

Opinions on GWA (GWA) remain divided. Deutsche Bank suggests the current tough market conditions are priced in and so the stock offers value at current levels sufficient to justify an upgrade to a Buy, but Credit Suisse disagrees. The latter has downgraded it to Neutral, reflecting the view the current downturn will probably be deeper and last longer than expected.

Deutsche also upgraded Mesoblast (MSB) to Buy from Hold after the company received approval to advance to Phase II trials of its diabetes treatment. Further good news is expected in coming weeks from approval for Phase II trials of a congestive heart failure treatment.

Solid mask sales and stronger margins in the second quarter were enough for Deutsche to upgrade ResMed (RMD) to Buy, while both Roc Oil (ROC) and Tabcorp (TAH) scored upgrades primarily on valuation grounds. The former saw JP Morgan move to Overweight from Underweight, while the latter had Macquarie upgrade it to a Neutral.

Downgrades

Energy Resources of Australia (ERA) was downgraded to Sell by both UBS and Credit Suisse. The company is fast becoming an exploration company with potential projects threatened by bad weather. There is also concern over the future at Ranger Deeps and the lack of any potential catalysts.

A weak quarterly production report from Aquarius (AQP) and the expectation of at least one more quarter of the same level caused Citi to downgrade it to Neutral.

A lack of short-term catalysts caused BA-Merrill Lynch to downgrade Asciano (AIO) to Neutral given rival QR National (QRN) appears to have more growth options.

Earnings headwinds across the IT sector have seen RBS cut its earnings estimates for ASG Group (ASZ), and its rating to Hold. It’s a similar story at Bank of Queensland (BOQ), where Deutsche has downgraded it to Hold to reflect the current lack of asset growth being achieved.

Reduced expectations for the Melbourne and Sydney office markets are behind Macquarie downgrade to Sell for Commonwealth Property Office (CPA), the broker also downgrading Dexus to Neutral for similar reasons.

A weak result and a resultant lowering in forecasts and confidence in coming years is why RBS downgraded CSG (CSV) to Sell. Upcoming commissioning risks at the Boseto project are enough for Deutsche to move to Neutral on Discovery Metals (DML), while valuation issues and tough market conditions have prompted downgrades for James Hardie (JHX) and Regis Resources (RRL).

Changes to earnings forecasts (EF)

Note: FNArena monitors eight leading stockbrokers on a daily basis: BA-Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, RBS and UBS.

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