Upgrades

As far as recommendation upgrades, many an analyst were forced to concede in 2011 that they’d been a bit premature in pricing in the opportunities available for New Zealand’s dominant building-material manufacturer, Fletcher Building (FBU), post the Christchurch earthquake. But JP Morgan now believes Fletcher’s time has come, upgrading it to Buy.

Most brokers already had Mermaid Marine (MRM) as a Buy, but a solid share price run threatened to change that as the company went about expanding its business of servicing offshore WA oil and gas operations. BA-Merrill Lynch, nevertheless, decided last week that Mermaid’s valuation still offered upside given the strength of demand potential and thus added it to the list of Buy raters.

UBS believes there are a number of different policy moves Toll Holdings (TOL) could implement in order to improve its earnings profile. With the Express division leading the near-term drive, and Toll trading at a 20% discount to peers, the analysts decided there was sufficient scope for an upgrade to Buy.

St Barbara (SBM) is an aspiring primary gold miner, but it has always been hampered by higher-than-average costs. This had been enough for Macquarie to rate it a Sell, but with scope for costs to now reduced, coupled with the broker’s bullish outlook for the gold price, the analysts decided to move it up to Hold.

BA-Merrill made a similar move for Dulux (DLX). The analysts noted margins have improved for the company more than had been expected in a weak building environment, which otherwise reduces the demand for paint.

Downgrades

Only three brokers in the database cover mineral processing equipment producer Ludowici (LDW) and last week both RBS and UBS downgraded the company to Hold. It seemed a no brainer – Ludowici received a takeover offer from FLSmidth representing a premium in excess of 100%.

Returning to prior suggestions of ‘toppiness’, four companies suffering downgrades last week were merely victims of their own success rather than anything untoward.

With trading prices now running ahead of valuations, and despite ongoing potential for success, UBS downgraded high-flying resource sector servicing companies Ausenco (AAX) to Sell and Monadelphous (MND) to Hold. UBS provided the same reasoning for downgrading nickel miner Western Areas (WSA) to Sell, and Citi threw in a downgrade to Hold. Favourable growing conditions for Graincorp have also seen investors over-excited, and hence Citi took that stock down to Hold as well.

While resource sector construction is booming along in Australia, the same is not true for residential and commercial construction. Analysts have been anticipating a post-GFC rebound for some time now, but over three years out there remains little sign. Credit Suisse downgraded Boral (BLD) to Hold. CSR’s (CSR) building products are in higher demand in flood-ravaged Queensland, but a weak outlook for aluminium saw Merrill take the stock down to Sell. Merrill also saw mounting competition for Adelaide Brighton’s (ABC) dominant cement business, and it was downgraded to Hold.

If you’re not building houses then nor are you filling them with household gadgets and cleaners and so forth. GUD Holdings (GUD) has a strong balance sheet and has increased its dividend but with little in the way of near-term catalysts, Credit Suisse has downgraded to Hold.

The world is swept up in the success of Australia’s resource boom and the recent return to positive commodity prices, but the latest round of production reports emphasises the fact mining is based on resource estimates and is impacted heavily by everything from rising costs to bad weather. Citi had suspected that Alacer Gold’s (AQG) production targets were a bit ambitious and was proved correct before downgrading it to Neutral. Mirabela Nickel (MBN) suffered a similar fate from Deutsche Bank (to Sell) when production guidance was cut and costs were more than expected. Rail transport issues have become a problem for Mt Gibson Iron (MGX), prompting a downgrade to Hold from RBS, and disappointing 2012 production guidance from PanAust (PNA) saw Merrill drop its rating to Sell. Macquaire took Whitehaven Coal (WHC) down to Hold on weak production, but notes the stock is still wrapped up in takeover speculation.

Finally, Citi noted that LNG darling Oil Search (OSH) posted greater recoveries than expected in the quarter but this was due to inventory run-down. With inventories needing to be rebuilt, and the analysts preferring PNG partner Santos (STO) anyway, Citi downgraded to Hold.

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.

Rudi Filapek-Vandyck is the editor of FNArena.com.