Downer and Newcrest upgraded as Boart Longyear gets slew of downgrades

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Last week, upgrade activity was spread across sectors, with the regular litany of miners and related companies increasingly diluted by infrastructure, industrials and even consumer stocks. One of the big drivers on the upgrade side of the ledger was again the falling Aussie. This positive theme is increasingly driving a significant level of upgrade/downgrade activity that is unlikely to slow soon.

Of last week’s 10 recommendation downgrades, three were garnered by Boart Longyear on a disappointing guidance downgrade, while Regis Recourses was slapped with two on the back of the falling gold price.

In the good books

ARB Corp (ARP) was upgraded to Neutral from Sell by Citi. The broker noted that since February, the FY14 PE has dropped to 17 times from 20 times and the share price has come off by around 8%. This was enough, in conjunction with revised AUD assumptions, to see Citi lift its recommendation, with about 1% added to net profit forecasts going forward.

Credit Suisse upgraded Crown (CWN) to Neutral from Underperform. Credit Suisse regards the prospect of Crown Sydney as value neutral. The rating was raised to Neutral from Underperform because of the recent stock price weakness. The broker calculates a Crown Sydney earnings/investment yield of 13.2% and after-tax cash yield of 5.3%, acknowledging that to achieve these rates, aggressive assumptions need to be made. These include Crown Sydney capturing $1 billion in player loss, contributing to a tripling of the market in 10 years and selling $300 million worth in apartments to bring down capital costs to $1.26 billion from $1.46 billion. The other assumption is that Crown does not cannibalise VIP revenue from its other casinos.

Downer EDI (DOW) was upgraded to Outperform from Neutral by Macquarie. Macquarie has refreshed its outlook on Downer EDI, noting while the outlook is still challenging, much of this is reflected in the current share price. Guidance for FY14 is expected to be flat and, assuming good cash flow, this should be well received, in Macquarie’s view. Potential catalysts include awards on Wheatstone and Ichthys and a go-ahead on Roy Hill. Macquarie emphasised that Downer has a relatively high level of recurring earnings and has a well regarded electrical and instrumentation business, which should stand it in good stead.

Citi upgraded Leighton Holdings (LEI) to Neutral from Sell. The broker noted the company has sold down its Nextgen, Metronode and Infloplex telco assets by 70%, with the broker guessing $628 million was paid by the Ontario Teachers’ Plan. Cash proceeds should total around $500 million, which, in turn, should pull down gearing by 10%. Otherwise, the deal was expected to be 3.8% EPS dilutive. There weren’t any changes to forecasts to speak of, given the broker had already been pricing in the deal. With the share price off some 12% since the end of May, Citi saw enough to upgrade.

Navitas (NVT) was upgraded to Neutral from Sell by Citi. Second term Northern Hemisphere enrolments were a bit softer than hoped for, with Canada and the UK in line and the US falling short. The broker trimmed its FY14 and beyond earnings a little, but that was the extent of it. Citi continued to feel confident, noting FY14 earnings are now very visible, with FY14 not just expected to be a strong year for Navitas in the US, but for the entire International student education market. The very low level of earnings risk saw the valuation lifted, pushing up the price target and giving Citi the confidence to lift its recommendation.

Newcrest Mining (NCM) was upgraded to Outperform from Underperform by Credit Suisse. The broker factored in new gold and foreign exchange assumptions and this lead to lower earnings and a lower price target. Yet despite the cuts, Credit Suisse noted the share price had come off more than enough to offset the revisions. It was the fall in the share price that saw the recommendation upgraded.

The not-so-good books

Boart Longyear (BLY) was downgraded to Neutral from Outperform by CIMB, to Sell from Neutral by Citi and to Underperform from Neutral by BA-Merrill Lynch. CIMB noted a new guidance was issued and it was for an FY result below the bottom of the current consensus range. The last downgrade was six weeks ago at the AGM, leaving the broker to wonder whether things have really become that much worse in a month and a half. Earnings and dividend forecasts were cut to bring them in line, the price target was slashed and the recommendation pulled back. The broker admitted it may have been a bit late to the party, but it said it sees a real risk of a capital raising if things get any worse. The broker also saw almost no chance for upside in the near term, predicting conditions will remain just as tough well into FY14.

Two years of losses and no dividend is what Citi pencilled in for FY13-14 post the update. There were no numbers with the guidance downgrade, just “below the bottom end of consensus”, and this had Citi bemoaning the continued lack of earnings visibility. The company has managed to restructure its bank debt, so at least there is increased covenant headroom, but Citi said that with demand still deteriorating, balance sheet risk remains high. FY13-15 earnings forecasts were cut between 30%-37% to better reflect the weaker demand outlook. And with demand still worsening, balance sheet risk elevated, and little in the way of near-term catalysts, Citi said it was time to downgrade.

Regis Resources (RRL) was downgraded to Sell from Neutral by Citi and to Hold from Buy by Deutsche Bank. Citi analysts like Regis Resources, a lot. It’s just they cannot see value at the present share price level. Hence the decision was made to downgrade to Sell. They seemed disappointed by the recent production performance at Garden Well. The operational disappointment filtered through to a cut in the price target, EPS and DPS estimates.

Deutsche Bank noted June production was affected by wet weather, resulting in poor ore availability and lower grades. The Garden Well resource/reserve update delivered a 30% increase to resource ounces, but the reserve grade was reduced to 1.27g/t. Regis has responded to the gold price fall with a reduced dividend of 15c against prior expectations of 20c. On Deutsche Bank’s estimates, the company can maintain forward year guidance of a 60% of earnings pay-out ratio. Regis was said to otherwise stand out among peers for its cash generation.

Whitehaven Coal (WHC) was downgraded to Underperform from Neutral by CIMB. Whitehaven has received final approval for Maules Creek construction. The broker said there is value in the stock on longer-term assumptions for coal prices, but near-term risks around funding and the coal outlook were expected to place further downward pressure on the share price. As a result of this, the rating was downgraded and the price target reduced to $1.80 from $2.30.

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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