The early innings for the local reporting season have thus far offered more upside surprises than negative disappointments, which could be taken as a good omen for the rest of the month. Certainly investors have shown little hesitance in buying up share prices in February, in particular when the surprise is linked to dividends.
Resources companies continue to dominate the negative side for earnings forecasts, while the positive side offers a multi-coloured mix combining the likes of Senex Energy with BWP Trust, Qantas and Cochlear. Too early still to draw definitive conclusions, but investors should have a much better idea before the end of this week.
In the good books
Ansell (ANN) was upgraded to Outperform from Underperform by Macquarie. Interim results beat expectations, including the dividend and this seems to have turned sentiment around at Macquarie. Ansell’s current momentum is driven by its single use division, with the analysts pointing out organic growth for medical, sexual wellness and industrial divisions remains rather slow. The company looks well placed to achieve guidance and acquisitions might be back on the agenda too. See also ANN downgrade.
Boral (BLD) was upgraded to Outperform from Neutral by Credit Suisse. Credit Suisse observes a number of emerging catalysts, such as significant cost reductions and the emerging NSW/QLD infrastructure cycle, which warrant a switch in favouring Boral as opposed to James Hardie (JHX).
Computershare (CPU) was upgraded to Buy from Neutral by UBS. First half results were broadly in line with UBS. Cost performance was solid while revenue was soft. The company expects FY15 to be modestly higher, in line with UBS expectations. The broker notes, despite FX valuation support, the stock has de-rated significantly since its FY14 result. The valuation is now considered relatively attractive.
CSL (CSL) was upgraded to Buy from Hold by Deutsche Bank. First half results were below the broker’s forecast. While the decision to reduce guidance was a shock, Deutsche Bank believes the company is still one of the best-positioned players in a robust industry. Deutsche Bank reduces estimates to reflect a period of more subdued growth but the rating is upgraded to Buy from Hold given the upside to target which is revised down to $90 from $92.
Nib Holdings (NHF) was upgraded to Neutral from Sell by Citi. Citi believes the contract announced with the Saudi Arabian Cultural Attache is no less than “transformational” for nib’s international students’ business, more than tripling the size of nib’s international students’ health insurance business. Estimates have been lifted, but from FY16 onwards. The benefit comes through higher margins rather than through additional revenues.
Virgin Australia (VAH) was upgraded to Neutral from Sell by Citi. Preliminary indications are that the performance/turnaround in Q2 has been much stronger than expected. And that’s before the full impact from lower oil prices will have been felt. Citi suggests management is speeding up its cost savings and this is seen as a clear positive. The company is scheduled to report interim results on Feb 19 and the analysts are awaiting further details. Estimates have been increased.
In the not-so-good books
Ansell (ANN) was downgraded to Sell from Neutral by Citi, to Underperform from Neutral by Credit Suisse and to Hold from Buy by Deutsche Bank. Growth was largely from acquisitions and it appears to Citi that initiatives taken in FY13 and FY14 to improve growth organically have not delivered the desired outcome. Credit Suisse notes the improved underlying performance and expects that over time, the launch of new products should deliver growth but foreign exchange remains a headwind. Deutsche Bank notes sales were patchy and suspects this lacklustre organic growth will remain the norm. See also ANN upgrade.
AGL (AGL) was downgraded to Neutral from Outperform by Macquarie. FY15 guidance was reiterated and management highlighted intense retail competition and soft electricity demand, confirming the broker’s flat earnings outlook. AGL’s New Energy initiatives are a good move to stave off competition from the likes of batteries and solar and second tier industry players, but won’t provide benefits until FY17.
Domino’s Pizza (DMP) was downgraded to Underperform from Neutral by Credit Suisse and to Hold from Buy by Deutsche Bank. First half results exceeded expectations. The broker has upgraded forecasts but, as the valuation still does not come close to the current share price, downgrades the recommendation to Underperform from Neutral. First half results were better than expected and Deutsche Bank observes the company continues to deliver exceptional operating results in key markets. Earnings forecasts are upgraded 5-7% but, with the stock trading on price/earnings of 43 times, the broker considers the positive outlook is reflected in the price.
James Hardie (JHX) was downgraded to Neutral from Outperform by Credit Suisse. Credit Suisse envisages limited upside from the prevailing share price with the stock reflecting fair value. James Hardie continues to perform well amidst challenging macro conditions but the broker considers earnings risk is growing towards the end of 2015 and into 2016.
Leighton Holdings (LEI) was downgraded to Sell from Neutral by Citi. Leighton’s fresh guidance implies lower revenues and no significant improvement in margins. There is a risk of falling into a funding hole between the completion of resource sector projects and the start of infrastructure projects.
Mirvac (MGR) was downgraded to Neutral from Buy by Citi and to Neutral from Outperform by Credit Suisse. The company is well positioned to take advantage of strength in residential markets, Citi suggests, but it’s all in the price. On share price outperformance, the broker downgrades to Neutral. Credit Suisse was disappointed by the guidance which seemed a bit tepid given strong momentum in residential.
Origin Energy (ORG) was downgraded to Neutral from Buy by Citi. Citi’s desk of commodity specialists has taken a negative view on oil prices, short term, and a cautious view beyond the next few months, warning investors there is a real chance oil prices might be in for an extended “lower for longer” era.
Rio Tinto (RIO) was downgraded to Neutral from Outperform by Macquarie. No one much cares about Rio’s result per se, which was in line with the broker’s forecast, it’s all about the fact management delivered on capital management as promised with an announced US$2 billion share buyback, and furthermore increased cash flow allowed for a better than expected 6% jump in the progressive dividend. Now the genie’s out of the bottle, attention turns back to iron ore prices. The broker has lifted its target to $63 from $60 but downgraded to Neutral on a less than encouraging iron ore price outlook.
Telstra (TLS) was downgraded to Hold from Add by Morgans. First half results were above forecasts with operating performance strong across the board. That said, given the strong run up in the share price, Morgans downgrades to Hold from Add.
Toll Holdings (TOL) was downgraded to Sell from Neutral by Citi. In a general preview on upcoming financial results for the transport sector, Citi analysts suggest most profit gains will have been made on the back of cost cutting exercises while the December period in general is seen as still a tough one for the industry overall. Toll Holdings is expected to retain guidance following asset sale benefits, but Citi analysts also expect the 1H15 results to highlight ongoing pressures to the core businesses.
Earnings Forecast
FNArena 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.
