Is the worst over for the mining sector?

Founder of FNArena
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A new Prime Minister, a weaker Australian dollar, a relaxed RBA on the sidelines and ongoing downgrades for future commodity prices; there was plenty of new material to keep stockbrokers in Australia busy during the week past.

Sectors in focus are retailers and mining services providers, for negative reasons, and banks, mining stocks and industrials, for positive reasons. Have we seen the worst for mining stocks in term of recommendation downgrades? One observation that stands firm and tall is miners are no longer dominating the downgrades section of stockbrokers ratings.

In the good books

Envestra (ENV) was upgraded to Outperform from Underperform by Macquarie. Macquarie analysts say Envestra is in a similar category to APA (APA), in that it has a strong growth outlook, which can be sustained beyond the current regulatory horizon. In addition, Envestra has strengthened its balance sheet through capital raisings, and reduced the dependence on the DRP. Any immediate impact of recent bond price increases should only be minor, given Envestra’s hedging approach. Given the heavy discount that is priced in the securities, the rating went up by two steps.

Newcrest (NCM) was upgraded to Buy from Hold by Deutsche Bank. Deutsche Bank analysts lowered price forecasts for commodities, yet again, noting most revised prices are now near present spot prices, with the analysts forecasting mild increases over 2014. The broad exercise also led to a re-appraisal of stock preferences and valuations. Newcrest Mining was upgraded on a valuation call.

Panaust (PNA) was upgraded to Buy from Neutral by BA-Merrill Lynch. The broker came to the conclusion that PNA is about the best way to play copper, if one still feels confident enough to do so. The broker cited both a solid production track record and the fact that production is expected to increase in the second half on the back of better recoveries. At the same time, the share price has come off some 30% in the last three weeks, compared to peer OZ Minerals (OZL) at just 6% and the copper price at 8%. Multiples are also well below peers, yet PNA has more certainty on production. There was only one thing to do, upgrade.

Woodside Petroleum (WPL) was upgraded to Buy from Neutral by Citi. The broker liked the company’s move to an 80% payout ratio, believing it to be sustainable at least out to 2020 and, depending on how new projects work out, maybe even indefinitely. The broker also ran three scenarios through the machine that range from no new growth projects to having final investment decisions (FID) on all of the major projects by 2016. The best case was an 8% dividend yield, the worst 5.4% and the most likely 7.4%. With the stock also offering 20% upside to the broker’s price target, the recommendation was lifted.

In the not-so-good books

AMP (AMP) was downgraded to Neutral from Buy by BA-Merrill Lynch and to Hold from Buy by Deutsche Bank. BA-Merrill Lynch noted that, for some reason, Aussies are dying at a higher rate than AMP expected, and in a time of weak economic activity. This impacted on the Wealth Protection business, leading to a significant profit downgrade. The broker downgraded forecast earnings by 12% and 8% in FY13-14. AMP is offering value appeal, but the fact that everything was fine at the May AGM and then this downgrade followed, suggested to the broker that there are broader issues at play.

Deutsche Bank noted underlying first half profit will come in 13% below the broker’s expectations, with wealth protection experience losses blamed as the culprit. Weaker wealth operating trends were also implied, with no clarity likely until the result in August. FY13 EPS was cut by 11%. The broker thought the sell-off post announcement was overdone, although the uncertainty about how long these pressures will last does mean a move to Neutral was warranted.

Goodman Fielder (GFF) was downgraded to Neutral from Buy by Citi. It was a bit of a good news/bad news scenario for GFF, the broker noted the company has successfully renewed its private label baking contract with Coles, but also issued an FY13 earnings guidance that fell around 3% short of the broker’s expectations. The FY13 earnings forecast was trimmed by 3.1% in response, the broker said one-off supply disruptions in the Asia Pacific poultry market were mostly to blame. Citi still expects better than 10% earnings growth in FY14, but the valuation is beginning to look stretched at 13.3 times FY14 earnings. The recommendation was downgraded, the broker wanting to see innovation and more marketing spend to lift sales growth.

Miclyn Express Offshore (MIO) was downgraded to Hold from Buy by Macquarie. Macquarie analysts remained of the view that, at some point, one of its suitors will launch a full takeover bid and the price will start with a two. However, now that the two independent directors have resigned, there are no independents left on the company’s board. This was sufficient for Macquarie to pare back its rating, negating the upgrade that was put in place exactly two months ago.

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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