The broker wrap: stock upgrades jump

Founder of FNArena
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Changes to broker ratings in the past week

The past week has been an active one for ratings changes by the eight brokers in the FNArena database, with a total of 11 recommendation upgrades compared with just six downgrades. Total Buy ratings now stand at 49.64%.

Upgrades

Aquila Resources (AQA) was upgraded by Macquarie, which lifted its rating to Buy following the lifting of coverage restrictions on the stock. In the broker’s view, the share price is simply not pricing in the value of Aquila’s asset base.

Deutsche Bank upgraded Commonwealth Property Office (CPA) to Hold on valuation grounds. It says when the recent acquisition of 10 Eagle Street Brisbane is factored in, the stock is now trading in line with peers.

The announcement of an equity raising by Echo Entertainment (EGP) saw brokers across the market adjust their models, including changes to earnings per share estimates and price targets. Credit Suisse expects the stock to trade closer to the offer price post the issue, which is enough for the broker to upgrade it to a Hold.

UBS has moved to a Buy rating on Fletcher Building (FBU) as management has reconfirmed full-year earnings guidance. The company has also announced some changes in senior management, which may see some restructuring and reorganising more likely in coming months, UBS predicts.

RBS Australia was active in upgrading resource stocks during the week, lifting Grange Resources (GRR), Iluka (ILU) and Mount Gibson (MGX) to Buy. In all three cases the upgrades stem from changes to commodity price forecasts, which flows through to adjustments in earnings estimates and price targets as well.

The changes to commodity forecasts worked the other way as well, as RBS downgraded both Kingsgate Consolidated (KCN) and Perseus Mining (PRU) to Hold on the back of its revised targets and earnings forecasts.

For Incitec Pivot (IPL), the upgrade to Neutral by JP Morgan is a valuation call and follows recent share price weakness. Minor changes to earnings estimates resulted in JP Morgan trimming its price target.

The rejection of an appeal against the approval of a temporary operating licence for Lynas (LYC) brings commissioning of the LAMP project closer in the view of UBS. This is enough for the broker to upgrade it to Buy.

Relative share price underperformance is behind Citi’s upgrade for National Australia Bank (NAB), as the broker notes NAB share price performance has lagged by around 6% so far this year. This leaves the stock offering compelling valuation according to Citi, which has also lifted its price target.

With Transfield (TSE) shares having fallen since an earnings downgrade in April, RBS sees value enough to upgrade it to Hold. A move to a more positive rating would require evidence of greater margin consistency and delivery on guidance for Easternwell.

Downgrades

On the downgrade side, Credit Suisse has cut its rating for Billabong (BBG) to Sell on the back of the capital raising and cutting of earnings guidance announced last week. The lack of earnings certainty translates into excessive risk in the broker’s view, while value is also limited given the group’s issues.

An update by Charter Hall Group (CHC) included the announcement of a contingent liability and this, plus recent share price outperformance, was enough for JP Morgan to downgrade it to Hold.

Lower earnings guidance from Jetset Travelworld (JET) caused brokers to cut forecasts and targets, while Deutsche Bank has also downgraded its rating to Hold. The rating change reflects uncertainty from restructuring initiatives announced with the market update.

The other resource upgrade was OZ Minerals (OZL), where JP Morgan cut its rating to Sell after a change in analyst covering the stock. While OZ Minerals offers a defensive exposure to the copper sector, JP Morgan says this is priced in at current levels.

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

Important information: 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. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.

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