The broker wrap: 45 stock ratings cut

Founder of FNArena
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Upgrades to ratings in the past week

Downgrades to ratings in the past week

Stockbrokers have been very active in the past week as more companies release their annual results. The eight brokers in the FNArena database lifted 10 recommendations in the period, while cutting ratings on a whopping 45 occasions. Total Buy ratings have now slipped to 46.61%. One consolation is that most of these downgrades are from Buy to Hold, with only a fraction reduced to Sell.

Upgrades

Among the upgrades was Mermaid Marine (MRM), lifted to a Buy following a solid full-year profit result and improved valuation following recent share price weakness.

RBS also upgraded QR National (QRN) to Buy, the full-year earnings result from the company providing greater confidence in the earnings trajectory in coming years.

Mirvac (MGR) beat expectations with its full-year result, after which Credit Suisse upgraded it to a Buy.

At the same time Citi was disappointed in Mirvac’s guidance for fiscal 2013, while also noting recent gains have the share price near its target. To reflect this Citi, downgraded it to a Neutral.

Mortgage Choice (MOC) beat UBS’s expectations with its full-year earnings result and changes to forecasts have driven up the broker’s price target. Improved performance and a solid balance sheet are enough for UBS to upgrade it to a Neutral rating.

Among retail exposed stocks, Credit Suisse has upgraded both OrotonGroup (ORL) and The Reject Shop (TRS). For the former the upgrade to Buy comes after severe selling of the stock after the loss of a licence with Polo Ralph Lauren, which has improved the value on offer, while for The Reject Shop, the broker’s upgrade reflects the fact the stock is trading in line with valuation.

Seek (SEK) delivered a full-year result a little better than RBS had expected, and increases to its forecasts suggest solid earnings growth in the year ahead. A strong market position and valuation upside see the broker move to a Buy rating.

Others took the opposite view, as both Citi and JP Morgan downgraded Seek post its profit result. Citi moved to a Hold given the view the stock is fair value despite solid confidence in the earnings growth outlook. JP Morgan downgraded it to Sell, reflecting a negative view of job volumes and what is regarded as an elevated earnings multiple.

QRxPharma (QRX) has been upgraded to a Buy by RBS. The broker expects FDA approval for the group’s lead product by the middle of next year. This should improve clarity with respect to the outlook for QRxPharma and so justifies an upgrade in the view of RBS.

Downgrades

Among the downgrades, multiple cuts in ratings were the norm for the week. An example is AGL Energy (AGK), where Citi, JP Morgan and UBS all downgraded it to Hold. In all cases, modest changes to earnings estimates and revisions to price targets implied reduced value on offer, even as earnings growth should be solid in the coming year.

Acrux (ACR) was downgraded to Hold by both Macquarie and RBS, as earnings guidance implies a more competitive operating environment.

Both UBS and Credit Suisse downgraded Amcor (AMC) post its result, the former to Hold and the latter to Sell. Forex headwinds are impacting the earnings growth outlook and Credit Suisse sees scope for defensives such as Amcor to be left behind if investors decide to turn attention to more cyclical exposures.

Despite a better than expected profit result, Monadelphous (MND) has been downgraded to Hold by both Citi and BA Merrill Lynch. The earnings growth outlook for the company remains solid across the next couple of years but valuation has become the issue for both brokers as the share price has continued to appreciate.

Interim earnings from QBE Insurance (QBE) disappointed from a margin perspective and generated cuts to earnings forecasts and price targets across the market. Restoring confidence is expected to take a number of periods and as a result both Citi and BA-ML have downgraded ratings to Hold.

Ramsay Health Care (RHC) delivered solid earnings for the full-year, but earnings guidance wasn’t good enough to justify a more positive view on the stock according to JP Morgan. Macquarie agreed, both brokers moving to Neutral.

For Super Retail Group (SUL), earnings for the full-year were solid but ongoing struggles in divisions such as Ray’s Outdoors and Goldcross Cycles remain a concern. While earnings growth overall should remain, solid valuation is now not as attractive, which has seen both Credit Suisse and RBS move to Neutral ratings.

Ardent Leisure (AAD) delivered a solid enough result given the impact of poor weather on the group’s theme park operations, but in Deutsche Bank’s view the various growth options open to management are priced into the stock at current levels. As a result, it was cut to Hold.

There was evidence of some weaker margins in the Bendigo and Adelaide Bank (BEN) result. With limited growth and returns on offer, RBS has downgraded it to a Sell.

RBS has lowered its rating for Coca-Cola Amatil (CCL), and while interim earnings were solid, the broker sees ongoing tough trading conditions as limiting earnings certainty enough to justify a downgrade to a more cautious stance.

BlueScope’s (BSL) full-year earnings performance was dominated by a weak second half in the view of BA-ML, which sees the broker push out timing expectations for a recovery in the key Australian steelmaking division. It’s rating was downgraded to Hold given the challenging near-term environment.

Lower expectations for CSR’s (CSR) aluminium division given lower prices for the metal saw UBS downgrade it to Neutral, while the broker has similarly moved to a Neutral rating on Dulux (DLX) given share price outperformance over the past 12 months.

RBS Australia has lowered its utilisation assumptions for Emeco Holdings (EHL) to account for tough market conditions and the changes see a reduction in earnings forecasts and price target. RBS has concerns for mining service companies with overweight exposure to the coal sector and to reflect this the broker has downgraded the company to a Hold rating from Buy.

While earnings for Fletcher Building (FBU) were broadly as expected Citi suggests the shorter-term outlook remains challenging and this has prompted cuts to estimates. The weak outlook caused Citi to downgrade it to Hold.

Better-than-expected earnings from iiNet (IIN) prompted some upgrades to forecasts and price target from Deutsche Bank. But the stock is trading near the broker’s revised valuation, which prompted a downgrade to Hold.

JP Morgan believes ongoing delays to approval for the LAMP are stretching Lynas’s (LYC) balance and creating significant uncertainty for investors. The longer the delay, the greater the risks, so the broker has cut it to Neutral.

Post interim earnings and a meeting with management, BA-ML has cut forecasts for OZ Minerals (OZL), reflecting concerns about the company’s ability to meet production guidance in 2013. It has been downgraded to Hold.

Deutsche cut Sonic Health (SHL) to Hold as near-term earnings growth is not strong enough in the broker’s view to offset some funding pressures and the persistent strength in the Australian dollar.

Tatts (TTS) delivered a solid result, but JP Morgan suggests the share price is now trading too far in advance of fundamentals to justify its previous Neutral rating. It has been cut to Sell.

A weak nickel price and a strong Australian dollar meant earnings for Western Areas (WSA) fell short of the expectations of UBS and cuts to forecasts on the back of weaker guidance prompt the broker to downgrade it to a Hold.

Credit Suisse has made a similar change in Woodside Petroleum (WPL) given its view the Pluto expansion has stalled and a re-rating will require greater clarity on one or more of the group’s growth projects.

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 consider the appropriateness of the information in regards to their circumstances.

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