The broker wrap: BOQ, BLD and CCL

Founder of FNArena
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Changes to stockbroker ratings in the past week

Last week saw local stockbrokers zoom in on the domestic Annual General Meeting season in Australia and expectations are far from exuberant. In a best case scenario, so it appears, company boards will re-affirm cautious guidance for the year ahead – or stay mum.

Those with a less buoyant world view are anticipating downgrades and early profit warnings. At the very least, it looks like the next few weeks won’t fly under the radar.

Last week also proved a big week for stockbroker recommendation downgrades. As of Friday, the FNArena Database scoreboard was showing a whopping 19 downgrades versus just four upgrades over the course of the week. Note that six of the downgrades recorded all belonged to serial disappointer Bank of Queensland (BOQ).

Downgrades

Early last week, Bank of Queensland came out and advised that bad debts are going to come in about 20% higher than the market was expecting. The regional lender ended up downgrading its full-year guidance and increasing its bad debt provisions by a further $15 million. Brokers reacted by cutting forecasts and downgrading their recommendations for the most part. Well, all except two. Still, what was a stock that rated six Buys in the FNArena Database last Monday is now left with just one.

Macquarie is the last man standing with a Buy call on Bank of Queensland, believing the sell-off in BOQ and across the board downgrades were overdone. The broker notes the market took away 40 cents per share when the downgrade and top-up were really only worth 4 cents per share, in its view. JP Morgan also bucked the trend, actually upgrading its recommendation to Neutral from Underweight on a view that while concerning, the lowered profit wasn’t that bad, while the topped-up debt provision has more evenly balanced risks. By the end of last week the stock was Neutrally regarded in the FNArena Database, with one Buy, one Sell and six Holds.

What does remain, and cannot be captured in mathematical models, is the erosion of trust, so it may take a while before Bank of Queensland is back on top of the Buy list for many an investor.

BA-Merrill Lynch downgraded Aristocrat Leisure (ALL) to Sell, claiming the market was underestimating the force of the headwinds facing the company. The headwinds were cited as being persistent US pricing pressure and increasing competition in the company’s home market, Australia. Interestingly, just a few days before, Deutsche Bank upgraded its recommendation on ALL to Buy, noting strong earnings growth, a sound balance sheet and positive momentum in all of the company’s key markets. The stock garners slight positive regard in the FNArena Database, with three Buys, two Sells now and three Holds.

Boral (BLD) was clipped to Sell by UBS last week after the broker pushed out its timing for a turn in the Australian construction cycle to early 2014. BA-Merrill Lynch made the same move about three weeks ago, while Citi, already at Sell, made similar comments two days before Merrill. The stock is now a mid level Sell in the FNArena Database, with just two Buys trying to face down four Sells and two Holds.

Next on the downgrade ledger is BT Investment Management (BTT), which reported September quarter numbers last week. Both UBS and JP Morgan were fairly positive on the release and upgraded funds flow forecasts, but Credit Suisse, on the other hand, was a little less impressed. It trimmed its forecasts on funds flow levels that were weaker than expected, while also cutting its recommendation to Neutral from Outperform given recent strength in the share price. As of Friday, shares were trading at just a 3.3% discount to the consensus price target in the FNArena Database. The stock is Neutrally regarded, with four Hold calls recorded.

UBS downgraded Coca Cola Amatil (CCL) to Sell on valuation grounds, noting that while the company seems to be performing quite well, the share price is simply too high to support forecast earnings growth. The stock is a little on the negative side of being Neutrally regarded, with two Buys trying to fend off three Holds and three Sells. The Holds and Sells are all of a fairly similar opinion; great company, too expensive. A fact demonstrated by shares trading at a 3.5% premium to the FNArena consensus price target.

JP Morgan has become the latest in line to downgrade its view on CSR (CSR). The broker has cut its call to Neutral citing continuing low aluminium prices and weakness in domestic construction. Citi downgraded it to Sell last month, UBS dropped it to Hold in August and Credit Suisse to Sell in July, all of them on similar grounds. The stock now rates just one Buy, four Holds and three Sells in the FNArena Database.

Fleetwood (FWD) was lowered to Hold from Buy by RBS, with the broker worried about occupancy rates in general and occupancy rates at Searipple in particular. The stock still enjoys three Buys versus just one Sell and one Hold in the FNArena Database. James Hardie (JHX) also suffered at the hands of RBS, the broker cutting its recommendation to Sell after pushing out its expectation of a recovery in the construction cycle. The stock is now negatively regarded in the FNArena Database, with three Sells out trumping three Holds and one Buy.

Both Macquarie and Deutsche Bank cut their calls on Lynas Corp (LYC) to Sell last week, with Macca’s actually cutting down from a Buy call. The company is beset by court problems in Malaysia that have seen LAMP processing delayed yet again. While both brokers are confident of an ultimately positive resolution, both are also concerned about the impact all of these delays are having on the balance sheet. The stock is now negatively regarded in the FNArena Database, with two Sells trumping two Neutrals and one Buy. It’s worth noting that the shares currently offer 43.7% upside to the consensus target, so probably worth watching when/if these Malaysian legal issues are solved (but beware of the potential need for additional equity).

UBS came off of Restriction on Nufarm (NUF) and promptly cut to Hold, seeing limited valuation upside over the near-term. Meanwhile, RBS downgraded Washington H Soul Pattinson (SOL) to Hold on valuation grounds, otherwise liking the diversified market exposure and focus on dividends that are offered.

Citi dropped Orica (ORI) to Neutral, concerned that a new wave of competition has eroded the company’s traditional first mover advantage and believing this will limit earnings growth going forward. Most brokers disagree, with the stock still rating six Buys, one Hold and the one Sell in the FNArena database. Meanwhile, Worley Parsons (WOR) was cut to Sell by Deutsche Bank, the broker thinking the time of high hydrocarbon earnings growth for the company are over. The stock now rates a flat Neutral in the FNArena Database.

Lastly, JP Morgan downgraded Westpac (WBC) to Sell, not liking the direction the bank’s return on equity levels are travelling. The broker thinks it’s time for some backbone and suggests the bank should think twice about continually increasing dividends. One Buy, one Sell and Six Holds leave the stock at flat Neutral in the FNArena Database.

Upgrades

The upside is a little less populous than the downside this week, with the two upgrades already mentioned (BOQ and ALL) only leaving us two more to discuss. RBS upgraded both Retail Food Group (RFG) and Seven Group (SVW) to Buy, albeit for different reasons. RFG was boosted because not only did the broker like the Crust Pizza acquisition, but it is also increasingly positive on the longer term growth dynamics on offer.

Seven was lifted not so much because the broker liked the company’s move to drop the Consolidated Media (CMJ) acquisition on ACCC issues, but more because of the company’s subsequent move to sell its CMJ stake at a decent price to News Corp (NWS). RBS thought it was a brilliant move, noting the company will pocket about $475 million in November and also benefit from a much simpler corporate structure. Both stocks are Positively regarded in the FNArena Database, each boasting straight Buys with the exception of one Hold each.

Changes to earnings forecasts (EF) in cents per share

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: 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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