The broker wrap: double the downgrades

Founder of FNArena
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Broker upgrades in the past week

As Australian profit reporting season moves into full swing, brokers are picking up the pace of ratings changes. Eight brokers in the FNArena database upgraded 18 stocks and downgraded 34 over the past week. The changes mean total Buy ratings have fallen to 48.5%. Despite this, the majority of downgrades were to Neutral, and pure Buy ratings outnumbered Sells.

Stock broker downgrades in the past week

Upgrades

RBS Australia lifted Goodman Fielder to Buy based on the view earnings have now re-based, which could prompt either the reinstatement of dividends or some corporate interest. Credit Suisse agreed both are possible and lifted its rating to Neutral.

SAI Global (SAI) again fell short of expectations in its core compliance division in particular and brokers have consequently cut earnings estimates and price targets. But recent underperformance has improved the value on offer, which drove the upgrades to Buy for both Citi and JP Morgan. In contrast, Deutsche downgraded it to Hold given its view the stock is fully valued at current levels.

Adelaide Brighton (ABC) enjoyed an upgrade from UBS to Buy on valuation grounds following interim earnings this week, while at the same time Credit Suisse downgraded its rating to Neutral given some concerns with respect to cement volumes in the current operating environment.

An upgrade for Ansell (ANN) to Buy by Macquarie followed a solid profit result and increases to the broker’s earnings estimates and price target. There is value on offer in Macquarie’s view given Ansell is trading on a market multiple at present.

A flat result was seen as solid performance from ARB Corporation (ARP) given tough operating conditions through the year and Citi expects further solid performance through at least the next nine months. This, and a reasonably attractive valuation, drove an upgrade to a Buy rating.

Carsales.com (CRZ) delivered solid results in the face of strong competitive pressures and this was enough for Macquarie to lift targets for the stock. The resilience of the business model in a difficult environment has given increased confidence and sees Macquarie lift it to a Neutral rating.

Management at Downer EDI (DOW) has addressed some key concerns, so Credit Suisse has lifted its forecasts and its rating to Buy.

While full-year earnings for GWA (GWA) were down significantly relative to full-year 2011, Citi suggests most of the bad news is now behind the company and has upgraded it to Hold. At the same time both UBS and Deutsche Bank downgraded it to Hold, UBS pointing out that while restructuring is being undertaken and there remains leverage to an economic recovery, the timing of any such recovery remains uncertain.

A marking-to-market of Henderson’s (HGG) investments has boosted UBS’s earnings expectations for the stock, enough for the broker to upgrade to Buy from Hold. At the same time UBS concedes an improvement in investment flows will remain a challenge for the company.

iiNet (IIN) beat RBS Australia’s expectations for full-year earnings and factoring in higher margins and cost savings sees the broker lift its price target. This drives an upgrade to a Buy rating, supported by the broker’s view iiNet offers relative earnings certainty at present.

Improving farm margins should be a boost for earnings at Nufarm (NUF) and to reflect this, BA Merrill Lynch has upgraded it to a Buy.

Paladin (PDN) signed a uranium off-take agreement during the week, causing JP Morgan to upgrade it to Buy. The deal removes balance sheet concerns given a significant up-front payment, while the broker also likes the leverage to underlying uranium prices.

While RBS has trimmed forecasts for Pharmaxis (PXS) to reflect a slower than expected ramp-up of sales for Bronchitol, recent share price weakness offers an opportunity and the broker has moved to a Buy rating.

Sirtex Medical (SRX) received positive reviews from FDA trials of its chemotherapy product and this has prompted UBS to upgrade it to Buy.

Following a review, JP Morgan has upgraded Spark Infrastructure (SKI) to Buy, reflecting a relative valuation discount to peers and potential for improving cash flow to support higher distribution payouts going forward.

There were few surprises in the Wesfarmers (WES) profit result, but RBS made enough changes to earnings forecasts to lift its price target. With consensus forecasts for the stock having fallen by more than for Woolworths (WOW) in recent months, risks now appear priced in, so RBS has upgraded it to Neutral.

Downgrades

Citi went the other way and downgraded Wesfarmers to Sell given the expectation the pace of earnings growth for the company will slow.

Among other downgrades, both Citi and UBS cut ratings for ASX Limited (ASX), the former to Sell and the latter to Hold. For UBS, earnings growth has effectively been deferred for a year and this impacts on valuation, while Citi’s downgrade also reflects revisions to earnings estimates and price target.

Goodman Group (GMG) received multiple downgrades over the week with RBS, Citi and JP Morgan all moving to Neutral. The problem for the stock is its recent share price strength limits the upside potential, though RBS did suggest looking to buy the stock on any share price weakness in coming weeks.

A solid profit result from Primary Health Care (PRY) was not enough to stop RBS and Deutsche downgrading it to Hold. For RBS an uncertain earnings outlook is the driver of the rating change, while Deutsche’s concern is further pathology funding cuts are looming. At the same time Deutsche suggests the stock is trading around fair value.

The most downgraded stock of the week was UGL (UGL), with Citi, JP Morgan and Deutsche all cutting ratings to Hold and Macquarie to Sell following cuts to earnings estimates post its full-year earnings result. A tougher earnings outlook has driven the reductions in forecasts and price targets, with Macquarie suggesting the result is enough to bring UGL’s safe-haven status into question.

Credit Suisse cut earnings forecasts for Aurora Oil & Gas (AUT) post the group’s full-year profit result and the changes mean a limited total return on offer. This was enough for the broker to downgrade it to Hold.

Recent share price gains prompted Macquarie to downgrade Bendigo and Adelaide Bank (BEN) to Neutral prior to next week’s profit result, while the weaker guidance and limited upside potential caused RBS to downgrade Brambles (BXB) to Hold.

Cardno (CDD) has enjoyed a recent re-rating and this has prompted Macquarie to downgrade it to Neutral. Full-year earnings met expectations and mean only minor changes to the broker’s model for the company.

While Commonwealth Bank (CBA) delivered a solid enough result, UBS has cut its rating to Neutral, seeing the bank as simply too expensive at current levels despite what remains an attractive dividend payout.

Crown (CWN) also delivered a relatively solid result, but Credit Suisse has trimmed earnings estimates and its price target given increased capex and debt assumptions. It cut Crown’s rating to Hold with the stock trading near the broker’s revised price target.

Valuation is the driver of Macquarie’s downgrade of Dexus (DXS) to Underperform, as the share price is trading broadly in line with a revised price target. It is a similar story for Credit Suisse with respect to Domino’s Pizza (DMP), which delivered a solid profit result, but has been downgraded to Hold given a high relative multiple.

GPT (GPT) has suffered a similar fate, as while Macquarie liked the profit result and lifted forecasts and its price target on the back of updated guidance, the share price is trading in line with the broker’s revised target. Its rating has been downgraded to Hold.

A recent run in the share price has seen Credit Suisse downgrade James Hardie (JHX) to Hold despite the broker remaining attracted to the company’s cyclical growth opportunities. Credit Suisse has also downgraded JB Hi-Fi (JBH) to Sell given the view profit is likely to remain constrained for the next couple of years on ongoing difficult market conditions.

Results and production guidance from Newcrest (NCM) were broadly as Citi had expected, but with gold de-rating and given recent share price strength, the broker doesn’t see as much value on offer. Rating has been cut to Hold.

OrotonGroup (ORL) has lost an exclusive licence with Polo Ralph Lauren and this has prompted Citi to move to a Sell rating. For Citi, the news means an Asian store rollout program is going to need to be very successful to restore investor confidence.

Lower cash sees UBS lower earnings forecasts for Oz Minerals (OZL) and when combined with a lack of exploration success is enough for the broker to downgrade to a Sell rating from Neutral.

Telstra (TLS) has been downgraded by Macquarie to Hold on valuation grounds after a solid full-year profit result, while a similar argument has been presented to justify the same downgrade in Macquarie’s rating for Westfield Retail Trust (WRT).

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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