The broker wrap: downgrades increase

Founder of FNArena
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Changes to stockbroker ratings in the past week

Changes in broker ratings over the past week have returned to the recent trend of downgrades outnumbering upgrades, with the eight brokers in the FNArena database lifting just five ratings while cutting 11 recommendations. Total Buy ratings now stand at 49.07%.

Upgrades

Alumina Ltd (AWC) was one to be upgraded, with BA Merrill Lynch lifting it to Neutral while suggesting news Chinalco is to cut output will be a positive in terms of bringing the global aluminium market into better balance. Other positives for the stock in the broker’s view are some improvements on costs and value following recent share price weakness.

However, views on Alumina Ltd were not all positive, with JP Morgan downgrading it to Sell on the view the current tough aluminium market conditions mean there is a lack of positive catalysts to drive the share price shorter-term. The broker is also concerned margin pressure could see dividends cut.

RBS Australia has lowered earnings forecasts and its price target for Billabong (BBG) on the view its new management should be able to run the business more appropriately going forward. As well, RBS sees good relative value in the stock following recent share price weakness and so has upgraded it to a Buy.

UBS has upgraded DuluxGroup (DLX) to Buy following the pre-release of full-year earnings from potential target Alesco (ALS). The Alesco result showed enough for UBS to estimate that a successful acquisition by Dulux would be around 7% earnings accretive, while recent share price moves have improved the value offering at current levels.

Following changes to oil price assumptions, JP Morgan has adjusted its model for Woodside (WPL), the result being a modest increase in price target. With improved valuation support, the broker has upgraded it to Buy.

Downgrades

The changes to JP Morgan’s expectations were not positive across the sector, as both Aurora Oil and Gas (AUT) and Beach Energy (BPT) were downgraded to Sell on changes to earnings expectations and price targets stemming from the revised oil price forecasts.

On the downgrades side of the ledger, Ten Network (TEN) was the only stock to suffer multiple downgrades with both BA-ML and UBS cutting ratings to Sell. The changes follow the decision by Ten Network to raise capital for programming and to strengthen the balance sheet.

UBS suggests the stock is now expensive at current levels given a soft earnings outlook, while BA-ML’s view is the attempt to copy Seven’s (SWM) strategy isn’t working and a return to being a low cost broadcaster would be appropriate. Targets and earnings for Ten Network were cut across the market on news of the capital raising.

While Alesco’s pre-released earnings were reasonably well received, recent share price moves have the stock trading in line with valuation for Deutsche Bank. As a result, the broker’s rating is downgraded to Neutral.

Macquarie was also busy with downgrades during the week, cutting Echo Entertainment (EGP), Qantas (QAN) and Telecom New Zealand (TEL) to Neutral.

For Echo, a trading update saw Macquarie revise earnings forecasts and price target down modestly. A takeover could see a valuation of around $5.00 but this suggests somewhat limited upside.

Qantas also lowered earnings guidance and Macquarie cut its numbers and price target accordingly (as did almost everyone else in the market). While seeing value at current levels, Macquarie sees few catalysts to suggest a share price rebound shorter-term for the Flying Kangaroo.

Increased competition remains an issue for Telecom New Zealand in Macquarie’s view, as is an apparent lack of clear growth drivers. With this in mind, valuation is fair rather than attractive in the broker’s view.

Macquarie downgraded Stockland (SGP) to Sell, suggesting the stock is now over-valued given consensus earnings forecasts appear too high for the medium term. A review of assumptions sees minor cuts to earnings estimates.

Telstra (TLS) shares have enjoyed a solid run in recent months and in RBS Australia’s view this reflects greater comfort with respect to future cash flows. The share price gains have probably run their course suggests the broker, who downgrades to a Hold from Buy on valuation grounds.

Changes to earnings forecasts (EF) in cents per share

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

Also in the Switzer Super Report:

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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