- Switzer Report - https://switzerreport.com.au -

The broker wrap: QAN, NCM, TOL, SVW

Posted By Rudi Filapek-Vandyck On In Markets | No Comments

Broker upgrades in the past week

[1]

Broker downgrades in the past week

[2]The end of yet another weak reporting season in Australia, the falling price of iron ore and the Gillard Government linking the price of carbon emissions permits to a weak and troubled Europe all featured prominently in local stockbrokers’ research last week.

Meanwhile, the trend of ratings downgrades far exceeding upgrades continued, showing 48 cuts to ratings against 11 upgrades. Total Buy ratings have now fallen to 44.6% at the finish of the local results season, while 44.1% of stocks are rated Hold and 11.3% rated Sell.

Upgrades

Aristocrat Leisure (ALL) made both lists, with RBS Australia upgrading it to a Buy on the view interim earnings contained enough good news to suggest market conditions for the company were improving. In contrast, Citi downgraded it to Hold on valuation grounds following a solid share-price run.

Transpacific Industries (TPI) saw RBS move to a Buy rating, with the company appearing to be moving through its deleveraging process faster than had been expected as cash flows and the balance sheet are now in better shape.

RBS Australia also upgraded Automotive Holdings (AHE) and Qantas (QAN) to Buy ratings, the former given the expectation of further solid earnings growth momentum from recent acquisitions and new dealerships and the latter an improved cash position reduces the likelihood of a capital raising.

Lindsay Australia (LAU) was RBS’s final upgrade for the week, the broker moving to a Buy rating as updated guidance from management saw earnings estimates increased. At the same time, recent share price weakness has improved the value on offer in the stock.

Also active in lifting ratings was JP Morgan, who upgraded Infigen (IFN) to Buy from Hold to reflect increases to forecasts following a better than expected profit result. PMI Gold (PVM) enjoyed a similar upgrade from JP Morgan, reflecting positive feasibility results for the Obotan project in West Africa and in particular the lack of any bad news with respect to grades at the project.

For Seven Group Holdings (SVW) a better than expected profit result thanks in large part to strong earnings from WestTrac was enough for JP Morgan to upgrade it to a Buy rating.

Both Macquarie Atlas (MQA) and SP Ausnet (SPN) were also upgraded by JP Morgan, but in both cases to Neutral ratings from Underweight previously, the former given some positives such as a maiden dividend announcement and some benefits from a weaker AUD/EUR exchange rate and the latter given scope for the company to pass through the costs of the Black Sunday bushfire litigation to customers on the back of a draft decision as to what qualifies as an insurance event.

SP Ausnet also experienced a downgrade in rating, Credit Suisse moving to a Hold previously as while the draft ruling is a potential positive the broker suggests recent share price performance means a more cautious rating is now appropriate.

The other upgrade during the week came from BA Merrill Lynch, upgrading Prime Media (PRT) to Neutral on the basis of an attractive valuation relative to peers. This follows a profit result that prompted the broker to lift its numbers in coming years.

Downgrades

Multiple downgrades to a stock was a major trend this week, with Ausdrill (ASL), Australian Infrastructure (AIX), Boart Longyear (BLY), Centro Retail (CRF), FKP Property (FKP), Investa Office (IOF), Newcrest Mining (NCM) and Telecom New Zealand (TEL) all seeing ratings downgraded by more than one broker.

For Ausdrill, an in-line full-year earnings result was not the issue as the Best Tractor Parts acquisition has lifted gearing levels and there is now less scope for outperformance relative to expectations. As a result Macquarie has downgraded it to Hold and BA-ML to Sell.

Australian Infrastructure also delivered a solid earnings result but the proposed acquisition by the Future Fund has become the main point of interest. For JP Morgan and UBS the proposal fully values AIX and the former notes a deal will take some time to become a reality. JP Morgan downgraded it to Sell, while UBS cut it to Hold.

A record interim result from Boart Longyear was accompanied by significant cuts to earnings guidance to reflect weaker exploration spending. Brokers quickly adjusted earnings forecasts and price targets accordingly, with RBS, Macquarie and UBS all downgrading it to Neutral given little scope for share price outperformance in the current environment.

Results confirmed Centro Retail has done a good job in reinventing itself, but the market has recognised this and driven up the share price this year. With valuation less attractive Macquarie, JP Morgan and UBS have downgraded ratings, JP Morgan to Sell and the other two to Hold.

RBS, BA-ML and JP Morgan have all moved to Hold ratings on FKP Property as the need to raise capital to strengthen the balance sheet, while at the same time indicating further asset sales are likely, has raised questions about the outlook for the stock. Price targets were also adjusted to reflect the capital raising.

Full-year earnings from Investa Office were solid and guidance for the coming year was regarded as impressive by JP Morgan but with the share price having reacted to the solid performance in recent months the broker downgraded iy to Hold on valuation grounds. UBS made a similar change for the same reason.

Newcrest’s pre-feasibility study for the Golpu project fell short of expectations given higher capex costs and lower output and this has prompted some downgrades, RBS and UBS both cutting ratings to Hold. Credit Suisse went further and downgraded to Sell on Newcrest, as the delay to the project also impacted on the broker’s valuation for the stock.

While Telecom New Zealand broadly met expectations with its profit result there were signs of revenues coming under pressure given increased competition in the fixed line business in particular. Both Citi and JP Morgan downgraded ratings to Sell as earnings estimates and price targets were cut.

Among other downgrades, RBS has moved to a Neutral rating on AP Eagers (APE), the change a valuation call as while forecasts have been lifted following a solid earnings result this is now reflected in the share price.

Lower revenues and higher costs meant a poor Atlas Iron (AGO) result, which prompted UBS to cut earnings forecasts and price target significantly. With the current iron ore price an issue the broker downgrades to a Sell rating.

A share price rally over the past couple of months has been enough for JP Morgan to downgrade AWE (AWE) to Sell, a change supported by the broker’s concerns with respect to capex risk for the BassGas project and financing for the Ande Lamut development in Indonesia.

Caltex (CTX) delivered a solid interim result in the view of Credit Suisse, but the share price has rallied solidly in recent weeks and this implies limited upside from current levels in the broker’s view. As a result, rating has been cut to Sell.

Still challenging conditions prompted Deutsche Bank to lower earnings estimates for Fairfax Media (FXJ), the changes bringing about a cut in price target. The ongoing uncertainty with respect to earnings and the group’s transition to digital revenue streams saw the broker downgrade it to a Sell.

Flight Centre (FLT) delivered a good full-year profit result in challenging conditions and this was enough for RBS to lift forecasts and price target. At the same time the broker cut its rating to Hold as the stock is now within 10% of the revised price target.

G8 Education (GEM) beat Citi’s forecasts with its interim result, but again the result has been reflected in an improved share price. With valuation now less attractive Citi has moved to a Hold.

The sale of the Integro business by Goodman Fielder (GFF) was done at a price generally in line with expectations, but does nothing to put an end to margin concerns in the view of JP Morgan. At the same time balance sheet issues have not been fully dealt with, so the broker has downgraded it to a Sell recommendation.

Graincorp (GNC) has acquired Integro and UBS sees the move as a solid one for the group given the deal should be earnings accretive and add to strategic assets. Weather remains a risk to earnings, however and the broker sees valuation as full at current levels, prompting a downgrade to a Hold rating.

Exposure to the resources sector has prompted Macquarie to lower earnings forecasts for Lycopodium (LYL), the changes pushing down the broker’s price target. With the share price above the revised target rating has been downgraded to Hold.

Ongoing delays to an operating licence for its LAMP facility in Malaysia continue to pressure Lynas’s (LYC) balance sheet and this increased risk is enough for Deutsche to downgrade to a Sell rating.

A change in analyst has seen Credit Suisse downgrade NRW Holdings (NWH) to Hold, the change accompanied by revisions to earnings estimates and price target following a strong full-year profit result.

Tough market conditions have increased doubts PaperlinX (PPX) will be able to maintain earnings, especially given some better assets are being sold to address debt issues. Deutsche has downgraded it to a Hold.

Peet (PPC) delivered a reasonable earnings result, but competition continues to increase and sentiment remains poor given ongoing discounting and resulting margin pressure. This combination saw Citi downgrade it to a Neutral rating.

Perpetual’s (PPT) profit result showed transformations being undertaken are beginning to have some impact, but the view full benefits from the program won’t be apparent until 2015 caused UBS to downgrade it to a Sell.

Retail Food (RFG) delivered a solid enough earnings result in the current environment, but for RBS the fact the share price has moved close to its revised target is enough for a downgrade in rating to Hold.

A strong run for Sigma (SIP) shares over the past few months has the stock appropriately priced at current levels in the view of Citi. As a result, the broker downgraded it to a Hold. Valuation is also the issue for Spark Infrastructure (SKI) in Credit Suisse’s view, the broker downgrading it to a Neutral.

It is a similar story for Toll Holdings (TOL), Credit Suisse moving to a Hold as recent price strength limits the potential upside on offer. A weak result prompted the broker to downgrade Transfield Servies (TSE) to Hold, as full-year earnings have been difficult to reconcile and increase questions with respect to earnings going forward.

Credit Suisse also moved to a Hold rating from Buy on Virgin Australia (VAH) as while the company now appears in much better shape, this is already reflected in the share price following recent gains

Lower margin assumptions have seen BA-ML lower earnings forecasts for WHK Group (WHG) and with the stock trading close to this revised valuation the broker downgraded it to a Hold. It is a similar story for Woolworths (WOW), as while full year earnings were solid this is priced into the stock and so RBS has downgraded to a Hold rating from Buy previously.

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.

Also in the Switzer Super Report