The broker wrap: TEN, STO and PRY

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Changes to stockbroker ratings in the past week

In line with a visible improvement in general market sentiment, stockbrokers and investment bankers in Australia zoomed in on all the market positives during the week past. Some strategists retain a cautious approach as earnings growth in Australia has not yet appeared on their radar, while the local annual general meeting (AGM) season might well deliver a few booby traps, they warn.

With AGM season under way, the past week has seen a number of updates with respect to outlook commentary from companies, which have prompted changes to ratings by the eight brokers in the FNArena database. A total of eight stocks received upgrades while 20 were downgraded, total Buy ratings now standing at 43.63%.

Upgrades

Among those stocks upgraded was Bank of Queensland (BOQ), RBS Australia moving to Buy and Citi to Neutral after the bank’s full year profit result. For Citi, the result offered some greater comfort with respect to bad debts, while RBS expects new management and strategy can boost revenue growth and returns in the not too distant future.

UBS upgraded Billabong (BBG) to Buy believing the market to be factoring in too pessimistic an outlook for the company’s potential turnaround, as there is upside if current turnaround plans can be executed successfully.

Despite a weaker first quarter result, RBS has upgraded Hills Industries (HIL) to Buy based on the expectation the weak result will prompt a needed restructuring of the business. As well, valuation is considered undemanding at current levels while the dividend yield seems attractive.

Changes to foreign exchange and commodity price assumptions have generated an upgrade for Newcrest (NCM) to Neutral by Credit Suisse, supported by the broker increasing its price target for the stock to $30.00 from $26.00. Revised oil price assumptions saw the broker similarly upgrade Santos (STO), in this case to a Buy.

Primary Health Care (PRY) should be a beneficiary of delays to pathology funding cuts and Deutsche Bank has lifted earnings forecasts for the company in response. The changes have meant an increase in price target and with the stock trading at a discount relative to peers, the broker upgraded it to Buy.

Downgrades

Among the downgrades, Stockland (SGP) was downgraded by two brokers during the week. Credit Suisse moved to Sell and Deutsche to Neutral, both on the back of revised earnings guidance from management.

ARB Corporation (ARP) has enjoyed a good share price run in recent weeks and this has been enough for Citi to downgrade it to Neutral on valuation grounds. Citi similarly downgraded Challenger Financial (CGF) to Neutral to reflect a lack of potential positive catalysts for the stock, this following a market update reiterating full-year sales guidance.

Changes to commodity price assumptions by Credit Suisse have prompted the broker to downgrade a number of stocks across resource companies under coverage. In iron ore, Atlas Iron (AGO) has been downgraded to Sell as revised earnings forecasts and some uncertainty with respect to future growth suggest limited scope for shorter-term outperformance.

Cockatoo Coal (COK) has also been downgraded by Credit Suisse to Neutral to reflect the possibility of a capital raising and some development risks associated with the company. Similar concerns with respect to future growth have seen Credit Suisse downgrade New Hope Coal (NHC) to Sell.

For Stanmore Coal (SMR) there is potential for the Range project to be delayed and for further funding to be required, causing Credit Suisse to downgrade it to Neutral. Yancoal’s (YAL) valuation and price target have been lowered and this has seen the rating downgraded to Neutral. Tigers Realm Coal (TIG) suffered a similar fate, the broker’s rating lowered to Neutral to reflect concerns over a lack of reserves and a significant funding gap.

For both Evolution Mining (EVN) and PanAust (PNA) recent share price strength has been sufficient for Credit Suisse to downgrade them to Sell ratings on valuation grounds, while Oil Search (OSH) has been downgraded to Hold following Credit Suisse’s changes to oil price expectations.

RBS Australia has downgraded Domino’s Pizza (DMP) to Hold following a solid run in the stock of late, though the broker continues to view long-term fundamentals for the company as attractive. For Citi, the recent run in the James Hardie (JHX) share price has pushed the stock to a level seen as expensive enough to justify a downgrade to Sell.

JP Morgan has lowered earnings forecasts for Fleetwood (FWD) to reflect a faster than expected decline in demand for modular buildings, the current market headwinds enough for the broker to downgrade to Neutral.

Imdex (IMD) delivered a disappointing quarterly result and Deutsche Bank lowered its earnings estimates and price target for the stock. With Imdex now trading in line with sector peers, the broker downgraded it to Hold.

Macquarie has reviewed the Australian TV sector post Ten Network’s (TEN) profit result and the result is a downgrade to both Ten and Seven West Media (SWM), the former to Sell and the latter to Hold. In Macquarie’s view, sector pressures suggest share price outperformance is unlikely prior to any improvement in conditions.

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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