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The broker wrap: Upgrades for Alumina and Myer

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

[1]Stockbrokers zoomed in on the re-election of US President Barack Obama last week and what the consequences might be for healthcare companies in Australia. Items that had their attention as well include banks, discretionary retailers and, of course, the leadership change in China.

As far as individual stock ratings are concerned, the past week has been a quieter one. The eight brokers in the FNArena database made just six upgrades and nine downgrades in recommendations. Total Buy ratings now stand at 43.32%. (See full-page broker wrap table at the end of this article.)

Upgrades

Among the upgrades was Alumina (AWC), raised by BA Merrill Lynch to Buy given signs that a squeeze in the bauxite market was occurring with China importing more alumina given limited bauxite availability. While a Supreme Court ruling in Indonesia later in the week set aside the government decision to ban exports and so created some additional uncertainty, BA-ML continues to see valuation upside for the stock.

Discretionary retail stocks were also a focus for brokers, as Billabong (BBG), Myer Holdings (MYR) and Specialty Fashion (SFH) all saw ratings upgraded over the week. Citi moved to a Buy on Billabong given the view sales trends are starting to stabilise and discounting across fashion categories is reducing, which was enough for the broker to lift earnings estimates and its rating.

For Myer, Citi also moved to Buy given the view conditions in the sector are improving. As with Billabong, the broker lifted earnings estimates and its price target, which supports the upgrade in rating.

Credit Suisse upgraded Specialty Fashion to Hold given both an undemanding valuation and evidence of some improvement in operating conditions. Changes to forecasts prompted a significant increase in the broker’s price target.

While a trading update from Domino’s Pizza (DMP) was a little softer than expected JP Morgan notes full-year guidance was maintained, meaning no changes to earnings estimates. To reflect recent share price weakness the broker upgraded it to Buy, supported by the view the current low share price offers an opportunity for investors.

Westpac (WBC) delivered what was regarded as the best of the major bank profit results and this prompted Citi to upgrade it to Buy. Improving revenue performance and changes to interest rate assumptions drove an increase in price target, which supports the upgrade in rating.

Downgrades

At the same time Credit Suisse went the other way and downgraded Westpac to Hold from Buy; a valuation call since the broker made only minor changes to earnings estimates and none to its price target post the profit result.

Credit Suisse also downgraded Australand Property (ALZ) to Hold on valuation grounds given recent share price outperformance. The broker suggests the stock has performed well given improvements made in earnings quality and capital position.

Elsewhere in the property sector, both BA-ML and UBS downgraded Charter Hall Group (CHC) to Hold. For UBS, the change comes after the broker adjusted its model for new assumptions to reflect an announced joint venture to acquire Bunnings assets, while for BA-ML the downgrade is a valuation call given strong returns from the company in recent months.

Having reviewed its uranium price assumptions JP Morgan has downgraded both Energy Resources of Australia (ERA) and Paladin (PDN), the former to Sell and the latter to Hold. The changes reflect weaker uranium price assumptions from the decision by Japan to delay the re-start of some of its nuclear reactions.

JP Morgan also cut its rating on Retail Food Group (RFG) to Sell given the view the core franchise systems of the group are struggling to achieve positive weekly sales growth. With organic growth more difficult executing on acquisitions becomes a key, but brings with it additional risk in the broker’s view.

QR National (QRN) has been downgraded to Hold on valuation grounds by Deutsche Bank following a gain in the share price of around 17% since July. Supporting the change in rating is the potential for uncertainty with respect to coal volume growth and contract volumes to impact on earnings going forward.

Increases to earnings forecasts were similarly modest, no stock under coverage enjoying an increase of more than 10%. Cuts to earnings estimates were more significant, with Beadell Resources (BDR), St Barbara (SBM), Boral (BLD) and Whitehaven Coal (WHC) all seeing earnings forecasts cut by at least 10%.

[2]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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