The broker wrap: MYR, TOL and LEI

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Changes to stockbroker ratings in the past week

The eight securities brokers in the FNArena database issued seven upgrades in the past week, compared with ten downgrades. Total Buy ratings now stand at 44.64%.

Upgrades

Among the upgrades were two resource plays: Atlas Iron (AGO) and Regis Resources (RRL). Atlas was upgraded to Neutral by UBS because despite the weaker iron ore price, the broker suggests Atlas has enough liquidity to meet its capex, dividend and tax requirements in the 2013 financial year. Recent share price weakness has improved the value on offer.

For Regis Resources, full-year earnings showed a strengthening of the group’s balance sheet, while Deutsche Bank continues to see value as production increases from the combination of the Moolart Well and Garden Well projects and dividends from the company come closer to reality. Deutsche has lifted its rating to Buy, while also lifting its price target on the stock.

Among the industrials, UBS upgraded Breville Group (BRG) to Buy given the expectation the company can continue to grow its share of the US market. Breville’s profit result prompted changes to earnings forecasts and the result was an increase in UBS’s price target.

While forecasting lower average income growth in the office sector in 2013, JP Morgan continues to like the quality of Dexus’ (DXS) portfolio, with scope for an increase in payout ratios in coming years. This is enough for an upgrade to a Neutral rating.

Sigma Pharmaceuticals (SIP) delivered a better interim profit result than Macquarie had forecast, the result being increases to estimates in coming years. Macquarie’s price target increased as well and on valuation grounds, the broker has upgraded it to Neutral.

Deutsche Bank upgraded both Leighton Holdings (LEI) and Myer (MYR) to Buy. For Leighton, Deutsche suggests the market is pricing in too much risk, particularly given in resources the company is primarily exposed to low cost mines and committed LNG projects. There are also some potential balance sheet positives such as a sale of NextGen, which is enough to justify a more positive view at current share price levels.

With respect to Myer, Deutsche says an improvement in its gross margin was the highlight of the full-year profit result. Top line growth continues to look difficult to achieve, but the stock offers an attractive yield and some longer-term value at current levels.

Downgrade

On the downgrade side of the ledger, UBS has cut its rating on Ansell (ANN) to Sell, a relative valuation call given the company is seen to have less defensive earnings than others in the sector.

UBS also downgraded Brambles (BXB) to Hold, again on valuation grounds following an 8% rally in the share price since full-year earnings were announced in August. As UBS notes, the stock is now trading broadly in line with valuation.

Aquarius Platinum (AQP) has been downgraded by BA Merrill Lynch to Sell as part of a reinstatement of coverage. With two mines on care and maintenance, the broker sees a turnaround being reliant on improving operations at Kroondal, which is currently operating at a loss. When political risk is added to the equation, BA-ML sees little upside for the stock in the short-term.

Credit Suisse has similarly downgraded Envestra (ENV) to Sell, this coming after changes to estimates to account for expectations of upcoming draft regulatory decisions. The cuts to forecasts impacted on the broker’s price target, while the rating downgrade is a valuation call.

The Reject Shop (TRS) was also downgraded to Sell by Credit Suisse, this after recent share price outperformance suggested limited further upside from current levels. Group gearing should improve with Ipswich DC flooding claims being finalised, Credit Suisse expects tough operating conditions will continue for some time.

Recent share price strength has been enough for Citi to downgrade Insurance Australia Group (IAG) to Hold, as even allowing for an increase in price target the broker doesn’t see enough upside from current levels to justify a more positive rating.

JP Morgan has made two downgrades over the week, lowering ratings on both Southern Cross Media (SXL) and Toll Holdings (TOL) to Sell. For Southern Cross, ongoing tough TV conditions lead the broker to suggest further cuts to consensus earnings estimates are likely, something that will act to limit potential share price upside.

In Toll’s case, JP Morgan suggests a focus on market share is generating some domestic margin pressure and this suggests earnings headwinds are likely to remain in place for some time. Along with the downgrade in rating, the broker has trimmed earnings forecasts and price target.

Macquarie has downgraded Woodside (WPL) to Hold after taking a less bullish view on the outlook for Australian LNG plays given the expectation of increasing competition in the global market. This view prompted cuts to earnings estimates and the broker’s price target for the stock.

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 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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