Weekly broker report – Bluescope and Tabcorp upgraded to buy

Founder of FNArena
Print This Post A A A

Written by Andrew Nelson

Brokers were a bit busier with upgrades and downgrades last week, seemingly spurred on by the impending break and determined to make a difference before we all headed off for Easter. The good news for the market is that upgrades again outweighed downgrades. The score by Thursday was 12 up and eight down.

Upgrades

We’ll start off with Billabong (BBG), which was upgraded to Hold from Sell by UBS. The broker took the chance to re-evaluate the stock now that final bids for the company are expected this week. UBS does not expect the $1.10 bid to become a binding offer because of the 10% earnings downgrade and $534 million in asset impairments taken since the initial bid was made. A lower offer is expected, but the worst case scenario could be the withdrawal of both bids. The upgrade is predicated by the assumption of a 65% probability that a bid will get up, but probably at a lower price. Broker sentiment for the stock in the FNArena Database reads neutral.

BlueScope (BSL) was lifted to Buy from Neutral by JP Morgan, who noted the company is now leaner and more focused and thus ready for a recommendation upgrade. The broker cites the fact that Coated & Industrial Products is now close to break even after two years of making losses. Global Building Solutions also looks to be on a strong growth path. Despite a strong rally from the five-year low the shares hit last year, JP Morgan believes there’s more upside available based on the aforementioned turnaround. Sentiment is positive for the stock.

Boart Longyear (BLY) was upgraded to Hold from Sell by JP Morgan, the broker believing the current share price more than covers current downside. At the same time, JP Morgan also sees little chance its price target will be challenged any time soon given the complete lack of catalysts. Sentiment for the stock is negative. The broker also lifted Fortescue Metals (FMG) to Buy from Hold, citing the sharp fall in the share price and the belief selling has been overdone. Despite the headwinds of iron ore price weakness, JP Morgan sees a good chance for some upside once the market returns to focus on the compelling valuation support. Sentiment is positive.

There was one last upgrade from JP Morgan. Tabcorp (TAH) was bumped up to Buy from Hold, the broker believing the company is showing some promise after a period of underperformance. The improved regulatory outlook, defensive revenue growth and possible future restriction on wagering advertising all bode well, according to the broker. Sentiment is positive.

Myer (MYR) also saw an upgrade to Buy from Hold, with Deutsche Bank lifting its call on the belief the market still has a steady appetite for discretionary retailer stocks. In this case, Myer represents the best opportunity given a reasonable valuation and strong free cash flow. The company is also delivering like-for-like sales growth and is addressing structural issues, said Deutsche. Despite the upgrade, sentiment for the stock is negative.

Analysts at Credit Suisse made two moves higher, lifting both Lend Lease (LLC) and Premier Investments (PMV) to Buy from Hold over the course of last week. For Lend Lease, Credit Suisse thinks investor concerns such as earnings uncertainty and weak operating cash flow are overstated, noting the stock’s price/earnings relative to the ASX has fallen 31% below the 10-year average.

Downgrades

National Australia Bank (NAB) had a busier week. Upgraded to Buy by Macquarie, but downgraded to Hold from Sell by CIMB. Macquarie notes institutional and corporate borrowing appears to be improving in the mining states, with signs of improving demand for equipment finance. Macquarie believes access to credit may become easier in the second half of the year, which means higher earnings. Meanwhile, CIMB was taking a look at bank sector net interest margins for FY13-15 and found risks remain skewed to the downside. While NAB’s dividend yield to the Australian government bond yield is supportive, the broker thinks the more fundamental valuations, like NAB’s, look stretched. Sentiment is positive.

Bank of Queensland (BOQ) is down to Hold from Buy on the books of BA-Merrill Lynch, the broker noting the stock is trading in line with its long-term price/earnings ratio and dividend yield and on par with regional peers. Deutsche Bank dropped DuluxGroup (DLX) to Sell from Hold saying that while the company may be strong and well managed, the market is still overestimating the leverage to improved housing activity and thus not worth the current premium. Sentiment remains positive for both stocks.

Our last two downgrades are both to Hold from Buy and both come from CIMB. The broker thinks Redflow (RFX) has done the hard yards on lowering operating costs, although the application of a 60% discount because of delays in securing a strategic partner sees the rating moved lower. Any success with partner negotiations is expected to prompt a review. Sentiment is neutral.
>The broker also took a closer look at Whitehaven Coal (WHC) and came to the conclusion the issues at Narrabri may end up lasting longer than first anticipated. There are a number of other important hurdles that soon need to be cleared as well such as construction at Maules Creek, which hasn’t even started despite off-take commitments already building. The broker now sees little in the way of clear information, while first coal from Maules Creek has been pushed back to 2015. Broker sentiment for the stock remains positive.
Note: FNArena monitors eight leading stockbrokers on a daily basis and the tables are based on data analysis from the week past from these experts. They are: BA-Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, CIMB (formerly 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.

Also in the Switzer Super Report

Also from this edition