Weekly broker report – Boral and Incitec Pivot upgraded

Founder of FNArena
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As production reports now comprise the bulk of the news flow in Australia, materials and resources companies wore most of the recommendation changes in the week past. FNArena recorded 15 downgrades and only eight upgrades, which pretty much reflects the price action witnessed in what was a tough week for equity investors.

In the good books

Credit Suisse upgraded APA Group (APA) to Hold from Sell now that the Moomba Adelaide Pipeline System sale process has closed and APA is in possession of an extra $423 million. The price was a bit below the broker’s expectation, but good enough. A mark to market and a few other changes to the valuation model caused a lift in the target price, which gave CS enough room to upgrade the recommendation. The FNArena Database shows a neutral sentiment for the stock.

Boral (BLD) was upped to Hold from Sell thanks to CIMB, the broker having cited recent share price weakness. The broker believes Australia’s residential construction cycle has likely found a floor and with the US recovery well underway, CIMB favours the company’s exposure profile and significant leverage to mid-cycle underlying activity. Sentiment for Boral is positive on four Buys, two Sells and two Holds.

Citi also upgraded Incitec Pivot (IPL) to Hold from Sell. The broker noted the company is planning to build an ammonium nitrate plant in the US. Citi said the economics stack up, at least for now, given historically low gas prices and rising ammonia demand. The problem is the company has not locked in long term gas supply or sales prices, which adds to earnings volatility and risk. Yet with the share price running some 15% below the market since January, the recommendation was lifted, although Citi noted there are still a number of earnings risks, like currency headwinds that could impact short-term performance. Sentiment for the stock is positive.

It was a good week for Woodside (WPL), with Macquarie upgrading its call to Hold from Sell, while Citi moved to Buy from Hold. Macquarie was thinking about the chances of capital management after Woodside deferred the James Price Point LNG facility plans and confirmed that expansion at Pluto is taking a back seat. The broker believes an off-market buy-back is the most efficient means of returning cash, as this would drive the greatest valuation and earnings accretion. Citi cited recent share price weakness and the numerous growth options not priced into the stock, long-dated though they are. Sentiment is positive.

On the way down

James Hardie (JHX) was cut to Hold from Buy, with Deutsche Bank doing the work on news the New Zealand Ministry of Education has commenced litigation against the company. James Hardie and a few other parties were named in relation to defects in 300 schools. Based on numbers published by NZ Education, the total repair cost is estimated at NZ$1.5 billion. If James Hardie’s fibre cement siding product is found defective, the liability could be up to $2.80/share in the broker’s view. Still, the case will likely take years to be resolved. Despite the intangible nature, the broker thinks management will now not pay the US35c final dividend mentioned at the third quarter result. Sentiment is negative.
The next two are both gold miners and were downgraded to Hold from Buy by Citi. Kingsgate Consolidated (KCN) and Newcrest Mining (NCM) both found their recommendations cut after the broker lowered its gold price forecasts. Kingsgate moves deeper into negative sentiment territory, while sentiment for Newcrest remains strong. Both Deutsche Bank and JP Morgan upgraded to Buy last week, the latter saying Newcrest is well placed to weather short-term fluctuations in gold prices, given more than 60% of production comes off long life and relatively low-cost assets.

There are three more miners to come from Citi, with Regis Resources (RRL) and Whitehaven Coal (WCH) going to Hold from Buy, while PanAust (PNA) is cut to Sell from Hold. All three are victims of the commodity price downgrades pushed through by the broker. Sentiment for Regis, Whitehaven and PanAust remains positive.

Credit Suisse downgraded Tabcorp Holdings (TAH) to Hold from Buy on recent share price outperformance. Stockland (SGP) went to Sell from Hold on BA-Merrill Lynch’s books given the fact the share price has run past the broker’s target, while the prospect of a new CEO also increases uncertainty. Our last downgrade was on Wesfarmers (WES), CIMB acknowledging the March quarter update was pretty good, but saying it sees a number of stocks with better leverage to an upswing in retail conditions. Sentiment for these stocks is neutral, negative and negative respectively.

Note: FNArena monitors eight leading stockbrokers on a daily basis and the tables are based on data analysis from the week past concerning these equity market 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.

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