Weekly broker wrap – AIO and AWE upgraded to buy

Founder of FNArena
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Downgrades for individual stocks in Australia have outnumbered upgrades for six straight weeks now and it’s clear that on a micro-level, more downward adjustments to forecasts and valuation estimates for mining and energy stocks will need to be made as the world is preparing for a more subdued outlook for Chinese growth

Last week again saw mining and resources stocks feature heavily on both sides of the ledger.

In the good books

Asciano Group (AIO) was upgraded to Buy from Neutral by BA-Merrill Lynch. The broker is starting to think the company is going to be able to book some market share gains over the next year. BA-Merrill Lynch noted Aurizon (AZJ) is also set to review its unprofitable Intermodal business in FY14, which could even spell more market share gains for Asciano. The broker thinks the stock offers an attractive valuation case. Forecasts were lifted a little on planned cost savings, which saw the recommendation upgraded.

AWE (AWE) was upgraded to Buy from Neutral by BA-Merrill Lynch and to Buy from Neutral by UBS. BA-Merrill Lynch noted AWE has reported an increase in the reserves at Ande Ande Lumut to 101mmbbl. The 33% increase improves the economics and increases the chances of AWE completing a sell-down of the asset by mid-year. The broker also suggested a sell-down will be a key catalyst for the stock. The price target was raised to $1.64 from $1.51.

UBS also noted the increase at Ande Ande Lumut. The broker said it continued to see a number of challenges ahead for the development, but the reserve increase was a definite positive and should help the company achieve a value above the original acquisition price. Recent share price weakness was also cited as a reason for the upgrade.

Worley Parsons (WOR) was upgraded to Hold from Sell by Deutsche Bank. The broker reported management has cut the FY13 net profit guidance to $320m-$340m, the mid-point representing a 4.5% downgrade. Weaker than expected activity in Western Australia and Canada were blamed for the softness. Deutsche Bank’s FY13-14 EPS forecasts were lowered by 9% and 8%, which pulled the price target lower. Given the recent trend of project deferrals, the broker thinks risks are increasing and lower margins, at least over the short term, are more than likely. With the stock now in line with the broker’s target and in the same multiple neighbourhood as peers, a Hold call was deemed more appropriate.

In the not-so-good books

Adelaide Brighton (ABC) was downgraded to Neutral from Buy by Citi. The company has said it expects 1H net profit to come in below last year’s 1H. The broker noted lower demand (especially in Victoria), the carbon tax and an earlier than expected planned maintenance shutdown were to blame. With the downgrade taking a chunk out of the broker’s total return expectations, Citi thought it was time to downgrade the recommendation. While short to mid-term headwinds abound, the company is expected to remain a premium pure-play on Australian construction.

Cardno (CDD) was downgraded to Neutral from Buy by UBS. The company said it expects an FY net profit of $73m-$77m, with a final dividend of 18cents. The broker noted that delays to both private and government infrastructure spending and tailing off in work from the US Gulf of Mexico have impacted margins. FY13-14 net profit forecasts were cut by 8% and 11% on the falling margins and a weakening outlook for the non-oil and gas sectors. The recommendation was also downgraded, but the broker said it continues to see value for investors patient enough to wait for it.

James Hardie Industries (JHX) was downgraded to Underweight from Neutral by JP Morgan. The FY13 results underwhelmed JP Morgan. Earnings forecasts were lowered, as the broker believes that operating challenges and elevated trading multiples will take their toll at some point. The broker also lowered its recommendation, albeit with some trepidation given the last time this was done it was a “painful” experience. The uncertainty is caused by the falling Australian dollar and the recovering US housing market. The challenges outweigh the positives at this juncture, said JP Morgan.
The FNArena database tabulates the views of eight major Australian and international stock brokers: BA-Merrill Lynch, CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie 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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