Weekly broker wrap – ANZ, BOQ and BEN upgraded

Founder of FNArena
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Changes to broker recommendations continued to flow at a steady rate last week and once again, upgrades have managed to out run downgrades. This makes for two straight weeks of amendments to the upside after a six-week run of downgrades winning out. Financials and property stocks enjoyed the majority of the upgrades pushed through by brokers. The downgrade side of the ledger featured a majority of materials and resources stocks.

In the good books

ANZ Banking Group (ANZ) was upgraded to Buy from Neutral by UBS. While the price target stayed put at $28.50, and forecasts were barely changed, the recommendation was upgraded after the run of share price declines booked over the past month and a half. Shares are down 17% since mid-April, making for an FY14 PER of 11.2 times on a yield of 6.3%. The broker said the only real problem it ever had with ANZ was valuation, and this is no longer a problem at current levels. Otherwise, operations continue to perform well, the Asian strategy still looks attractive and the falling Australian dollar provides a good opportunity for the bank’s global markets businesses. Bad debts are always a risk, but UBS said it was comfortable with the outlook for impairments, at least near-term.

Bank of Queensland (BOQ) was upgraded to Buy from Neutral by UBS. The price target stayed put at $9.70 and there were only miniscule changes to forecasts, but the recommendation was upgraded now that the share price has come off some 20% since the end of April. The broker said it liked the management reshuffle and subsequent turnaround that has happened over the past couple of years, and with capital and provisioning levels looking much better, UBS said the impaired asset book is not so much a problem anymore. On the other hand, the exposure to mining and mining sectors are troubling and could prove a problem if the bottom really falls out of the sector.

UBS also upgraded Bendigo and Adelaide Bank (BEN) to Buy from Neutral. The price target remained at $10.00 and there were only minor changes to forecasts, but share price falls – of 15% over the past six weeks – were also behind the upgrade here. The broker continues to like the potential upside from the Community Bank network and sees BEN as being well placed for a turning of the cycle given its mix of products. Provisioning remains a concern, while most debt is secured mortgages, rural and margin loans, thus a fall in asset prices could lead to a material hit to earnings.

Suncorp Group (SUN) was upgraded to Neutral from Underperform by both Macquarie and Credit Suisse. Macquarie noted Suncorp has sold the non-core bank portfolio to Goldman Sachs and that Suncorp expects to incur a net loss around $480 million in the second half. Macquarie said payment of a special dividend will now be at the mercy of rating agency and regulator considerations. For the broker, the distinction between Suncorp and Insurance Australia (IAG) is reduced. IAG remains the preferred domestic P&C insurer because of underwriting performance and the reinsurance program. Suncorp may increase reinsurance coverage at the July 1 renewal, further reducing the distinction between the two.

Credit Suisse lowered FY13 earnings forecasts for Suncorp by 41%, but made no changes to the dividend forecast or the $12.20 target price. The share price has dropped around 10% since May and hence the recommendation was upgraded. Credit Suisse’s valuation implies 11.5 times FY14 cash price/earnings, a discount of 12% to IAG and a 10% premium to the regional banks. This is justified in the broker’s view, given Suncorp’s business mix.

In the not-so-good books

Cochlear (COH) was downgraded to Underperform from Neutral by Credit Suisse. C1500 failures may be low, but they’re lingering. The US FDA has updated its MAUDE database for May, including failures to May 21. There are 26 events so far, suggesting that the full month will be higher than March or April. Credit Suisse said it was uncertain as to whether this problem will abate, noting malfunctions continue to occur 20 months after the recall.

BA-Merrill Lynch downgraded Leighton Holdings (LEI) to Underweight from Neutral. The price target was also reduced to $15.00 from $21.20. Reasons for the bearishness include a peaking of mining sector investment, a tightening up of government infrastructure spending as well as expectations of softer economic growth in 2013 and 2014. Analysis of current and committed major projects suggests that roads and highway sectors are most at risk.

Newcrest (NCM) was downgraded to Neutral from Buy by BA-Merrill Lynch. Its price target was also cut to $13.50 from $20.00. The company’s planned operational changes have been viewed positively, as the aim is to maximise cash flow and reduce high cost assets. BA-Merrill Lynch saw little room for error on the balance sheet and suspects it may need repair via some kind of capital raising. On the broker’s analysis, if gold prices were to fall to around US$1200/oz then an equity raising of $2 billion would be required to bring gearing back to the company’s stated target. Investors are cautioned to be patient until there is a clearer picture. The risk is a rally in the gold price. That would alleviate the balance sheet pressure.

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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