Australian stockbrokers have put the focus on the Australian dollar and the upcoming elections in September. While the AUD can be used as an explanation for virtually everything these days (more optimistic consumers versus still troubled businesses), it would appear that a widely anticipated loss for the Gillard government is not one of the consequences of a persistently strong Aussie currency.
In terms of rating changes for individual stocks, the week past saw 24 upgrades, nearly double the 13 downgrades. Resources stocks proved popular with weak share price performances triggering more upgrades.
On the way up
CIMB was the stingiest broker when it came to handing out upgrades last week, lifting calls on just three stocks. AP Eagers (APE), Mermaid Marine (MRM) and Wotif.com (WTF) were all bumped up to Buy from Hold. AP Eagers is now the broker’s top pick in the Auto sector, with CIMB especially liking the group’s extensive property portfolio. The Sentiment Indicator in the FNArena Database reads positive for the stock.
While a drop in Mermaid Marine’s share price might have spurred the broker to upgrade its call, CIMB also noted that increasing activity on the North West Shelf and high demand for Mermaid Marine’s supply base services should underpin growth. The broker further believes that, notwithstanding Woodside’s decision on the Browse development, Mermaid Marine remains one of the best ways to play the increased spending in the oil and gas sector in Australia. Sentiment is positive.
As far as Wotif.com goes, the broker sees potential for monetising new revenue streams that the rest of the market doesn’t seem to see. Display advertising and increasing flight to TTV through packaging appears to offer the most potential. On CIMB’s forecasts on the day, Wotif.com was trading at a price to earnings ratio of 15.8 times FY14 earnings. The broker notes this is a 22% discount to comparable online stocks. Sentiment for the stock is negative.
Newcrest (NCM) was upgraded to Buy from Hold and not just by JP Morgan, but by Deutsche Bank as well. The size of the downgrade at Lihir was bigger than feared, but JP Morgan believes the market over-reacted nonetheless. The broker sees Newcrest as being 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. Sentiment for the stock is positive.
Macquarie upgraded BHP Billiton (BHP) to Buy from Hold, the broker thinking the recent sell down has been overdone and also seeing a seasonal pick up in Chinese commodities and improving free cash flow. The broker also upgraded Rio Tinto (RIO) to Buy from Hold, saying the stock has never offered as much valuation upside as it does now. While sentiment for BHP is positive, sentiment for Rio is perfect on eight straight Buys.
Macquarie also upgraded both Boart Longyear (BLY) and Transurban (TCL) to Buy from Hold. The broker observed that while markets for BLY have deteriorated, they haven’t to the extent that was expected. On Macquarie’s numbers, shares are factoring in around 35% in downgrades to guidance. After the upgrade sentiment has improved to neutral.
Traffic was good on most of Transurban’s roads in the March quarter, said Macquarie. Key roads like Citylink, M7 and LCT delivered over 2% growth. Macquarie has upgraded Citylink and M7 expectations and notes Transurban sits on significant option value associated with truck tolling that should be unlocked in the coming 12 months.
JP Morgan disagreed, downgrading its recommendation to Sell from Hold. JP Morgan points out the stock is trading at a 13% premium to its price target and there is a risk that Transurban goes to the next stage in evaluating the F3-M2 project, which may be cash flow negative. Time to take profits, says JP Morgan. Sentiment remains positive for the stock.The final two upgrades for the week both came from Credit Suisse, with Mount Gibson Iron (MGX) and News Corp (NWS) both boosted to Buy from Hold. Credit Suisse may be negative on the outlook for iron ore prices, but this does not affect its view of the valuation in Mount Gibson. The company’s mine life is too short to be greatly affected by longer-dated price changes and the recent slide in the share price was just too much to pass up.
As far as News Corp goes, Credit Suisse revisited its model to account for some recent value-accretive acquisitions and for higher expected growth from Fox’s Cable and Television assets. The broker otherwise continues to have a positive view on both companies post-split. The new valuation lifted the price target and gave the broker the room to upgrade its call. Sentiment for both stocks is positive.
On the way down
In terms of downgrades, Alumina Ltd (AWC) received two. BA-Merrill Lynch went to Hold from Buy, while Credit Suisse cut to Sell from Hold. The Alumina division results were broadly in-line with Merrills and showed a big improvement on previous periods. The problem is the broker sees more weak times soon for alumina and aluminium prices, given a number of issues. Credit Suisse said that despite the small 1Q beat, it still expects to see a loss of $11m in the 2Q on falling alumina and aluminium prices and higher costs, hence the downgrade. Sentiment remains neutral on the offsetting changes.
Macquarie Group (MQG) was downgraded to Sell from Hold by Citi, the broker citing reduced M&A activity, weaker ECM volumes and lower commodities price volatility as the cause of 3%, 10% and 8% cuts to FY13-15 EPS. Macquarie shares have risen by 30% over the past 12 months but Citi analysts believe investors have been ignoring the increasingly significant risk to forward consensus earnings estimates. Citi’s FY14 earnings forecast is now around 17% below consensus.
Note: FNArena monitors eight leading stockbrokers on a daily basis and the tables are based on data analysis from the week past concerning these eight 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.
