Weekly broker wrap – BLD, CCL and DOW action

Founder of FNArena
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The week ending on Friday 10 May saw seven upgrades being outnumbered by no less than 20 downgrades, as the Australian share market continued its strong run upwards.
Meanwhile, in the background to what appears to be rising risk appetites, securities analysts are increasingly zooming in on what might go wrong, and where. Doubts remain about the non-mining segment of the Australian economy, with consensus forecasts for earnings in 2014 still deemed too optimistic.

The key question is, now the Australian dollar has embarked on a weakening path, whether a positive impact from a weaker currency and lower interest rates will be enough of an offset?

It should come as no surprise that analysts often disagree. Of the 27 actions over the past week, three companies appeared in both the upgrade and downgrade side of the ledger. This week, we take a look at the differing views on those three companies.

Boral (BLD)

JP Morgan upgraded the company to Neutral from Underweight. The broker noted Boral has started to have some serious issues with the weather, after what was a fairly issue free 1H. The 3Q report unwound all the good weather upside that was accumulated, with 3Q earnings falling $19 million short of management’s expectations. The FY net profit guidance was pegged at $90-$105 million, although stripping out the chaff shows an underlying net profit of just $19 million. That’s how tough it is out there, said the broker. JP Morgan’s FY13 net profit forecast was cut by 27%, with FY14-15 down around 10%. That being said, the broker still thought net profit will double in 2014 on the back of announced cost savings, the reversal of some one-offs and hopefully a still ongoing recovery in the US.

BA-Merrill Lynch downgraded the company to Neutral from Buy. It doesn’t believe the company has done enough to stem the fall in earnings in the wake of last week’s trading update. The Australian market has, quite simply, disappointed against the broker’s expectations, hence the downgrade to Neutral, with earnings forecasts cut by 34% and 25% in FY13-14. An Underperform rating might have been on the cards, but for the obvious housing recovery in the US and growth opportunities in Asian plasterboard, the broker pointed out.

Coca Cola Amatil (CCL)

JP Morgan upgraded to Overweight from Neutral. The magnitude of the weakness in last week’s trading update surprised JP Morgan. Contrary to many, the broker decided the resultant share price sell-off provided a good buying opportunity, although acknowledging the focus on the earnings downgrade and the potential for further downgrades near term. The broker said buying in at current levels provides benefit from a change in the market’s focus from near-term earnings to accelerating free cash flow and surplus capital. A recovery in earnings in the second half is also expected, although the broker’s earnings forecasts were revised down 8.8% for 2013, 6.8% for 2014 and 5.5% for 2015.

But the company was downgraded to Underperform from Neutral by CIMB and downgraded to Underperform from Buy by BA-Merrill Lynch. They didn’t like the trading update.

Post the AGM, CIMB said earnings are about to turn quite a bit more volatile, especially in Australia, now that Pepsi’s Project Zero is approaching completion. CIMB is also predicting further cash and non-cash charges, which could well lead to a de-rating. Seeing downside risk on both a relative and absolute basis, the recommendation was downgraded.

BA-Merrill Lynch said Coca-Cola Amatil’s trading update didn’t instil much confidence. The broker thought the reduction in Australian earnings could be attributed to more intense competition from Pepsi, and increased competitiveness by major retailers. While the company blamed cyclical factors, the broker is worried the news may signal increased structural risk in the grocery industry. FY13-15 earnings forecasts were cut by 9.3%, 11.7% and 14.9%.

Downer EDI (DOW)

Credit Suisse upgraded Downer to Outperform from Neutral, as it liked what it heard at the investor day for the most part, with FY13 looking to be on track. FY14 looks a little less certain, with net profit for that year trimmed by 3.5%, given the end market focus on cutting costs. With shares in line with the sector, and at a 34% discount to the market, plus offering a yield of 5.4%, CS felt confident in upgrading its call.

But Macquarie downgraded it to Neutral from Outperform, reducing forecast earnings by 4% and 12% in FY13-14 after the investor day. Management has delivered well in the past 12 months, the broker noted, and revenues have grown at double-digit rates over the past three years. But the revenue profile begins to flatten into FY14. The broker dropped its target to $5.00 from $5.55 and at 9.8 times FY13 forward earnings, Downer is not expensive, the broker suggested, but until there is more certainty around FY14 revenues, the multiple is very unlikely to expand.

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. For the purpose of broker rating correlation, Outperform and Overweight ratings are grouped as Buy, Neutral is grouped with Hold and Underperform and Underweight are grouped as Sell to provide a Buy/Hold/Sell (B/H/S) ratio.

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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