Weekly broker wrap: CBA and NAB upgraded, as regional banks BEN and BOQ downgraded

Founder of FNArena
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Understandably, with corporate results hitting investors’ screens fast and hard last week, most attention inside stock brokerages was spent on how these corporate results matched or missed expectations, and how all of it would impact on future prognostications and valuations.

In a continuation of the trend in place since equities started rallying last year, there were considerably more downgrades in ratings than there were upgrades, the former hitting 35 against 26 for the week.

In favour

Alumina (AWC) was upgraded to Hold from Sell by Credit Suisse, the broker noting a better than expected 2012 loss and a substantial fall in the share price. Macquarie downgraded to Hold from Buy the week prior, saying the share price is too high, while otherwise remaining positive on the overall story. The changes leave the stock with a positive sentiment read.

Atlas Iron (AGO) was upgraded to Buy from Hold by UBS and downgraded to Hold from Buy by JP Morgan. UBS made its move despite a big reporting miss on the belief some sort of infrastructure solution will materialise between players in the Pilbara region, which translates to Atlas Iron getting Horizon 2 up and running. It’s actually the inclusion of Horizon 2 in the valuation case that encourages the broker to move. Conversely, JPM’s downgrade was all about uncertainty and disappointment after the weak result, which saw forecasts slashed. Post the changes the stock sits in negative sentiment territory in the database.

Caltex (CTX) was lifted to Buy all the way from Sell by Credit Suisse, while Macquarie dropped from Hold to Sell on some quite obviously different opinions. The upgrade has everything to do with CS putting a new analyst on the case with a new valuation model. The broker’s new man believes Mr Market is failing to properly value the reliable earnings stream on offer and also failing to appreciate that by 2015, refining will only account for less than 5% of earnings. Macquarie’s downgrade cited increased competitive pressures, balance sheet pressures, a weakening domestic economy and strength in refining that is likely to prove temporary at best. Sentiment remains negative post the changes.

JP Morgan also upgraded its call on Commonwealth Bank (CBA), moving to Hold from Sell, noting the shares have underperformed the sector by around 5% since the beginning of the year on the back of what the broker assumes is an ex-dividend migration into major bank peers. This is expected to end quite soon, especially given some of the longer term benefits offered by CBA, such as sector leading return on equity, low loan default rates, leverage to recent and substantial IT spend, and below peer exposure to resources, retail and manufacturing. Sentiment remains mired in negative territory, with shares trading at a 7.6% premium to the consensus price target.

Harvey Norman (HVN) was upgraded to Hold from Sell by Macquarie. Poor results and a deteriorating brand and business model aside, the broker thinks the market is now looking through to a retail recovery down the track. The upgrade does little to improve the negative sentiment read.

National Australia Bank (NAB) was bumped up to Buy from Hold by JP Morgan. The broker cites cheap shares, improving banking conditions in the UK, effective cost cutting and improving leverage to a recovery in the business lending cycle. In fact, the broker sees the bank as having the best prospects for above-peer EPS increases going forward. Sentiment is positive.

Oil Search (OSH) was upgraded to Buy from Hold by Credit Suisse, but downgraded to Hold from Buy by Macquarie. CS noted everything remains on track for first LNG in 2014 and inside the earlier revised budget of US$19bn. The broker also saw no problems with liquidity on the horizon either. The broker also notes the company’s LNG project is among the majors in Australia and the broker is increasingly confident that sufficient gas resources can be found to proceed with train 3. Macquarie cut its price target a bit post an FY result that fell a bit short and given higher capex estimates going forward. Sentiment remains positive, with six Buys versus just two Holds in the database.

BA-ML lifted Orica (ORI) to Buy from Hold, moving the stock to its “most preferred” in the sector position after downgrading Incitec Pivot (IPL) to Hold from Buy. The stock boasts almost straight Buys in the database, with just one Hold from Citi ruining the perfect score.

BA-ML lifted Ramsay Healthcare (RHC) to Buy from Hold on the belief returns are likely to escalate over the next three years. Sentiment remains negative despite the upgrade. Credit Suisse pushed up Virgin Australia (VAH) to Buy from Hold on the back of an optimistic assessment that the ongoing change in strategic direction will deliver results. Estimates were reduced, however, the broker thinking Tiger Australia will not be able to effectively compete with Jetstar (QAN) until FY14. Sentiment is none the less positive.

Last upgrade of the week was enjoyed by Westfield Retail Trust (WRT), BA-ML made the move on the back of management announcing an increase in dividend payout. The broker believes the move will help narrow the gap between share price and Net Tangible Asset valuation. While sentiment is positive for the stock, it is far less so than it was given the three downgrades to Hold pushed through last week. JP Morgan, UBS and Credit Suisse all cut their calls post the FY result.

Out of favour

Bank of Queensland (BOQ) and Bendigo and Adelaide Bank (BEN) were both downgraded by JP Morgan, the broker moving to Sell from Hold given regional bank shares have outperformed the broader sector by around 5% since the last full round of major bank updates in October. Currently, both of these regionals are trading at around the same levels as the majors and JP Morgan thinks this is unwarranted. Sentiment levels remain positive for BOQ, but Bendigo drops further into the negative post the downgrade.

It was another difficult week for Billabong (BBG), with CIMB dropping from Buy to Hold and UBS cutting from Hold to Sell. A downgraded guidance along with an otherwise half decent 1H result has brokers thinking that a takeover offer from one of the two active suitors now looks a little less likely. As far as CIMB is concerned, if this company is not being bought it will be forced to announce yet another capital raising, which is an unpalatable proposition for the Board. While the sentiment read has dropped from neutral to negative, a close read of broker commentary in the database shows little optimism outside the bids.

There were three more downgrades from Citi, with Reece Australia (REH) and Western Areas (WSA) down to Hold from Buy and Woolworths (WOW) cut to Sell from Hold. Woolies shares have been pushing higher for the last three months, meaning a better than expected result was still not enough to substantiate current prices. Sentiment has moved to neutral on the cut.

Horizon Oil (HZN) is dropped to Hold from Buy by CIMB, with the valuation looking increasingly stretched, while lower than expected production for Maari and a delay to the start up of Beibu Gulf didn’t help. Sentiment remains positive. UBS trimmed Henderson Group (HGG) to Hold from Buy on a simple too high share price call. A positive sentiment stance remains in place.

BA-ML downgraded its call on Westfield (WDC) to Hold from Buy. Says the broker: Westfield is a high quality company and the 2012 report showed just that. Alas, the broker also believes the company is lacking sufficient EPS growth momentum, for now, and hence the decision was made to pull back the rating. The sentiment read just hangs on to a positive bias.

The final five mentions all come from Credit Suisse. Sims Metal (SGM) was cut all the way from Buy to Sell on a messy and somewhat indecipherable result that showed some, but nowhere near enough, improvement. The move lowers the stock to a neutral sentiment read.

Meanwhile Crown (CWN), Flight Centre (FLT), Santos (STO) and Wotif.com (WTF) were all reduced to Hold from Buy. Crown booked a decent 1H result, but on weak VIP numbers in Perth, temporarily higher corporate costs and weak operating cash flow. Sentiment remains positive. Flight Centre is a simple share price too close to the target call, with positive sentiment otherwise maintained. Santos is lowered given the stock is up 10% in the past three months. The Hold call is the only blemish on an otherwise full house of Buy calls. Lastly, Wotif was lowered on a 1H miss and a PE that looks too rich. The downgrade pushes the stock a bit further into negative sentiment territory.

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