Weekly broker wrap: DJS, MYR and NAB all downgraded

Founder of FNArena
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Brokers are still shaking off their hangover after interim reporting season but activity is slowly picking up. FNArena registered six upgrades last week versus nine downgrades. Resources and mining-related companies were marked up as retailers and banks fell out of favour, mainly due to recent share price gains and analysts not believing their valuations match the share price.

In the good books

Atlas Iron (AGO) was upgraded to Buy from Sell by Credit Suisse on the back of a strong December quarter production report that saw the broker lift its FY13-14 EPS forecasts by 66% and 18% and price target to $5.40 from $5.20. Sentiment in the FNArena Database is positive, with more than 17% upside to the consensus price target.

Aurizon Holdings (AZJ) was lifted to Buy from Hold by JP Morgan. Shares were trading at an 8% discount to the broker’s valuation and JPM notes the company has limited exposure to domestic macro conditions. Recent rail contract wins have also added to the valuation picture.

JP Morgan’s final upgrade last week was on Australand Property (ALZ), which went to Hold from Sell, the broker noting the share price has underperformed residential developer peers by around 15%. At the same time, JP Morgan also reduced the valuation discount it applies for the residential business. Broker sentiment is positive.

Credit Suisse boosted Fortescue Metals (FMG) to Buy from Hold. The broker re-modelled its case after the sell down of the minority stake in the port and rail infrastructure, assuming the company will attract $3.3 billion for a 35% stake. CS reasons earnings will improve slightly, but the major benefit is the lower gearing ratio, which Credit Suisse foresees reaching 49% by end of FY14. This should enable Fortescue to be re-rated investment grade. Broker sentiment remains positive.

OZ Minerals (OZL) was lifted to Buy from Hold by CIMB, who cited strong cash flow and recent share price underperformance. The broker believes the company should generate strong operating cash flow from Prominent Hill over the remainder of the mine’s life, despite being a bit sceptical of the plans to extend underground, given the volume of ore required to justify it.

In the bad books

Of the downgrades, CIMB dropped its call on CSR (CSR) to Hold from Buy. The company put out an update last week and guidance for a net profit of $32m-$34m, 30% below the broker’s previous estimates, which were pretty much in line with consensus. The damage was done by an underperforming Viridian glass business, which is unsurprisingly being restructured yet again. Weaker than expected numbers for property and aluminium also didn’t help. The call was ultimately made on valuation grounds, the broker looking for some more clarity and a better entry price before taking a more positive stance. The Sentiment Indicator in the FNArena Database shows a negative read.

David Jones (DJS) was cut to Sell from Hold by Deutsche Bank, the broker pointing out the share price has run better than 26% so far this year and is now looking way too expensive on a 12-month PER of 16.8x, which is a 10% premium to the broader market. Sentiment for the stock is negative ahead of the company’s interim profit report this week.

Myer (MYR) was downgraded to Sell from Hold by Citi and to Hold from Buy by both UBS and Credit Suisse. Citi liked the focus on costs and noted there was some sales growth on offer, but the broker is concerned the improvement has come on the back of more discounting and a lower-margin sales mix. A lower margin outlook and the fact the shares have run 42% this year are what tipped the broker to Sell. Both UBS and CS also liked the look of the result and are reasonably optimistic on the outlook, but like Citi, they think shares have run too far too fast. Sentiment has moved into negative territory on the downgrades.

National Australia Bank (NAB) was dropped to Hold from Buy by Citi, the broker concerned about the recent rally in the share price. BA-Merrill Lynch downgraded Premier Investments (PMV) to Sell from Hold, noting the stock is overvalued at current levels, after having significantly outperformed peers since the FY result last September, while offering a yield of only 4.8% versus a peer average of 5.9%.

Lastly, Credit Suisse downgraded Sigma Pharmaceuticals (SIP) to Hold from Buy, noting the 1H result fell a bit short and that the rising costs of goods is concerning. Operating cash flow was strong and given the broker sees the company as being in a state of significant internal change, this is definitely a good thing and should help support the share price.

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