Weekly broker wrap – Evolution Mining and Oz Minerals upgraded to Buy

Founder of FNArena
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Stockbrokers are using the quarterly production updates from miners to factor in less favorable economic forecasts into their models. This, in combination with some disappointing production updates, is causing profit estimates and valuations to drop and can serve as an explanation as to why weaker recommendations are dominating the landscape.

In the good books

Credit Suisse lifted its recommendation on Boart Longyear (BLY) to Buy from Hold. It has been a busy month for the stock, Credit Suisse’s move was the fourth upgrade over the past four weeks. The recent trends in exploration activity and commodity price movements saw the broker cut its earnings by an average of 30% going forward. Despite the cuts, the broker still thought an overly bearish outcome was factored into the price. On Credit Suisse’s numbers, exploration activity would have to remain 31% below 2012 levels and drilling services margins would have to remain at trough levels to justify the current share price. The FNArena Sentiment Indicator has turned positive for the stock after this run of upgrades.

Evolution Mining (EVN) was boosted all the way to Buy from Sell by Credit Suisse, despite the company posting its worst production quarter since the end of 2011. Rainfall at Mt Rawdon flooded the pit and slowed down work. Grades slipped at Pajingo, maintenance slowed throughout at Edna May, there was lower mine production at Cracow and on it went. There was, however, no change to FY guidance and reserves were upgraded. Rising costs are still a concern, but the share price hadnfallen enough for the broker to upgrade its recommendation. Sentiment for the stock is positive.

Citi upgraded its call on Newcrest (NCM) to Hold from Sell. The broker thought production was ok, but noted costs were higher on a number of operational issues. FY13 production guidance was maintained, with Cadia East continuing to perform in line with expectations. The broker continued to view FY13 as a transitional year, with the major capex program undertaken over the past few years finally starting to come on stream. This investment program should provide for strong cash flow generation in the longer-term, although there are still a few near-term operational risks that need to be dealt with as projects move toward full production. The prospects and recent share price weakness combined to see the recommendation upgraded. Sentiment is positive.

The broker also upgraded its call on OZ Minerals (OZL) to Buy from Hold, while UBS lifted to Hold from Sell. March quarter production fell short of Citi expectation, with a continued slippage of the South Wall not expected. This has seen the company downgrade its FY13 guidance. The copper guidance was downgraded to 82-88kt from 90-95kt, while the cost guidance was also increased. The broker also trimmed its forecasts to bring them in line and lowered its price target. Despite all this, Citi said it sees compelling valuation support. Sentiment is positive.

In the not-so-good books

The downgrades begin with CFS Retail Property Trust (CFX), which was cut to Hold from Buy by Macquarie. The broker said the next bits of news out of Emporium will likely be negative, while the company’s lower-quality tail also remains in focus. This adds to recent concerns about the change in definition to the payout ratio. Macquarie said it likes the stock, noting it provides a solid and defensive exposure to what is a well-leased, high-quality, mostly-regional retail shopping centre portfolio. Also, the changes to the distributable earnings should also mean a slightly higher dividend. Sentiment is negative.

Deutsche Bank downgraded Commonwealth Property Office Fund (CPA) to Sell from Hold on the view the stock appears fully priced on a risk adjusted basis and noting there is over 120,000 square metres of proposed incremental supply that could significantly affect the company’s ability to lease vacancies in FY15. Furthermore, Deutsche Bank thinks there are limited incremental levers to drive earnings via acquisitions. Sentiment is negative.

Crown Limited (CWN) was cut to Sell from Hold on Credit Suisse’s accounts, the broker citing a triple whammy of softening main floor gaming trends at Crown Melbourne, higher operating expenses at Crown Perth post capacity additions and recent share price strength. Sentiment is positive. CS also downgraded Santos (STO) to Hold from Buy after 4Q production fell a bit shy because of maintenance issues and cyclones. FY13 production guidance was maintained. Revenue came in a bit short despite better prices, the broker blaming weak third party gas sales. It all added up to CS trimming its production and oil price expectations, which saw FY13-14 EPS lowered by 10% and 3.5%. Sentiment for the stock remains positive.

BA-Merrill Lynch made two more changes last week, cutting both David Jones (DJS) and Toll Holdings (TOL) to Sell from Hold. The key reasons for the downgrade on David Jones included unrealistic earnings expectations by the market in FY14, high execution risk as management implements a three-year transformation strategy, unlikely monetisation of property assets and a potential weakening macro environment in the second half of this year. The broker’s prior, more positive, view was based on the inherent value of the property assets, but these appeared fully valued at current prices. Recent commentary from the company suggests any potential sale of the property is unlikely, with this monetisation unlikely to occur before FY15/16. Sentiment is negative.

Toll was downgraded on the broker’s suspicion that the weak Australian economy must be having an impact. Feedback from unlisted transport companies indicated to the broker that there has been little increase in volumes since the start of 2013. The recent uptick in Australian retail sales has been driven, in part, by discretionary sectors, so Merrills was not convinced this has translated into a material volume uplift for Toll either. Sentiment is negative.

Citi downgraded Woodside (WPL) to Hold from Buy after the company announced it would be paying a 63c fully franked special dividend and lifting its payout ratio to 80% near term. While the 63c is something like the broker was expecting, the 80% payout ratio was a surprise. The temporarily increased payout ratio told the broker that growth must be long dated, while the decision to return capital in the meantime instead of chasing low-returning growth projects was a good sign management have their heads in the game. On the other hand, with growth so obviously long dated and thus risky, the dividend should support the price, but will likely not drive it materially higher. Expected total returns this year are running at 13% after the strong share price performance on the news, but this is still short of the 15% the broker needs to see (to retain a Buy rating). Sentiment remains positive.

Our last downgrade comes from CIMB, with Westpac Banking Corp (WBC) cut to Sell from Hold on the view that shares are really starting to look expensive after the recent share price run. Broker sentiment is now negative.

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.

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