Weekly broker wrap – NXS and SXY upgraded

Founder of FNArena
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Downgrades in ratings for individual stocks remain largely focused on the mining and mining-related sectors. But that was before the Aussie dollar tanked to well below USD-parity. A weaker AUD is poised to start an earnings upgrade cycle for Australian companies, including mining stocks.

This week, we focus on mining and mining-related stocks receiving actions on both sides of the ledger.

In the good books

Nexus Energy (NXS) upgraded to Overweight from Neutral by Macquarie. The broker noted Nexus has agreed with Santos (STO) to amend the Longtom Gas Sales Agreement and while overall gas volumes may have fallen, Nexus managed to get a better price and also doesn’t have to pay for a $65 million infill well. With the Crux licence restructured, retention licences secured and Longtom metrics looking better, the recommendation was upgraded.

Oakton (OKN) upgraded to Buy from Hold by UBS. Oakton now expects 2H earnings to come in around 1H levels, which implies about a 12% cut to guidance. Lower than expected Federal Government spending did much of the damage. FY13-15 EPS estimates were cut by 10%, 7% and 9% to account for the new guidance and soft operating environment. Cost cutting is about the only way to support margins, so the offshoring of work is likely to continue. Despite the soft outlook, the recommendation was upgraded, with the stock now too cheap to be passed up, said UBS.

Senex Energy (SXY) was upgraded to Neutral from Underweight by JP Morgan. JP Morgan pointed to the share price roller coaster over the past several weeks, noting the stock now offers 24% potential upside to the price target, albeit in a generally undervalued sector. The company has announced the Hornet gas discovery, which is a positive, but the timeframe to realise value of the CSG in the Cooper Basin remains unclear, in the broker’s opinion.

In the bad books

Evolution Mining (EVN) was downgraded to Hold from Buy by Deutsche Bank. The likely strength of the USD and declining inflationary pressures see the broker revise its gold price assumptions. Deutsche Bank average forecasts now stand at US$1,533/oz for this year, US$1,500/oz for next year and US$1,450/oz for 2015. This adds up to 6%, 17% and 25% reductions. The broker’s long-term price remains unchanged at US$1,300/oz. For Evolution, this added up to a downgrade, lower forecasts and a lower price target.

Iluka Resources (ILU) downgraded to Underperform from Outperform by Credit Suisse. The broker said it was feeling a bit optimistic in thinking a zircon restock is underway in China. In the meantime, the share price reached the broker’s target and with little to push it higher any time soon, the recommendation was dropped.

Newcrest (NCM) was downgraded to Hold from Buy by Deutsche Bank due to the downward revisions in gold price mentioned above for Evolution. For Newcrest this added up to a downgrade as part of a sector review.

OZ Minerals (OZL) downgraded to Hold from Buy by Deutsche Bank. After the visit to Prominent Hill and Carrapateena, the broker was still of the view that the asset potential for OZ Minerals is yet to be defined. So, with operational issues in 2013 and no clear path to earnings growth, the stock is not a preferred copper play. Deutsche Bank expects the company to meet revised copper and gold production guidance in 2013 but is cautious and assumes grades will stay low.

Regis Resources (REA) and Silver Lake Resources (SLR) were both downgraded to Hold from Buy by Deutsche Bank also on the back of its gold price revisions.

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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