Weekly broker wrap – QAN, Virgin and NAB upgraded to buy

Founder of FNArena
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Changes to stock broker ratings in the past week

Stockbroker upgrades and downgrades for individual stocks were pretty much in balance during the week past – nine versus eight. Some companies – like David Jones – received both upgrades and downgrades as brokers remain unconvinced on the outlook for retail. Others – like National Australia Bank – were back in brokers good books again, who were encouraged by an expected improvement in access to credit.

In favour

Aristocrat Leisure (ALL) was upgraded to Buy from Sell by Citi, the broker noting the company has done a really good job in bringing in some new design talent for games, which is already paying off in North America. Citi now expects to see decent market share gains, especially in recurring revenue lines. FY15 earnings forecasts were lifted by 20% to reflect the better market share. The higher earnings caused a big jump in the price target, giving Citi the headroom to upgrade its call. Broker sentiment for the stock is neutral according to the FNArena Database.

Last week was a busy one for David Jones (DJS). The stock was upgraded to Hold from Sell by JP Morgan, while both Macquarie and Citi downgraded their calls to Sell from Hold. JP Morgan has grown a bit more comfortable with the company’s strategic direction and sees signs of growth for FY15. Citi didn’t much like the first result, with cost pressures, weak sales and lower credit card earnings combining to make it difficult for the broker to see any kind of growth over the next couple of years. Macquarie has trouble with the increasingly steep looking valuation and thinks it will take just about everything the company has, just to keep from going backwards. Sentiment for the stock is neutral.

Macquarie upgraded its call on National Australia Bank (NAB) to Buy from Hold. The broker conducted a review of the sector and reported institutional and corporate borrowing appears to be improving in the mining states. Macquarie believes access to credit may become easier in the second half of the year and given NAB is the primary banker to more SMEs than any of the other major banks, it is now the broker’s top pick in the sector.

Another stock that had a busy week was Premier Investments (PMV), with Credit Suisse upgrading its recommendation to Buy from Hold, while Deutsche Bank upgraded to Hold from Sell and Citi downgraded its call to Sell from Hold. Credit Suisse thinks the outlook is finally starting to improve. The broker sees growing upside in the group’s domestic mature brands, while international growth also looks promising. Deutsche Bank is starting to see some positive signs for retailers in Australia, but the broker also reckons it’s way too early to call a macro improvement. A federal election later in the year further adds to Deutsche’s cautious stance. Citi is simply expecting nothing in the way of earnings growth in the second half and really through FY14. Add the flat earnings outlook to a valuation that is looking increasingly stretched and you’ve got a downgrade. Sentiment for the stock is neutral.

Earnings Forecast

Qantas (QAN) was upgraded to Buy from Sell by Macquarie, the broker thinks earnings margins are moving back to a more normal rate and has more confidence in the industry outlook, generally. Sentiment is positive. The broker also upgraded Sydney Airport (SYD) to Buy from Hold, noting the outlook for international remains solid, while growth in domestic remains in line with expectations. Given the improving performance, the broker thinks the valuation and general prospects are becoming increasingly attractive. Sentiment for the stock is negative.

Rounding out the air travel theme from Macquarie is Virgin Australia (VAH). Citi upgraded its recommendation to Buy from Hold, noting that Virgin is increasingly challenging Qantas’ position in the business class and regional markets. Sentiment is positive.

Out of favour

On the downgrade side of the ledger, AMP (AMP) was cut to Sell from Hold. Macquarie believes most of the upside from improving economic conditions is already in the price, while ongoing negative performance in the life sector is starting to pose a clear downside risk to expectations. Sentiment shifted to neutral on the downgrade.

Our last two downgrades come from UBS, the broker lowering its calls on both Bandana Energy (BND) and Orica (ORI) to Hold from Buy. As far as Bandana goes, the market will be unlikely to pay a ‘valuation based price’ until there is more clarity on funding and a project go-ahead can be counted on. Thus a funding solution, probably via a sell down to a JV partner, is required if the stock is going to re-rate.

The broker thinks the outlook for Orica is still positive, yet it is cautious about margins. The company also reported a number of weather-related impacts on earnings to the tune of $10-$15m, while the operating environment for Minova is not good. As well as downgrading the stock, the broker also cut FY13-14 earnings forecasts.

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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