Buy, Sell, Hold – what the brokers say

Founder of FNArena
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One look below the surface shows most stockbroker recommendation changes for the week are directly related to the latest good news/bad news updates provided by companies.

JP Morgan turned more bearish on TV networks at the beginning of the week, which is why Nine Entertainment and Seven West Media feature on the negative side.

In the good books

ALS (ALQ) was upgraded to Buy from Hold by Deutsche Bank. Buy/Hold/Sell: 1/5/2 ALS has suffered earnings declines for the past two years and Deutsche Bank believes the market should now start valuing the company on through-the-cycle earnings. The broker’s rating is upgraded to Buy from Hold on this basis. Life Sciences is now the largest division and should provide a stable earnings base.

20150518 -upgradesGUD Holdings was upgraded to Neutral from Sell by Citi and to Buy from Sell by UBS. Buy/Hold/Sell: 3/2/0 GUD will acquire Brown & Watson for $200 million plus an earn-out. In light of the transaction Citi upgrades to Neutral from Sell. FY16 and FY17 forecasts are raised by 37% and 33% respectively and the target to $8.23 from $6.64. The acquisition will complement GUD’s existing automotive business, providing the opportunity to expand existing products into new end markets. GUD’s automotive after-market business has been its star performer so UBS considers Brown & Watson as a positive fit, offering around 15% earnings accretion in FY16.

M2 Telecommunications (MTU) was upgraded to Neutral from Sell by UBS. Buy/Hold/Sell: 1/4/0 The company has reiterated FY15 guidance for 15-20% profit growth. UBS maintains forecasts and continues to envisage robust earnings over the next two years. Forecasts do not incorporate an acquisition of iiNet (IIN) given the outcome of the bid is uncertain. The company does have a more aggressive gearing profile relative to peers but UBS believes this is offset by a stronger growth outlook.

Premier Investments (PMV) was upgraded to Equal-weight from Underweight by Morgan Stanley. Buy/Hold/Sell: 0/6/0 Premier Investments is in a growth phase, benefitting from the expansion of Smiggle and Peter Alexander and has a favourable currency hedging profile. There are longer-term structural headwinds, which the broker believes may hamper core brands. Still, the near-term opportunity and long-term sub-par growth are reflected in the share price.

Sirtex Medical (SRX) was upgraded to Outperform from Neutral by Macquarie. Buy/Hold/Sell: 2/0/1 Sirtex has revealed data from its SIRFLOX study shows a statistically significant improvement in progression-free survival for the secondary end point in terms of liver cancer, thus the broker believes Sir-Spheres could play a large role in the earlier treatment in those patients suffering only from liver cancer.

In the not-so-good books

Fantastic Holdings (FAN) was downgraded to Underweight from Equal-weight by Morgan Stanley. Buy/Hold/Sell: 0/3/1 While the decline in earnings is behind the company, Morgan Stanley does not envisage a return to historical averages. The main reason is the company is yet to re-establish its brand and ward off the competitive threat.

20150518 - downgradesFortescue Metals (FMG) was downgraded to Underperform from Neutral by Credit Suisse. Buy/Hold/Sell: 0/5/3 Credit Suisse is of the view that Fortescue’s share price has run ahead of fundamentals, hence the downgrade to Underperform from Neutral. To further underpin the move, CS analysts believe second half 2015 looks “ominous” as further supply looms. They expect the price of iron ore to fall to US$45/tonne. Forecasts have been pared back and FY16 is now expected to see a gigantic loss.

Incitec Pivot (IPL) was downgraded to Underperform from Neutral by Credit Suisse. Buy/Hold/Sell: 2/4/2 The first half result held few surprises for Credit Suisse. Fertiliser profit was affected by lower urea prices and competition while downstream profitability in Asia Pacific took the hit from lower demand for explosives. The outlook is dominated by US ammonia production and Credit Suisse suspects the contribution of the Australian explosives and fertiliser segments is likely to decline further.

Nine Entertainment (NEC) was downgraded to Neutral from Overweight by JP Morgan. Buy/Hold/Sell: 7/1/0 The analysts have kept a close watch on free-to-air TV industry trends as they believe the sector is in for a major meltdown, at some point in the years ahead. They now believe the first cracks have started to emerge and have promptly responded by cutting forecasts. Short term advertising trends are likely to show small year-on-year losses, on the analysts’ new forecasts. Longer term the growth rate for the industry has been reduced to 1.5% per annum. Because of a more cautious stance vis-a-vis the industry, the rating for Nine Entertainment has been cut to Neutral from Overweight.

PanAust (PNA) downgraded to Underperform from Outperform by Credit Suisse and to Neutral from Buy by UBS. Buy/Hold/Sell: 2/5/1 GRAM has increased its cash offer to $1.85 a share, at the lower end of the independent expert’s range of $1.84-2.04. The offer has been recommended by the board in the absence of a superior proposal. Credit Suisse is disappointed with the outcome, given the long-term view of the potential of Frieda River.

Seven West Media (SWM) was downgraded to Neutral from Overweight by JP Morgan. Buy/Hold/Sell: 3/4/1 JP Morgan has updated their view on the sector (see above). Because of a more cautious stance vis-a-vis the industry, the rating for Seven West Media has been cut to Neutral from Overweight. Estimates have been reduced.

Silver Chef (SIV) was downgraded to Hold from Add by Morgans. Buy/Hold/Sell: 0/2/0 The introduction in the federal budget of a tax incentive for small business acquiring equipment up to $20,000 should mean a boost in demand for equipment dealers and finance providers. However, Morgans does not believe Silver Chef’s rental product will qualify, which may marginally affect demand in the hospitality segment. This may be immaterial and the company does have other growth drivers but Morgans moves to Hold from Add, given the stock is trading at the target, raised to $9.00 from $8.22.

The Reject Shop (TRS) downgraded to Underweight from Equal-weight by Morgan Stanley. Buy/Hold/Sell: 0/2/2 Morgan Stanley believes structural challenges will mean the company disappoints on earnings. Rating is downgraded to Underweight from Equal-weight. Target is reduced to $5.75 from $6.50. The broker expects the sharp depreciation in the Australian dollar to weigh on margins. Secondly, a shift in market share to Kmart and international competitors is occurring in the discount variety segment.

Whitehaven Coal (WHC) was downgraded to Underperform from Neutral by Macquarie. Buy/Hold/Sell: 3/4/1 Macquarie has incorporated new commodity price forecasts, with most of the pain in cuts to coal price expectations. Whitehaven’s earnings are seen falling 80-100% over the next few years and most Australian coal assets now generate only modest cash flow. Whitehaven’s recommendation is therefore downgraded to Underperform from Neutral and the target to $1.00 from $1.50.

Earnings Forecast

20150518 - earnings forecastsFNArena 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.

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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