Company specific actions drove broker activity this week, with the Chevron sell-down in Caltex making that a prime target for acquisitions and therefore eligible for an upgrade by some brokers. The Slater & Gordon UK acquisition also prompted some broker action.
In the good books
Morgan Stanley upgraded Caltex to Equal-weight from Underweight and Credit Suisse upgraded to Outperform from Neutral. Buy/Hold/Sell 1/4/2 With further analysis on the sale of the Chevron stake, Morgan Stanley upgrades to Equal-weight from Underweight. The broker envisages more chance of a buyback, organic growth through acquisitions over the next 12 months. Near-term earnings are unchanged but with the Chevron exit, higher trading multiples are justified, in the broker’s opinion. Credit Suisse now believes cheap debt, in a low-growth world, makes defensive infrastructure plays like Caltex prime targets.
Deutsche Bank upgraded Metcash (MTS) to Hold from Sell. Buy/Hold/Sell 1/4/3 Deutsche Bank remains concerned about the company’s grocery business, given independents are expected to shed market share, while Woolworths ((WOW)) is likely to become more aggressive with pricing. Nevertheless, industry feedback suggests to the broker that independents have performed better over the last few months, after a long period of underperformance. The stock’s valuation is undemanding, particularly given the prospects for its non-food divisions appear reasonable to the broker.
UBS upgraded Slater & Gordon to Buy from Neutral. Buy/Hold/Sell 3/0/0 Slater & Gordon has acquired Quindell’s professional services division, which operates in the UK and includes personal injury legal services business. The acquisition means the company becomes the largest UK player in personal injury, with a market share of 12%. UBS maintains its investment thesis but considers the acquisition-driven growth opportunity has diminished and organic growth must become the driver.
In the not so good books
Credit Suisse downgraded Navitas (NVT) to Underperform from Neutral. Buy/Hold/Sell 1/4/2 First semester enrolments disappointed the broker, as growth of 3.0% represented a significant slowdown from the 7.0% growth in semester three of 2014. Credit Suisse had previously not factored in any impact from the forthcoming loss of the SIBT contract in 2016 but it appears some withdrawals have been brought forward. The broker suspects guidance is beginning to look out of reach, although the company reiterated its earnings forecasts for FY15.
UBS downgraded Westpac to Neutral from Buy. Buy/Hold/Sell 1/5/2 Although banks appear expensive in absolute terms, relative to low bond yields and term deposit rates, they appear relatively attractive. The broker considers the banks still fairly priced relative to industrials. Banks may remain expensive or even rally further, provided earnings fundamentals remain intact, but they remain highly sensitive to any change in the macro environment, in UBS’ opinion.
The above was compiled from reports on FNArena, which 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.
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