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Buy, Sell, Hold – what the brokers say

The fall-out from the rout in oil and iron ore continues, with cuts in earnings forecasts and price targets/valuations dominated by both sectors, including companies that are only partially exposed such as Qube Logistics. No surprise thus, stocks linked to holidays and travels and transport stand out on the positive side.

In the good books

JP Morgan upgraded Coca-Cola Amatil (CCL) to Overweight from Neutral, believing the risk/return on the stock has become positive. There remains some residual uncertainty about 2014 earnings but the broker believes downside risks are outweighed.

Drillsearch Energy (DLS) was upgraded to Outperform from Neutral by Macquarie. Macquarie has made material adjustments to medium term oil price assumptions, lowering 2015 and 2016 Brent forecasts by 31% and 23% respectively. The broker upgrades Drillsearch to Outperform from Neutral, with the company’s core asset value now discounting oil at US$70/bbl.

Mount Gibson (MGX) was upgraded to Neutral from Sell by Citi. The company has put Koolan Island on care and maintenance, flagging a substantial non-cash impairment as a result of the breach of the sea wall. Citi upgrades to Neutral/High Risk from Sell/High Risk. The prior recommendation was based on the cash burn suspected over the next few years from the pre-strip at Koolan Island and the bearish iron ore price forecast. With the pre-strip averted and a potential insurance pay-out, the broker considers this pressure has eased.
See also MGX downgrade

Programmed Maintenance (PRG) was upgraded to Overweight from Neutral by JP Morgan. The company’s operations have put in a flat performance and the share price has come under serious selling pressure recently, but JP Morgan analysts believe value has now emerged. They note there’s a large valuation gap vis-a-vis the broader market. The balance sheet has plenty of franking credits. Equally important, the analysts point out this company’s exposure to lower commodity prices is far less than most in the sector.

Qube Logistics (QUB) was upgraded to Buy from Neutral by Citi. The company has acquired a New Zealand stevedore, ISO, for NZ$80 million, its second material acquisition this financial year. Citi notes management has also reached agreement to develop the Moorebank terminal in Sydney. Citi upgrades to Buy from Neutral, following the recent weakness in the share price. The broker considers the concerns over iron ore are excessive. Target is unchanged at $2.62.

Sonic Healthcare (SHL) upgraded to Outperform from Neutral by Macquarie. The government has reworked its GP co-payment proposal and, with the threat of pathology co-payments now gone and a falling Australian dollar, Macquarie believes it is timely to upgrade Sonic Healthcare to Outperform from Neutral.

The Reject Shop (TRS) was upgraded to Neutral from Sell by UBS. A number of retail/consumer companies have provided weak trading updates at their recent AGMs, the broker notes, and it’s now crunch time for Reject. The broker estimates 99% of TRS’ profit is generated in the December half and most of that in the last six weeks of the year. The new CEO has retained the 400-plus store target but has complained of high rents in major centres. The broker will not rule out store closures and restructuring costs. Target falls to $6.60 from $7.90, but at its current share price TRS is offering a positive shareholder return, so the broker upgrades to Neutral.

Webjet (WEB) was upgraded to Buy from Neutral by UBS. Given all of Webjet’s structural changes and acquisitions over the past four years, the broker was pleased with an articulation of WEB’s existing business mix and growth plans at its investor day. The broker estimates WEB is aiming for about 10% underlying growth over the next five years. Based on current valuation, an expected recovery in B2C and a “leap of faith” for B2B, the broker upgrades to Buy.

In the not-so-good books

Atlas Iron (AGO) was downgraded to Underweight from Neutral by JP Morgan. JP Morgan analysts have come to the conclusion that the issues dogging iron ore this year are not going to be resolved anytime soon. As a result, they have lowered the long-term iron ore price forecast from US$80/t to US$75/t. Price forecasts for the three years ahead are below this level, starting with a 6. For mid-cap producers in Australia, JP Morgan sees no re-rating potential on the horizon. “Profitability” from now onwards is a target that may not be reached and this also applies to “free cash flow”.

Fortescue Metals (FMG) was downgraded to Neutral from Overweight by JP Morgan. JP Morgan previously rated Fortescue Overweight on the basis of relatively bullish prospects for iron ore further out. Now that this outlook has changed, the rating has been pulled back to Neutral. Dividends are to be scrapped from this year onwards. On JPM’s projections, Fortescue will not remain profitable in FY16.

Mount Gibson (MGX) was downgraded to Underweight from Neutral by JP Morgan and to Neutral from Outperform by Macquarie. For mid-cap producers in Australia, JP Morgan sees no re-rating potential on the horizon. Macquarie suspects a decision to start remedial work will be dependent on a recovery in iron ore prices, while the company has signalled it will update the market in mid 2015. The broker has made material reductions to earnings forecasts and downgrades to Neutral from Outperform. The removal of Koolan Island from forecasts has translated to a target reduction to 30c from 55c.
See also MGX upgrade

Oil Search (OSH) downgraded to Equal-weight from Overweight by Morgan Stanley. Morgan Stanley has revised Brent oil price forecasts sharply lower, believing the oil price environment will get worse before it gets better. Oil Search is downgraded to Equal-weight from Overweight not because of any detriment to its investment appeal but relative to peers as it offers less upside against the more heavily discounted stocks.

Skilled Group (SKE) was downgraded to Neutral from Buy by UBS. The broker suggests Australia’s rising unemployment rate, muted wage growth and falling global oil prices are creating headwinds for Skilled across all divisions. The broker has cut forecast earnings by 13%-31% in FY15-16, mostly reflecting reduced activity in oil and gas.

WorleyParsons (WOR) was downgraded to Hold from Buy by Deutsche Bank. Deutsche Bank has reduced earnings forecasts to reflect the sharp decline in oil prices amid the expectation that market conditions will remain challenging for the next few years. The broker does not expect a significant amount of FY15 revenue will be cancelled or deferred but envisages greater risk in FY16-17. Given the uncertainty and the likelihood of a weak performance, Deutsche Bank is downgrading WOR to Hold from Buy.

FNArena 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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