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Buy, Sell, Hold – what the brokers say

Last week proved exceptionally busy for changes to stockbroker ratings with major banks featuring on the positive side, despite investor concerns about valuations, regulatory risk and increased competition.

What does the frenetic activity during the opening weeks of the New Year suggest about what might be in store for the upcoming February reporting season? All shall be revealed from next week onwards.

In the good books

AMP (AMP) was upgraded to Buy from Neutral by Citi. Marking to market has triggered small positive changes to forecasts, but what caught Citi’s attention was the recent share price fall. Looking through market volatility, argue the analysts, the stock now represents good long-term value. There are still risks down the track, but Citi analysts also believe a weaker Aussie dollar and falling bond yields should support funds under management (FUM). Upgrade to Buy from Neutral. Target price remains at $6.10.

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Aristocrat Leisure (ALL) was upgraded to Buy from Neutral by UBS. While the weaker Australian dollar has provided upside to Australian earnings, the recent acquisition of VGT means Aristocrat’s revenue is linked to the health of the Oklahoma tribal casinos. As that region has benefitted from a strong oil price in recent years, UBS expects ongoing risks to the level of investment in the area under prevailing conditions. The broker has left forecasts unchanged in this regard, having already taken a conservative approach.

Blackmores (BKL) was upgraded to Overweight from Neutral by JP Morgan. The company expects to report sales and profit in the first half up 50% on the prior corresponding half. This is ahead of JP Morgan’s forecasts. The broker expects a weaker Australian dollar may put pressure on gross margins in the next 12-18 months but upgrades to Overweight from Neutral, believing earnings will continue to recover and the company is better positioned than its competitors.

Harvey Norman (HVN) and Super Retail were upgraded to Outperform from Neutral by Credit Suisse. The outlook for Australian retailers is not going to get any easier in 2015, argue analysts at CS. They see ongoing challenges from tepid growth in household incomes, a weaker Aussie only partially offset by cheaper fuel stimulus. The broker’s “self-help” favourites in the sector are Woolworths (WOW), Harvey Norman and Super Retail (SUL).

Oil Search (OSH) was upgraded to Overweight from Neutral by JP Morgan. The broker envisages strong free cash flow yields with manageable gearing. While Oil Search does not offer valuation upside in the way Santos (STO) does, the broker considers it a strong play on an eventual recovery in Brent and it is priced more attractively than it has been for some time. JP Morgan expects a trough in the Brent price of US$38/bbl over March but envisages little in the way of supply discipline or demand elasticity.

WorleyParsons (WOR) was upgraded to Outperform from Underperform by Credit Suisse. More downgrades to profit estimates may well be on the cards for the years ahead, however, all the negative news can be offset by the company deciding to buy its own shares. On the broker’s calculations (now below market consensus), a debt funded (5% cost of debt) $500m buyback, at $9 a share, would be circa 20% EPS accretive.

Western Areas (WSA) was upgraded to Buy from Neutral by UBS. The December production report proved in-line but the highlight was lower costs. CS analysts point out the reported nickel unit cash costs are the lowest in three years and management has confirmed there will be a significant improvement in unit cash cost guidance for FY15 at the half year financial results in February.

Xero (XRO) was upgraded to Neutral from Underperform by Macquarie. Xero has revealed an upgraded version of its payroll offering in the United States, targeting a nationwide roll out by the end of the year. Macquarie suspects that one of the reasons Xero was struggling to match customer acquisition rates was the weak payroll product on offer.

In the not-so-good books

Amcor (AMC) was downgraded to Neutral from Buy by Citi. After a very strong 2014, Citi analysts believe headwinds are building for the company, which probably means 2015 will be a year of consolidation. The weaker euro, the departure of the CEO and a more difficult M&A background are all conspiring against Amcor. Longer term, Citi very much lauds the company’s high quality fundamentals. Amcor is expected to announce a buyback at the release of interim results.

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Caltex Australia (CTX) was downgraded to Neutral from Overweight by JP Morgan. Cost savings and capital management may be positives but near-term upside from these drivers appears modest. That said, the broker remains confident in the broader business re-positioning and would become more constructive at a lower share price.

Evolution Mining (EVN) was downgraded to Underperform from Neutral by Credit Suisse and to Hold from Buy by Deutsche Bank. B/H/S: 2/2/1. The December performance beat the company’s own guidance. The CS analysts point at the record cash flows for the quarter. Forecasts have been lifted but given the share price has moved too, the rating is being pulled back to Underperform. The company has reiterated FY15 production guidance of 400-440,000 ozs and Deutsche Bank observes it is currently tracking at the top of that range. Costs are expected to be at the bottom end of guidance.

JB Hi-Fi (JBH) was downgraded to Neutral from Outperform by Credit Suisse. The outlook for Australian retailers is not going to get any easier in 2015, argue analysts at CS. They see ongoing challenges from tepid growth in household incomes, a weaker Aussie dollar only partially offset by cheaper fuel stimulus.

Kathmandu (KMD) was downgraded to Hold from Add by Morgans. The recent trading update reveals the very soft conditions in Australia and the potential for further discounting to clear excess stock outside of the promotional sales periods. The lack of a permanent CEO is also a concern for the broker.

Scentre Group (SCG) was downgraded to Underweight from Neutral by JP Morgan. The analysts estimate total returns of 7-10% for the sector in 2015. Part of the attraction, in the analysts’ view, is a defensive earnings outlook, with potential for upside as the year unfolds. JP Morgan’s sector favourites are Stockland (SGP), Dexus Property (DXS), Mirvac (MGR) and Charter Hall (CHC). For Scentre Group, however, there has been a downgrade in rating to Underweight from Neutral.

Westfield Corp (WFD) downgraded to Sell from Neutral by Citi. Citi considers the stock is trading well above most key benchmarks. Westfield is a major beneficiary of recent weakness in the Australian dollar but Citi notes a weakening of the British pound also creates a headwind to earnings growth, given 30% of the company’s assets are in the UK.

Earnings forecast

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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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