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Buy, Sell, Hold – what the brokers say

Commodity price updates drove ratings actions this week as Arrium received a half-hearted upgrade and a downgrade. Santos also got an upgrade to Buy from UBS.

In the good books

Citi upgraded Arrium (ARI) to Neutral from Sell. Citi analysts have updated their modeling for the latest changes in commodity prices and foreign exchange forecasts, as well as the company’s announced restructuring of its iron ore operations. Citi observes its non-consensus forecasts of the Aussie dollar for US 72 cents and iron at US$58/tonne keep the pressure high for Arrium, with the latter more than outweighing the tailwind benefits from the weaker currency. (See downgrade).

UBS upgraded Myer Holdings (MYR) to Neutral from Sell following a share price decline of around 30% since September. The broker is increasingly confident in management’s ability to meet or exceed forecasts for the first half. UBS considers the valuation attractive and outlook is improving despite the long-term structural risks, which remain.

UBS upgraded Santos (STO) to Buy from Neutral after incorporating lower oil price assumptions. While prices are expected to stay volatile, the broker considers the share price decline of 47% since early September more than adequately compensates for the fall in the oil price and the chance of an equity raising. The company posted a better-than-expected end to 2014 with December quarter production surprising on the upside.

In the not-so-good books

Credit Suisse downgraded Arrium (ARI) to Neutral from Outperform. The company has signaled the closure of its Southern Iron operations, which did not surprise Credit Suisse. The iron ore impairment of $1.17 billion is in line with expectations. While the iron ore asset is taken from the balance sheet the broker expects the debt liability will continue to challenge the company for many years. (see upgrade).

UBS downgraded GrainCorp (GNC) to Sell from Neutral. Recent rainfall in parts of the east coast is too late for the winter crop harvest and unlikely to materially affect the summer crop but could improve winter planting in May if sustained. A falling Australian dollar also improves GrainCorp’s outlook, as UBS notes it translates positively for offshore earnings as well as making Australian grain relatively cheaper. UBS downgraded its rating to Sell from Neutral after strong share price performance and now forecasts negative total shareholder returns.

UBS downgraded The Reject Shop (TRS) to Sell from Neutral. The company has announced that first-half earnings will be down 14%. UBS observes cash flows appear to have been reasonable and sales were noted to have stabilised in January. The tough decisions on store closures are still to come and UBS also believes the weakening Australian dollar looks ominous.

Citi has downgraded Westpac (WBC) to Sell from Neutral. Citi analysts believe Westpac post-Gail Kelly will have to face more significant challenges than opportunities for its key Australian operations. Amongst the challenges that need to be tackled are the risk of an “overdose” on mortgage lending, high costs for running a multi-brand strategy and a challenging revenue outlook for the wholesale and institutional divisions.

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.

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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