Broker actions so far this week have been driven by some end of season results updates and strategic announcements from companies. A restructure notice from Nufarm prompted two brokers to upgrade, while David Jones’ half-year results prompted further talk of a Myer merger and an upgrade and a downgrade.
In the good books
Credit Suisse upgraded Nufarm (NUF) to Outperform from Neutral and UBS upgraded to Neutral from Sell. The company is restructuring the Australian business with $13 million in cost savings to be achieved by FY16. Credit Suisse expects working capital management to improve, with fewer warehouses to stock. UBS’s upgrade follows a period of underperformance in the share price. UBS believes the review of the Australian operations should align the company better for the upcoming challenges. UBS has incorporated the savings, plus a modest turnaround in margins over the next three years, to reflect better seasonal conditions.
CIMB Securities upgraded Adelaide Brighton to Hold from Reduce. The market appears to be factoring in the worst-case scenario after the company announced it could be about to lose one of its biggest customers. The stock is trading 14% lower after the announcement, and CIMB considers it now to be fairly valued and therefore raises the rating to Hold from Reduce.
JP Morgan upgraded David Jones to Neutral from Underweight. DJs’ result beat the broker’s expectations on improved revenue growth from reduction in the cost of doing business and execution on the Future Strategic Direction Plan. The broker upgraded on the back of improved operational performance and the possibility of a change of control. A nil-premium merger with Myer remains more possible than probable, albeit the likelihood of engagement on this proposal has increased. (See Downgrade below)
In the not-so-good books
BA-Merrill Lynch downgraded David Jones to Underperform from Neutral. Merrills was disappointed with flat gross margin, while strong top-line growth and cost savings helped drive earnings in the department store. This was not able to offset the 53% decline in financial services earnings. Merrills thinks the stock, currently trading at a 25% premium to its peers, is overvalued. (See Upgrade above)
JP Morgan downgraded Metcash to Underweight from Neutral, following a review of the company’s outlook. It retains concerns over revenue declines and the “almost insurmountable” problems with executing on the strategic plan. JP Morgan expects the dividend may be reduced further and thinks valuation is expensive.
The above was compiled from reports on the FNArena database, 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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