Buy, Sell, Hold – what the brokers say

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This week, broker activity was dominated by potential merger and acquisition activity and speculation. There was the 14.1% stake in Duet Group that was acquired by Spark Infrastructure and the proposed merger between IOOF and SFG Australia. KKR’s announced bid for Treasury Wine Estates also prompted both an upgrade and a downgrade.

In the good books

Credit Suisse upgraded ASX Limited to Neutral from Underperform. The valuation is now undemanding and, while there is some scope for further earnings upside, the stock offers less earnings volatility than the broader financial sector, along with a 5.4% dividend yield. Hence, ASX is a relative safe haven investment.

Macquarie upgraded Bendigo and Adelaide Bank (BEN) to Neutral from Underperform. The broker has reviewed its valuation of Bendelaide following the acquisition of RFC Vic. The acquisition demonstrates BEN’s M&A discipline, something the broker suggests is “sorely lacking” among peers.

Duet Group (DUE) was upgraded to Neutral from Underweight by JP Morgan and to Outperform from Neutral by Macquarie. Spark Infrastructure (SKI) has acquired a 14.1% stake in Duet for an average price of $2.16 per security via a derivative structure. JP Morgan observes that, while Spark Infrastructure has stated it does not intend to make a takeover bid, this has provoked market speculation regarding further M&A activity. While nothing has fundamentally changed for Duet, Macquarie suggests the company is now “clearly in play” and SKI’s actions may yet draw others out of the woodwork.

JP Morgan has upgraded IOOF Holdings (IFL) to Overweight from Neutral following the IOOF and SFG Australia (SFW) proposed all-scrip merger. From IOOF’s point of view, the broker sees the price as reasonable and synergy potential as significant, with the broker noting IOOF has a strong track record of extracting solid expense synergies from its acquisitions.

JP Morgan has upgraded Regis Resources (RRL) to Overweight from Neutral. Given the problems that have plagued the Garden Well open pit goldmine that was flooded earlier this year, Regis has been sold down recently. But given a strong balance and strong cash flow from Australian-based low-cost assets, the broker believes RRL is now oversold.

Deutsche Bank upgraded Treasury Wine Estates (TWE) to Hold from Sell following KKR’s bid for the group. The revelation of KKR’s bid at $4.70 a share suggests to Deutsche Bank that someone sees value in the stock but the current price is well above where the broker’s fundamental valuation lies, even assuming a dramatic improvement in the business. The upside risk is the emergence of a higher bid, while the downside risk is for no further interest (see downgrade).

In the not-so-good books

CIMB Securities has downgraded Spark Infrastructure Group (SKI) to Hold from Add, JP Morgan has cut from Overweight to Neutral and Macquarie to Underperform from Neutral. Spark Infrastructure (SKI) has acquired a 14.1% stake in Duet which caught JP Morgan by surprise, although the emergence of another M&A situation did not. Cash flow accretion from the move is modest, but the broker thinks the risk/reward balance has weakened. Macquarie fails to see the strategic benefit to SKI, particularly if a further premium has to be paid. With the stock trading near its fair value ahead of a potential merger,Macquarie downgraded to Underperform.

Macquarie downgraded Treasury Wine Estates (TWE) to Underperform from Neutral. Get out while you can! That’s the broker’s recommendation following the Treasury Wine board’s rejection of KKR’s cheeky offer at $4.70. While experience suggests KKR’s offer may well not be its last, at 30x FY14 earnings, the broker sees it as pretty fair, particularly given TWE took the opportunity to flag further downside earnings risk.

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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