Underlying earnings estimates in Australia may now have a negative bias, because of lower iron ore prices and a persistently stronger-for-longer Aussie dollar, but there doesn’t seem to be any negative pressure on stockbroker valuations. The week ending on Friday May 23 registered no more than four downward changes in consensus price targets and, maybe with the exception of junior miner Mt Gibson (-3.63%), none of these changes would have genuinely registered.
In the good books
BlueScope Steel (BSL) was upgraded to Neutral from Underperform by Credit Suisse. Steel spreads relative to raw material costs have improved marginally. Lower iron ore price will have some impact on NZ Steel’s iron sands export revenue but the broker believes this is countered by higher steel spreads. Moreover, lower raw material prices are helpful in releasing working capital. The recovery in residential construction in Australia also suggests a potential reduction in loss-making exports.
Hillgrove Resources (HGO) was upgraded to Overweight from Neutral by JP Morgan. The broker believes risks round the company’s ability to repay its debt have subsided and this warrants the re-rating. An upcoming site trip to Kanmantoo provides a near-term catalyst, which should reinforce improvements that have been made to operations.
Qantas Airways (QAN) was upgraded to Overweight from Underweight by JP Morgan. JP Morgan has undertaken a review of forecasts, following a recent update from the company on the cost savings and fleet rationalisation. The broker expects an underlying pre-tax loss of $134.6 million for FY15 compared with former forecasts for a loss of $325.8 million. JP Morgan thinks FY14 will herald a trough in earnings but does not expect any tax to be paid until FY18 nor any dividends before FY17.
Western Areas (WSA) was upgraded to Buy from Neutral by Citi. Commodity analysts at Citi are now self-declared “nickel bulls” and if their predictions prove correct, investors in the sector are yet to see the true nature of the term “commodities boom”. Citi continues to see lots of upside, despite the 50%-plus rally in prices year-to-date. Nickel is projected to peak at US$26,500/t in 2016. Western Areas is the stockbroker’s preferred exposure to the sector in Australia. The analysts like the fact management has the ability to use cash flow to fund growth options that are earnings/NPV accretive.
In the not-so-good-books
Adelaide Brighton (ABC) was downgraded to Neutral from Outperform by Macquarie. Adelaide Brighton has provided FY14 guidance at the AGM. The company expects an impact from outages at Birkenhead, while lime volumes are down 5% year-on-year. Despite a reduced earnings profile Macquarie believes the company can still pay special dividends, although upside in the near term is limited. As there are no short-term catalysts and there is a risk that earnings will be flat or lower in FY15, the broker downgrades to Neutral from Outperform.
Cochlear (COH) was downgraded to Underperform from Neutral by Macquarie. Cochlear is to spend $130 million on research and development (R&D) – 25% more than its FY14 forecast profit, and more, as a percentage of sales, than all of the top 25 US medical device companies, the broker notes. But despite ongoing heavy R&D investment, COH has delivered zero sales growth over three years. The strategy is not working but the broker is not surprised. Innovation does little to entice new customers into an implant, the broker suggests, and today’s technological improvements are more and more incremental rather than game changing. What COH really needs is an effective distribution channel to penetrate the adult segment, the broker suggests.
CSR (CSR) was downgraded to Neutral from Buy by Macquarie. The broker has updated aluminium and alumina estimates. As a result, the company’s aluminium division estimates are reduced in the outer years, despite the positive outlook for building products, which appears fully priced in the broker’s opinion.
Dexus Property (DXS) was downgrade to Neutral from Outperform by Credit Suisse. Incorporating Commonwealth Property into the DXS valuation provides a neutral result, but the broker has rolled forward its asset valuations to June 2015, which provides for a DXS target increase to $1.19 from $1.16. The broker would like to see more transparency of the integration of CPA but on a 12% total return for 2014 to date, the broker believes the stock is now fully priced.
Goodman Fielder (GFF) was downgraded to Underweight from Neutral by JP Morgan. The broker has downgraded Goodman Fielder to Underweight in the wake of the rally after the takeover bid. The risk is to the downside, given the buyer has said it will not increase the offer. Some may consider the bid opportunistic, but the broker believes it is fair.
Newcrest Mining (NCM) was downgraded to Neutral from Overweight. Newcrest has outperformed of late on an easing in balance sheet concerns, but debt remains high, there is little growth outside Cadia, and Lihir needs to see significant improvement.
Woodside Petroleum (WPL) was downgraded to Neutral from Overweight by JP Morgan. After an investor briefing, which focused on Browse FLNG, exploration and operational efficiencies, JP Morgan has decided to downgrade Woodside to Neutral from Overweight, believing the stock has had a good run and is now fairly valued. While the stock has limited downside because of its solid free cash flow and yield appeal, JP Morgan thinks upside hinges on progress at Browse and exploration success, both of which are long dated.
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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