Analysts are very reluctant to lower their valuations and price targets, maybe with the exception of specific resources stocks. Another positive is that resources stocks, bulk commodity producers and explorers in particular, remain the main targets of any negative revisions to profit estimates. On the positive side we find insurers, energy companies and selected cyclicals including Incitec Pivot, Western Areas and BlueScope Steel, while Alumina Ltd continues to enjoy renewed interest and upwards momentum for aluminium.
In the good books
Atlas Iron (AGO) was upgraded to Neutral from Underperform by BA-Merrill Lynch as weak results have now been laid bare and iron ore prices have stabilised, limiting near-term downside. That said, the broker thinks material upside will continue to be limited by oversupplied iron ore markets and uncertainty regarding future growth plans. The target is raised to 60c from 50c. See also AGO downgrade.
Drillsearch Energy (DLS) was upgraded to Neutral from Underweight by JP Morgan based on the improved sector-relative valuation as the stock retreats from its April highs. The target is raised to $1.60 from $1.56 and JP Morgan increases FY15 earnings forecasts by 8%. The quarterly result beat on revenue, capex and cash flow. Further improvements will depend on the longer-term outlook and the broker awaits the investor briefing on August 1.
IOOF (IFL) was upgraded to Buy from Neutral by Citi. Given recent weakness in the share price, Citi is upgrading to Buy from Neutral and reducing the target to $9.15 from $9.30. The broker expects June reports should deliver another quarter of strong flows into the company’s flagship platforms. The broker thinks some of the market scepticism regarding the Shadforth acquisition is misplaced. Additional revenue should be able to be generated in a way that Shadforth in isolation could not achieve.
Sims Metal Management (SGM) was upgraded to Outperform from Neutral by Macquarie. The broker believes overcapacity in the scrap metal market will remain an issue and turning Sims around will take some time. However, if the new CEO can deliver on, even a part of, his ambitious new strategy for the company, the risk is skewed to the upside. SGM should return to net cash by FY16 on the broker’s estimates, which allows some room for the odd stumble along the way.
In the not-so-good books
Atlas Iron (AGO) was downgraded to Underperform from Neutral by Macquarie. While the broker expects Atlas to ship less lower grade ore ahead, it has adjusted its grade discount forecast to 10% from 5%. Forecast earnings fall 45% and 78% in FY14-15. See also AGO upgrade.
Australand (ALZ) was downgraded to Neutral from Outperform by Credit Suisse. Residential margins drove a 30% increase in earnings in the first half. The company has reiterated guidance for 20-25% earnings growth in 2014 and 10-15% in 2015 and 2016. Credit Suisse expects an 11% fall in FY17 residential earnings as the cycle moderates. The broker thinks the Frasers’ offer will be hard to beat and a counter offer from Stockland (SGP) is unlikely.
Bendigo & Adelaide (BEN) was downgraded to Neutral from Buy by BA-Merrill Lynch. The broker is downgrading to Neutral from Buy. The bank is fundamentally attractive and better positioned from a regulatory perspective compared with the majors but its recent performance is reflected in the share price, in Merrills’ view. The stock is up 14% since April, while the sector is up 3%. The broker acknowledges a key risk in relation to the Great Southern class action has now been removed, as an agreement has been concluded with investors.
Insurance Australia (IAG) was downgraded to Neutral from Outperform by Macquarie. IAG has pre-announced an insurance margin well ahead of guidance. But notwithstanding synergies from the incorporation of the Wesfarmers’ business, the rate of premium growth is slowing and IAG’s share price is currently reflecting a favourable claims environment. Having pre-released its result “surprise”, there’ll be no more surprises at the actual result release, the broker suggests. Downgrade to Neutral. Target unchanged at $6.20.
Investa Office (IOF) was downgraded to Neutral from Buy by BA-Merrill Lynch, following the stock’s performance over the past year. While speculation of a possible takeover may underpin the share price, the broker thinks the current trading range factors most upside into the stock. Merrills has analysed the potential impact if either GPT (GPT) or Mirvac (MGR) acquired Investa. In both instances the broker envisages limited capacity to pay above the current share price.
Nufarm (NUF) was downgraded to Neutral from Outperform by Credit Suisse. A month ago the broker was confident in its Outperform rating for Nufarm, driven by growth in Brazil. But in the interim, soft commodity prices have fallen in the region and may yet fall further, pressuring farmers to turn to cheaper pesticides, and the broker has cut earnings forecasts.
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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