While more downgrades than upgrades for individual stocks were registered in the week, underlying support for Australian equities is strengthening, not weakening. Investors seeking to put this observation to the test should zoom in on what is happening with broker price targets and profit estimates, rather than being misguided by the fact that rating downgrades outnumber upgrades in just about every single week. Ratings downgrades are but a logical result of rising share prices, which is why most stockbroker ratings are now grouped together in the Hold/Neutral/Marketweight basket.
In the good books
CSL (CSL) upgraded to Buy from Hold by Deutsche Bank.
The company’s strength in its broad portfolio was in evidence in FY14 results, which were above Deutsche Bank’s forecasts. The results have prompted Deutsche Bank to upgrade to Buy from Hold. Target is raised to $76.50 from $73.20. The broker considers CSL’s success in beating its competitors may in part reflect more aggressive pricing but underlying margins appear to have improved as well.
Fletcher Building (FBU) upgraded to Buy from Hold by Deutsche Bank.
Deutsche Bank believes concerns about an earnings gap developing in FY15, given the end of some projects, are unfounded. The broker expects FY15 earnings growth of 5%. This may not be inspiring but in FY16 growth of 23.8% is forecast, driven by the Canterbury rebuilding and strength in Australasian housing. Deutsche Bank upgrades to Buy from Hold and reduces the target to NZ$9.85 from NZ$9.94.
Skilled Group (SKE) upgraded to Add from Hold by CIMB Securities.
The FY14 result was in line with the broker and provided more confidence in the outlook for FY15. CIMB acknowledges the risks from a new, unknown CEO and potential industrial action but finds the valuation is now too compelling.
In the not-so-good books
Bank of Queensland (BOQ) downgraded to Underperform from Neutral by Macquarie.
CEO Stuart Grimshaw is resigning at the end of August to pursue a new non-banking opportunity in the United States. Chief operating officer John Sutton will take the helm while the board conducts a search. This is a surprise to the broker and means the CEO’s growth strategy is probably up for review. As a result of the ongoing uncertainty and likely loss of momentum, Macquarie is downgrading to Underperform from Neutral. Target is steady at $12.11.
Crown Resorts (CWN) downgraded to Neutral from Buy by Citi.
MPEL Crown has reported 11% quarterly earnings growth, emphasising growth to 80% mass market earnings and subsequently high margins, the broker notes. But the rapid growth of mass market has now eased, leading the broker to downgrade forecasts. The broker has downgraded its Crown forecasts as a result, but notes an announced MPEL buyback sends a positive signal of management confidence, given increasing capex on new developments. The broker downgrades to Neutral.
CSR (CSR) downgraded to Hold from Buy by Deutsche Bank.
The broker is expecting CSR to deliver ongoing margin improvement in building products, but believes the market already has this factored in. The broker acknowledges short-term improvement in aluminium but is less bullish longer term. CSR has rallied 62% over 12 months against a peer average of 24%. The broker downgrades to Hold, dropping its target to $3.63 from $3.71.
Dexus Property (DXS) downgraded to Neutral from Outperform by Macquarie.
Macquarie downgrades to Neutral from Outperform, following FY14 results. The outlook is weaker than the broker was expecting, although the realisation of trading profits will underpin a higher dividend over the next three years.
Goodman Group (GMG) downgraded to Neutral from Overweight by JP Morgan.
JP Morgan has downgraded Goodman to Neutral from Overweight as it is trading close to target and the broker envisages development risks increasing. FY14 results were in line with the broker’s forecast.
Henderson Group (HGG) downgraded to Neutral from Buy by Citi.
Henderson’s result showed the spike in staff costs in the previous half did not ease as the broker expected, thus despite strong inflows and asset under management growth, the broker has cut its earnings forecasts by 8% and 7% in FY15-16. While HGG’s medium-term growth profile remains compelling, the broker expects a negative market reaction to the cost issue. Target falls to $4.45 from $4.85. Downgrade to Neutral.
STW Communications (SGN) downgraded to Neutral from Outperform by Macquarie.
First half results were ahead of Macquarie’s forecasts. After 18 months of poor cash flow, the broker is no longer of the view that valuation is enough for the stock to outperform. Rating is downgraded to Neutral from Outperform. The stock requires a material positive catalyst, in the broker’s view, and there is little on the horizon. The target is reduced to $1.40 from $1.80.
Suncorp (SUN) downgraded to Neutral from Buy by BA-Merrill Lynch and to Sell from Neutral by UBS.
The second half beat the broker’s expectations and the dividend also surprised on the upside. Merrills now considers valuation is fair, rather than attractive, and downgrades to Neutral from Buy. Suncorp’s result fell short of UBS but beat consensus. The special dividend was a nice surprise. But the broker is now downgrading to Sell. The broker suggests the majors have a difficult transition period ahead with regard to personal line pricing, Suncorp is unlikely to hit both revenue and return on equity targets, capital management is likely done now, three-year cash profit growth will be minimal and Suncorp is now fully valued.
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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