With the plethora of earnings results, brokers have been busy this week. Most changes have been due to price targets being met or the subsequent reaction in the market, rather than to the quality of the result.
In the good books
Ansell (ANN) was upgraded to Add from Hold by CIMB, and Neutral from Underperform by Credit Suisse. Ansell’s FY14 results were in line with CIMB’s estimates. The broker notes that while economic conditions remain sluggish, the company shows signs of growth, with a focus on high return profit improvements, which should drive earnings momentum. However, the broker has made a modest cut to FY15 and FY16 forecasts. The stock is upgraded to Add from Hold and the price target is raised to $22.13 from $20.71.
Following an FY14 result that was in line with forecasts, Credit Suisse upgrades to Neutral from Underperform. The broker has rolled over valuation and used a lower AUD rate. Hence the target increases to $21.30 from $19.00. Growth remains patchy and varies by geography. That said, Credit Suisse notes a large number of new products that are to be launched in FY15, which should assist.
Despite these upgrades, most other brokers are in the Neutral camp on Ansell.
Asciano (AIO) was upgraded to Outperform from Neutral by Macquarie. The broker acknowledges that competition is ramping up on the wharves and terminals but does not expect Asciano to be impacted to a great extent. The company has higher market share than the broker previously attributed. Container volume growth looks to be remaining at current levels, driven by a high Australian dollar and improving consumption outlook. Macquarie believes now is the time to buy the stock. Target is revised up to $6.74 from $6.00.
Arrium (ARI) was upgraded to Hold from Reduce by CIMB. Arrium’s result fell 8% short of the broker’s estimate but there was a positive surprise in the shape of a greater than expected reduction in debt. ARI is executing well on its strategy, the broker suggests, at least those factors it can control. With uncontrollable factors proving volatile (i.e. iron ore), the broker is still worried about the debt level. Target rises to 87c from 74c on new tax rate assumptions and the rating upgraded to Hold from Reduce as a result. But only buy ARI, the broker suggests, if you are an iron ore bull.
Other brokers remain a little negative on Arrium, with only UBS rating it as a Buy.
James Hardie (JHX) was upgraded to Outperform from Neutral by Credit Suisse. Despite consensus guiding for a 10% drop in earnings, Credit Suisse views the drivers behind the weak first quarter result as largely one-off. The broker believes the stock will return to a more positive trajectory, despite a broader soft patch in US housing. Price target is reduced to $14.60 from $15.20 but rating is upgraded to Outperform from Neutral.
Brokers have pretty mixed views on James Hardie. Deutsche, JP Morgan and UBS rate as Buy/Outperform, Citi is Neutral, and CIMB and UBS reaffirmed Reduce/Sell recommendations.
Macquarie (MQG) was upgraded to Neutral from Underweight by JP Morgan. The broker notes that while FY14 earnings may still see tailwinds from a recovering M&A cycle and growth in the domestic mortgage book, the broker views the key swing factor to be the timing and quantum of upcoming performance fees from the Macquarie funds division. The price target remains at $54.35.
Newcrest Mining (NCM) was upgraded to Neutral from Sell by Citi. The broker upgrades to Neutral from Sell, given the success with cost cutting and FY14’s revelation of first positive cash flow since FY10. Citi raises the target to $11.16 from $9.86. The broker expects FY15/16 to be spent boosting throughput on Lihir and awaits more insights from the investor briefing in October.
Overall, brokers remain negative on Newcrest, with Credit Suisse, Deutsche, and UBS reaffirming Underperform/Sell ratings, BA-Merrills and JP Morgan Neutral, and only CIMB being positive with an Add.
OzMinerals (OZL) was upgraded to Hold from Sell by Deutsche. The pre-feasibility study suggests Carrapateena still hangs in the balance, the broker notes. Encouraging headline metrics still only imply an internal rate of return of 13%, even being optimistic about copper prices and operating expenses. Securing a funding partner at the right price could prove difficult. The PFS release nevertheless leads to de-risking hence the broker’s target rises to $4.00 from $3.40, prompting an upgrade to Hold from Sell.
QBE Insurance (QBE) was upgrade to Add from Hold by CIMB, and Neutral from Underperform by Macquarie. According to CIMB, QBE’s result was in line with the July profit warning. The result nevertheless takes a back seat to the announced capital raising, aimed at reducing gearing, and a business restructure. While the broker has reduced forecast earnings on dilution, gearing was of primary concern. Now that it is being addressed the broker believes value will outweigh risk. Upgrade to Add, target rises to $12.20 from $11.50.
Macquarie believes the recapitalisation and asset realisation will be well received, as the balance sheet is de-risked. Initiatives should reduce gearing to 30% for FY15. Rating is upgraded to Neutral from Underperform and the target lifted to $11.40 from $11.20.
Other brokers reaffirmed positive ratings – BA-Merrills, JP Morgan and UBS at Buy/Outperform.
In the not so good books
Commonwealth Bank (CBA) was downgraded to Neutral from Buy by Citi. Their analysts have made the “Big Call”: from here onwards, the banks in Australia will no longer outperform the broader market. The analysts have taken a longer term view on the sector and concluded some serious headwinds are building.
The downgrade for CBA means Macquarie Group (MQG) carries the last remaining Buy recommendation from Citi in the sector. Price target has been cut to $80 from $83.70. Citi’s major bank pecking order remains CBA, Westpac (WBC), ANZ Bank (ANZ) and National Australia Bank (NAB).
GWA Group (GWA) was downgraded to Hold from Add by CIMB, and to Underperform from Neutral by Credit Suisse. CIMB said GWA’s result was in line with recent guidance but slightly misled given a lower tax rate. The earlier suspension of the dividend brought gearing down comfortably, the broker notes. Recent trading feedback suggests GWA is heading into FY15 with solid growth. The impending sale of Dux and BriVis will dilute earnings growth but also provide for potential capital management, the broker suggests. Target rises to $3.16 from $3.00 but after a solid share price run, the broker downgrades to Hold.
Analysts at Credit Suisse said that the composition of the FY14 report proved weaker than expected. Yes, there is a lot of leverage in the business, they concede, but the analysts also believe the upside has already been captured in the share price. Earnings have been lifted further out, but reduced shorter term. Credit Suisse’s target lifts to $2.95 from $2.83, however the rating is downgraded to Underperform from Neutral.
Investa Office (IOF) was downgraded to Neutral from Buy by Citi, and Sell from Neutral by UBS. For Citi, the FY14 results were in line with forecast and they say that the stock is delivering reasonable growth despite a difficult operating environment. The stock is considered fair value at current levels. Potential corporate activity has been speculated on for some time but the broker does not believe it likely at current pricing. Valuation is rolled forward and the target is raised to $3.50 from $3.45. Rating is downgraded to Neutral from Buy.
UBS noted that the positive aspects were an increase in net tangible assets of 3.4% over six months, a strong balance sheet and some leasing success. Negatives were soft net operating income growth and rises in vacancy rates, albeit in line with the market. UBS expects Investa Office to trade on break-up value, given corporate activity and takeover rumours. The rating is downgraded to Sell from Neutral and the target is unchanged at $3.46.
Other brokers reaffirmed their ratings – BA-Merrills, Credit Suisse and Deutsche at Neutral/Hold, Macquarie an Outperform and JP Morgan an Underperform.
Invocare was downgraded to Sell from Neutral by both Citi and UBS. First half result was below Citi’s optimistic forecasts. Market share losses that negatively impacted FY13 have been stemmed and the number of deaths from a severe winter flu season, have rebounded at the start of the second half. The company is confident growth will continue in the remainder of the year. Citi likes the business but awaits a cheaper entry price. Rating is downgraded to Sell from Neutral following the recent rally. Target is reduced to $9.89 from $9.95.
For UBS, the first half was in line with the broker’s forecast, driven by a 35 basis point improvement in earnings margin. UBS raises FY14 estimates but notes this is more than offset by higher net interest expense. The company is well run and poised to benefit from demographics but, with the share price up 8.6% since the result was announced, the broker believes execution is reflected in near-term multiples and reduces to Sell from Neutral. Target is raised to $10.90 from $10.65.
Credit Suisse, Deutsche, JP Morgan reaffirmed Neutral/Hold ratings, while Macquarie rates as Outperform.
Mermaid Marine was downgraded to Neutral from Outperform by Credit Suisse. A new analyst assumes coverage with a Neutral rating, downgraded from Outperform, and a $2.20 target, reduced from $3.64. The company faces two difficult years in its operations. The broker expects Chevron, which contributed 43% of group revenue in FY13, will increase its contribution in FY14. Credit Suisse assumes Mermaid Marine will win Wheatstone and Ichthys construction support and envisages limited upside risks to forecasts.
Western Areas (WSA) was downgraded to Neutral from Overweight by JP Morgan. The stock provides high quality exposure to nickel but has performed strongly to date and JP Morgan believes a more attractive entry price may present in the second half of the year. The rating is downgraded to Neutral from Overweight as consensus forecasts have already priced in near-term appreciation of the nickel price. The stock is not priced aggressively but JP Morgan suspects, if the appreciation in the nickel price is delayed, this could then induce near-term earnings downgrades. Target is raised to $5.25 from $3.40.
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