While there were many more downgrades than upgrades, the common theme was that some stocks are fully priced and that there is not much blue sky left. One of the stars of 2014, Orora, suffered three downgrades – despite beating brokers’ forecasts!
There were some misses on earnings – with Bluescope Steel, Fleetwood Corporation, Mermaid Marine and Pacific Brands earning a downgrade following a disappointing report.
On the flipside, IOOF, M2 Telecommunications and Qube earned upgrades following their reports.
In the good books
Beach Energy (BPT) was upgraded to Neutral from Sell by Citi. The company’s FY14 results were in line with the broker’s estimates. FY15 forecast has been moved forward 5.2%, while FY16 forecasts remain unchanged. The broker notes that current capex levels appear high, but are inflated by the one-off Cooper infrastructure expansion program. The price target is lifted to $1.78 from $1.69.
See also BPT downgrade by Credit Suisse.
Bluescope Steel (BSL) was upgraded to Outperform from Neutral by Credit Suisse. FY14 proved in-line but guidance for FY15 was some 20% below consensus, observe analysts at CS. They have cut estimates, but left their $6.40 target unchanged. Given a negative response by the market to the company’s guidance, this now leads to an upgrade in rating, to Outperform from Neutral.
See also BSL downgrade by Macquarie.
Cabcharge (CAB) was upgraded to Neutral from Underperform by Macquarie. Cabcharge’s result beat the broker, but the 10c div fell short of the broker’s 13c forecast. CAB noted turnover in Victoria had increased some 30% since the surcharge was halved by the government but the revenue loss more than offset. This is not as bad an outcome as the broker had feared, but if NSW-WA follow suit, the broker does not expect similar market share gains. CAB still faces structural headwinds but has improved as a valuation proposition, the broker suggests. A shift in valuation model to PE from sum of the parts prompts a target increase to $5.48 from $3.50. Upgrade to Neutral.
Federation Centres (FDC) was upgraded to Buy from Neutral by UBS. Federation Centres’ result beat the broker on earnings, distribution and FY15 guidance. The broker had flagged upside on cost cuts and further syndicate acquisitions. Supermarket sales were the only disappointment in an otherwise solid result all round, but the broker expects improvement ahead. On that basis, the broker has increased its target to $2.75 from $2.52 and upgraded to Buy.
See FDC downgrade by Deutsche below.
IOOF Holdings (IFL) was upgraded to Buy from Neutral by UBS. IOOF’s result beat the broker on lower operating expenses and tax. Organic momentum is building and given IFL’s track record of delivery, synergies from the SFG acquisition should help support the broker’s two-year compound growth forecast of 12%. IFL has underinvested in growth over the years but is a more defensive proposition than pure-play fund managers, the broker suggests, and offers double the earnings growth of AMP ((AMP)). Target rises to $9.70 from $8.70, upgrade to Buy.
UBS joined Citi, JP Morgan, and Macquarie with positive ratings on IFL. Merrills rates as an Underperform, while both Credit Suisse and Deutsche are Neutral.
M2 Telecommunications Group (MTU) was upgraded to Hold from Reduce by CIMB. Earnings were ahead of the broker’s forecasts for FY14. CIMB observes the company has demonstrated the value in its organic business model and, on an upgraded outlook, further good growth is still expected in FY15. The stock justifies a higher market valuation now and CIMB upgrades the rating to Hold from Reduce and the target to $7.00 from $5.42.
Citi and Credit Suisse reaffirmed Buy/Outperform ratings for MTU, Macquarie is Neutral.
Qube (QUB) was upgraded to Add from Hold by CIMB. Qube’s FY14 results were slightly ahead of the broker’s forecast. CIMB is confident that management has the ability to drive strong earnings growth into the future and therefore lifts its FY15 forecast by 15%. The broker has upgraded the stock to Add from Hold and the price target is raised to $2.73 from $2.13.
Each of the other major brokers reaffirmed Neutral/Hold ratings on QUB.
Senex Energy (SXY) was upgraded to Buy from Neutral by Citi. Senex reported FY14 earnings below Citi’s forecast. FY15 forecast has been reduced by 26% and FY16 by 20.6%. The broker has upgraded the stock to Buy from Neutral. Citi believes a greater focus on exploration will add greater value in the long term. Price target is raised to 85c from 84c.
Credit Suisse and Macquarie reaffirmed Outperform ratings, JP Morgan a Neutral rating for SXY.
In the not so good books
Beach Energy (BPT) was downgraded to Neutral from Outperform by Credit Suisse. Beach had pre-warned, but CS analysts had waited before updating their modelling. They have cut forecasts on a mix of changed assumptions but the key factor is that operations in the Cooper Basin require more capex than previously thought. CS is suggesting Beach might be better off spending money elsewhere and selling its stake in the JV, potentially offering it to partners Santos ((STO)) or Origin Energy ((ORG)). The lower Cooper Basin valuation is partially offset by better than-expected cash conversion and a roll-forward of the valuation model with the end result only a 10c drop in the target, to $1.80. Recommendation downgraded to Neutral from Outperform.
See also BPT upgrade by Citi.
Bluescope Steel (BSL) was downgraded to Underperform from Outperform. Bluescope’s result appeared to meet guidance but take out a tax effect and it missed the broker’s forecasts. First half FY15 guidance remained very cautious, with weak domestic steel demand the primary driver. The broker has slashed forecasts but suggests more cuts might come if there is no evidence of any sort of pick-up in steel demand in the near term, as the broker had previously assumed. Target falls to $5.52 from $6.86 and rating downgraded to Underperform from Outperform.
See also BSL upgrade by Credit Suisse.
Dexus Property (DXS) was downgraded to Underperform from Neutral by BA-Merrill Lynch. The company is experiencing a deteriorating underlying growth outlook, in Merrills’ opinion. Funds from operations guidance for FY15 is being driven primarily by the recognition of trading profits, a low quality earnings source, and the broker does not believe this is sustainable across the cycle. The broker believes there is downside risk to the share price and the stock is moderately overvalued. Rating is downgraded to Underperform from Neutral. Target is steady at $1.16.
DUET (DUE) was downgraded to Underweight from Neutral by JP Morgan. FY14 results were slightly above the broker’s forecasts, although proportionate cash earnings were well below. JP Morgan is re-examining sector-relative recommendations in the light of this. With the stock trading 11% above the $2.20 target, JP Morgan downgrades to Underweight from Neutral. In relation to M&A, the company has pointed out that there has not been any discussion with Spark Infra ((SKI)) since it acquired a 14% stake earlier this year.
Other brokers reaffirmed Neutral/Hold ratings on DUE, with Macquarie rating as Outperform.
Federation Centres (FDC) was downgraded to Neutral from Buy by Deutsche Bank. FY14 results were in line. Deutsche Bank had expected strong FY15 guidance but the growth forecast exceeded expectations. On revised estimates, which are up by 2.5% on average, and while the growth profile is attractive, the broker raises the target to $2.65 from $2.60. The rating is downgraded to Hold from Buy as the stock appears fairly valued.
See FDC upgrade by UBS above.
Fleetwood Corporation (FWD) was downgraded to Underperform from Neutral by Credit Suisse. CS saw yet another weak result and though there were some positives, overall visibility remains low and the analysts thus believe the risk remains to the downside. Price target sinks to $2.25 from $2.70. CS states it has a low conviction on any recovery story unfolding in FY15. Earnings estimates have received the chainsaw treatment. The analysts don’t believe the share price is low enough to account for ongoing risk.
Separately, JP Morgan reaffirmed an Underweight rating, while Macquarie rated FWD as Neutral.
Mermaid Marine (MRM) was downgraded to Neutral from Buy by UBS. Mermaid’s result fell slightly short of the broker but featured Jaya acquisition costs. The dividend was a nice surprise and the broker notes MRM’s balance sheet is still well positioned. Target falls to $2.40 from $2.42 and given a recent strong run in the share price, rating is pulled back to Neutral. The other major brokers are also Neutral on Mermaid Marine.
NIB Holdings (NHF) was downgraded to Underweight from Neutral by JP Morgan, and to Sell from Neutral by Citi. NIB’s FY14 results missed the JP Morgan’s forecast, and following subdued FY15 guidance, JP Morgan has reduced its FY15 and FY16 earnings forecasts by 10% and 6% respectively. The broker believes the stock still offers potential for very good long term earnings growth. The price target is cut to $3.00 from $3.15.
Citi has downgraded NHF to Sell from Neutral as it believes the earnings multiples the stock is trading at are too high. The broker has also lowered its FY15 and FY16 forecasts by 18% and 7% respectively. Target price is increased to $3.14 from $3.10, but this includes NHF’s special dividend of 9c.
Separately, Macquarie reaffirmed an Outperform rating, Deutsche a Hold, and Credit Suisse an Underperform for NHF.
Pacific Brands (PBG) was downgraded to Neutral from Buy by Citi, following weak FY14 results and a 26% drop in earnings. As a consequence, Citi has cut its FY15 forecast by 16% and FY17 forecast by 15%. The broker believes the sale of the Workware division may be followed by further disposal of key brands. The broker values the company at 73c per share under this break up approach, and places a 25% probability on this occurring. Price target is reduced to 55c from 60c.
Other major brokers remain negative about PBG.
Scentre Group (SCG) was downgraded to Neutral from Buy by Citi, and Neutral from Buy by UBS. Scentre’s first half results were basically meaningless as the company was formed only recently, but Citi believes progress will be made in the second half, in line with management’s guidance. With concerns about the overhang having largely abated, the broker believes the market is better reflecting the value of the business and as a result downgrades the stock to Neutral from Buy. Price target is reduced to $3.52 from $3.55.
Second half guidance for 2014 is slightly below the broker’s estimates but UBS remains comfortable with its figures. Distribution guidance is in line at 10.2c per security. Credit conditions have continued to improve and operating income guidance has been upgraded. UBS is downgrading to Neutral from Buy on valuation. The stock remains a preferred A-REIT but the sector screens expansively at current levels, in the broker’s opinion. Target is raised to $3.43 from $3.30.
Overall sentiment on SCG remains marginally positive, with BA-Merrill and Deutsche rating as a Buy, JP Morgan at Neutral and Macquarie at Underperform.
SAI Global was downgraded to Hold from Buy by Deutsche. Operating results were broadly in line with the broker’s forecast. Management anticipates improved profitability in FY15 with benefits from cost cutting. Deutsche Bank downgrades to Hold from Buy on valuation grounds. The target is lowered to $5.18 from $5.25.
Sims Metal Management (SGM) was downgraded to Neutral from Overweight by JP Morgan. FY14 profit was well below the broker’s estimates. The broker expects a pick up this year but this is dependent on a considerable improvement in underlying market conditions in North America. There is limited upside to the broker’s $12.35 target so the rating is downgraded to Neutral from Overweight.
Brokers are mixed on SGM – with Deutsche, Macquarie and UBS in the Buy/Outperform camp, Citi at Neutral, and Credit Suisse and CIMB at Underperform/Reduce.
Specialty Fashion Group (SFH) was downgraded to Neutral from Outperform by Credit Suisse. Specialty’s weak result was in line with expectation. That opening sentence was from February this year, so not much has changed since. CS analysts do have positive expectations regarding the Rivers acquisition that is currently being bedded down. In the short term, however, higher costs lead to reduced forecasts. Rating has been downgraded to Neutral from Outperform, while the target remains unchanged at $1.00.
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