Resources companies featured on the plus side of the ledger this week for a change but that was mainly due to a run of actions from Credit Suisse, as it reviewed its forecasts for a range of commodities.
In the good books
Credit Suisse upgraded Fortescue Metals (FMG) to Outperform from Neutral. The shares have now priced in a very bearish iron ore outlook and Credit Suisse now assumes Fortescue will not pay a dividend in FY15. The bad news is now priced in and the stock is trading on a FY16 cash/earnings ratio of 4.6 times.
Credit Suisse upgraded Nufarm to Outperform from Neutral, Deutsche Bank to Buy from Hold and UBS to Buy from Neutral. Credit Suisse upgraded after Nufarm met its cash goals in FY14. Credit Suisse believes the company could generate enough free cash by FY16 to lift its dividend to a yield of 6%. The result fell short of the Deutsche’s expectations but cash flow well exceeded on better than expected reductions in working capital and debt. The turnaround in cash flow stood out for UBS. Nufarm’s FY14 earnings were above the broker’s forecasts, driven by better outcome in European crop protection and the global seeds segment.
Whitehaven Coal was upgraded to Outperform from Neutral. The stock is a tricky one for Credit Suisse, given high quality production growth at a time of low coal prices. The company is expected to be loss making until FY17 and thereafter debt should fall quickly, as Maules Creek ramps up. The broker suspects coal prices are at cyclical lows and will move higher in the next 12 months.
In the not so good books
Credit Suisse downgraded Western Areas (WSA) to Neutral from Outperform following a share price appreciation over the past six months of 46%. The broker applies a modest discount to the target price, reducing it to $5.20 from $5.40, given a 24% fall in FY15 profit estimates, as the assumed nickel price peak is pushed out by six months.
UBS downgraded Metcash to Sell from Neutral. UBS has reviewed the discounter model among supermarkets, noting Aldi and Costco are highly efficient and offer compelling value, making it very hard for the major chains to compete – particularly the independent supermarkets supplied by Metcash. The broker reduces Metcash forecasts to assume ongoing market share decline, downgrading FY16-19 earnings forecasts by 3-8% and reducing the target price to $2.60 from $2.75.
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.
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