Buy, Sell, Hold – what the brokers say

Founder of FNArena
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Stockbroking analysts continue to seek for value and buying opportunities through the rubble that is the Australian share market post the September-October global correction for risk assets. In Australia, the focus has clearly shifted towards energy stocks and miners, both sectors have had to endure tougher times than others in the share market thus far in 2014.

In the good books

AGL Energy (AGK) was upgraded to Outperform from Neutral by Credit Suisse. Surplus generation capacity has pushed wholesale electricity prices down to marginal cost levels and Credit Suisse observes this limits the downside to wholesale price as the supply curve cannot be compressed any further. AGL is the clear winner in this regard, with the downside priced in. The company has a fixed price coal supply and a large generation footprint and remains the most leveraged to the upside in power prices.

BC Iron (BCI) was upgraded to Outperform from Neutral by Macquarie. BC has now moved to compulsory acquisition of Iron Ore Holdings (IOH). The broker takes the opportunity to adjust its earnings forecasts, incorporating a wider discount for lower grade ore prices and the slower ramp-up at Iron Valley, offset by a lower Aussie dollar forecast which buffers FY15-16 earnings. BCI will report its quarterly production later in the month, which may provide some positive catalysts.

Beach Energy (BPT) was upgraded to Neutral from Underweight by JP Morgan. The broker has reviewed the mid cap oil sector as the recent price rout is even more pronounced for these stocks. JP Morgan upgrades Beach Energy to Neutral from Underweight, given the fall in its share price. The broker continues to find the company’s unconventional aspirations challenging but believes the tail risk of Chevron’s exit from the JV is now reflected in the share price.

Boart Longyear (BLY) was upgraded to Neutral from Underperform by Macquarie and to Neutral from Sell by UBS. Boart Longyear has announced a “good save”, Macquarie suggests, through a debt and equity injection from major shareholder Centerbridge. Existing shareholders are diluted to 58% if they take up their rights but this is a good outcome, in the broker’s view, as it removes uncertainty and provides the possibility of BLY trading through the cycle. The deal is nevertheless conditional so the broker has not made changes, and indeed has increased its target to 23c from 20c after switching to an enterprise valuation model. The voting share of Centerbridge is 49.9% but UBS observes there is potential for its economic interest to rise as high as 70%.  The broker notes obvious benefits from the recapitalisation include removing maintenance covenants on the debt, providing longer tenure, lowering cash interest costs and providing liquidity.

Drillsearch Energy (DLS) was upgraded to Overweight from Neutral by JP Morgan.The broker has reviewed the mid cap oil sector as the recent price rout is even more pronounced for these stocks. JP Morgan upgrades Drillsearch to Overweight from Neutral, given the very sharp pull back in its share price. The broker considers the stock is a strong play on a recovering oil price.

Newcrest Mining (NCM) was upgraded to Buy from Neutral by Citi. It is time for Newcrest shareholders to finally reap the benefits of the more than $13 billion capex outlay from the past decade. Following site visits and issuance of a trading update to the ASX, Citi analysts have come to this conclusion.

Transfield Services (TSE) was upgraded to Hold from Reduce by CIMB Securities. Transfield received an offer from Ferrovial Servicios at $1.95 a share. The board has rejected the bid but offered Ferrovial the option of undertaking limited due diligence. CIMB would not be enticed by the prospect of an increased bid emerging and believes shareholders should capitalise on the current elevated price rather than rely on the potential of an increased offer. See also TSE downgrade

Western Areas (WSA) was upgraded to Outperform from Neutral by Credit Suisse. The September quarter production result was excellent in Credit Suisse’s opinion with cash costs impressive and higher-than-expected grades at Flying Fox. FY15 production guidance is unchanged but the broker believes there is a risk it will be upgraded. Credit Suisse upgrades to Outperform from Neutral, given the 15% fall in the share price in the last three months.

In the not-so-good books

G8 Education (GEM) was downgraded to Sell from Neutral by Citi. G8 Education continues doing what it does best: acquiring smaller childcare centres at a steep discount to its own share market valuation. So far so good and it clearly is working.  Citi analysts, however, are starting to have second thoughts. Pointing at the shares’ high PE, Citi analysts would rather buy into Navitas (NVT) or Veda Group (VED), which are trading on similar PE multiples but carry a better “feel”. They believe at some point the G8 business model might come unstuck and when it happens they do not want to be on the register.

Super Retail (SUL) was downgraded to Neutral from Overweight by JP Morgan. At the AGM, the company signalled trading has improved slightly but flat margins have contributed to guidance downgrades. Vehicle and sports division sales growth in the first 16 weeks of FY15 were up 4% and 3% respectively, while leisure was down 8%. JP Morgan downgrades to Neutral from Overweight, noting the problems in leisure are worse than feared and there appears to be less potential for margin recovery in sports.

Transfield Services (TSE) was downgraded to Neutral from Buy by Citi. Given the severe downturn for the resources services sector, Citi is not surprised consolidation is happening. Ferrovial has now made an initial approach for Transfield but the bid might need extra sweeteners to get acceptance, note the analysts. With the share price now above their target, and above the indicative $1.95 offered by the suitor, Citi analysts downgrade the rating to Neutral. See also TSE upgrade.

FNArena 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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