Buy, sell, hold – what the brokers say

Founder of FNArena
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Stockbrokers in Australia are awaiting financial reports from local banks and day-to-day developments in the US, just like everybody else in the finance sector. In the meantime, overall activity has slumped to a virtual standstill. Two sectors that proved responsible for most changes are banks and energy stocks, with Woodside Petroleum receiving both one upgrade and one downgrade, while Santos received one downgrade. Bank of Queensland received two downgrades post the release of its financial results.

One development that might be worth pointing out is that the number of Sell (and equivalent) ratings for the eight stockbrokers under FNArena’s daily coverage has now risen above 19%, not a level I have witnessed often since we started monitoring this more than 10 years ago.

In the good books

CSL was upgraded to Buy from Hold by Deustche Bank. While the Bank thinks the decision to settle the long-running class action in the US is disappointing, given the company considers it did nothing wrong, the recent share price weakness suggests to the broker a buying opportunity as the fundamentals remain robust. The rating is upgraded to Buy from Hold, given the upside potential to the revised price target of $71.00 (from $69.00).

Woodside Petroleum (WPL) was upgraded to Overweight from Neutral by JP Morgan, following a review of its oil price and foreign exchange forecasts. After visits to LNG sites in Japan and South Korea, the broker is more bullish about the tightness of global LNG markets through to 2018. The main potential beneficiary here is Woodside. The rating has been upgraded to Overweight from Neutral. The price target is raised to $39.60 from $39.34.

On the other hand, Credit Suisse downgraded Woodside to Underperform from neutral. CS analysts are predicting tougher times for shareholders in the Australian E&P sector, with key players such as Woodside, Santos (STO) and Oil Search (OSH) being faced with natural decline in the output of their existing sources of production between now and 2020. The analysts have lost a lot of their enthusiasm for the sector. Further analysis suggests sustainable dividend yields will be a lot lower than what investors are currently assuming. On this basis, CS is not positive on Woodside, as sustainable yields are poised to disappoint. The rating is downgraded to Underperform. Price target drops to $35.70 from $40.00.

Macquarie upgraded Independence Group (IGO) to Outperform from Neutral. It believes the ramp up of production at Tropicana will transform the earnings outlook for Independence. The rating has been upgraded to Outperform from Neutral. Delivering on Tropicana and improving cash flow at Jaguar/Bentley are the two positive catalysts that are expected to drive the stock in the next six months. The target is raised to $4.60 from $4.10.

In the not-so-good books

Bank of Queensland (BOQ) was downgraded to Underperform from Neutral by Macquarie, and to Neutral from Buy by UBS, following the release of its annual results and a strong rally in price in the lead up to it. The FY13 earnings improvement was centred on lower impairments and Macquarie expects this to continue as the Queensland economy recovers. The broker believes the bank needs to improve its business model and its strategy will come under scrutiny in FY14. With the share price rally, the market has now more than fully priced success, and Macquarie thinks this is not a certainty as yet. The result was pre-announced, thus in line, and UBS was pleased with the quality in the detail. BOQ has been in “clean up” mode for some time, trying to overcome a troubled loan book. That clean up accelerated in the second half, with non-performing loans falling by 20%. An expansion in net interest margin was also pleasing. BOQ is a “classic” turnaround story, the broker suggests, albeit a new growth phase will bring its own challenges.

JP Morgan downgraded Santos to Neutral from Overweight, following a review of its oil price and foreign exchange forecasts. After visiting Japan’s and South Korea’s LNG sites, the broker is more bullish on the tightness of global LNG markets through to 2018. While expecting Santos to perform reasonably well over the coming 12 months, as the risk profile around delivery of key projects PNG LNG and GLNG diminishes, the company’s recent strong performance means the investment proposition is no longer as compelling to the broker. The rating is downgraded to Neutral from Overweight and the price target is reduced to $14.93 from $15.09.

Note: FNArena monitors eight leading stockbrokers on a daily basis and the tables below are based on data analysis from the week past. The eight experts are: BA-Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, CIMB (formerly RBS) 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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