The broker wrap: FMG, ILU and WRT

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Changes to stockbroker ratings in the past week

Downgrades to ratings by the eight brokers in the FNArena database continue to outweigh upgrades to the tune of 12 ratings reductions over the past week compared with eight increases. Total Buy ratings now stand at 44.79%.


Among the upgrades, the one stock to see more than one increase was Fortescue Metals (FMG), with both UBS and RBS Australia upgrading it to Buy. RBS says Fortescue’s securing of a new debt facility removes short-term funding issues, enough to justify a more positive rating in the broker’s view.

Also upgraded was biotech Acrux (ACR), with RBS suggesting there is now reasonable value in the stock at current levels following share price weakness post a profit downgrade announcement in August. RBS has moved to a Buy rating.

RBS also upgraded Mortgage Choice (MOC) to a Buy following a change in analyst covering the stock. The change has generated adjustments in price target and earnings estimates, while the broker also sees longer-term upside potential from recent acquisitions. An added attraction is Mortgage Choice offers an attractive fully franked dividend yield.

Citi upgraded AGL Energy (AGK) to Buy as the broker sees upside from the optionality in electricity retailing in NSW that the company has developed in recent years. The upgrade has no impact on Citi’s earnings estimates or price target.

Westfield Retail (WRT) was upgraded by UBS to Buy on valuation grounds as the stock has underperformed in relative terms against the A-REIT index in recent weeks. UBS makes no changes to earnings forecasts or price target.

Both Graincorp (GNC) and Iluka (ILU) were upgraded to Buy by JP Morgan, the former on valuation grounds as the share price has fallen more than 10% since the recent edible oil assets acquisition. For Iluka, JP Morgan expects higher zircon prices to continue until at least 2015, which supports a solid earnings outlook for the company. Also positive is Iluka’s strong balance sheet, good management and unique assets.


But Macquarie is less positive and has downgraded Iluka to Neutral as recent share price gains suggest limited valuation upside from current levels. Changes to commodity price forecasts resulted in Macquarie lifting its price target modestly.

Macmahon Holdings (MAH) was downgraded by three brokers, with RBS and Macquarie moving to Hold and UBS to Sell following a rather severe profit warning from the company. Earnings estimates and price targets for Macmahon received the chainsaw treatment across the market. Macquarie suggests a more cautious view on the company is now justified as the market will want some evidence with respect to the consistency of earnings before any re-rating occurs. UBS also sees an uncertain earnings outlook and suggests this risk is reason enough to exit the stock.

James Hardie (JHX) has also been downgraded by two brokers, BA Merrill Lynch moving to a Neutral rating and UBS to Sell. For UBS, the issue is value as the stock is viewed as simply too expensive at current levels, while BA-ML moves to a more cautious view as the current share price leaves little wriggle room for any earnings disappointment relative to expectations.

Among iron ore plays, both Atlas Iron (AGO) and Grange Resources (GRR) have been downgraded by Macquarie, this following revisions to the broker’s commodity price forecasts. In the case of both, recent share price gains add weight to the downgrades.

Citi downgraded CSR (CSR) to Sell, reflecting the view non-residential and engineering work is likely to decline in coming years, impacting CSR’s earnings, which are already under pressure from weak residential construction activity.

BA-ML has downgraded Sydney Airport (SYD) to a Sell. Solid traffic numbers for August and expectations this trend will continue are not enough to be more positive as the good news is already priced into the stock in the broker’s view.

RBS has downgraded TPG Telecom (TPM) to Sell. Full year earnings for FY2012 were solid, but the earnings growth outlook for the stock isn’t good enough in the broker’s view to justify the stock’s current premium to the sector.

For (WTF), UBS has moved to a Neutral rating on news the CEO has resigned. This creates uncertainty in the broker’s view, which limits the scope for any share price outperformance in the shorter-term.

Note: FNArena monitors eight leading stockbrokers on a daily basis. The eight experts are: BA-Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, RBS and UBS.

Changes to earnings forecasts (EF) in cents per share

Important information: 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. Anyone should consider the appropriateness of the information in regards to their circumstances.

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