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The broker wrap: sell warnings rise

Changes to broker ratings in the past week

[1]Downgrades to company ratings by brokers in the FNArena database outweighed upgrades this week by a score of 12 to nine, leaving total Buy ratings at 50.03%.

Upgrades

Among the upgrades was Billabong (BBG), where UBS lifted its rating to Neutral on news of yet another approach from private equity play TPG. UBS’s valuation has increased in line with the offer of $1.45 per share, though Citi went the other way and downgraded to a Neutral rating from Buy given the share price reaction to TPG’s approach and the conditional nature of its proposal.

Newcrest (NCM) was also upgraded by UBS to Buy after delivering a solid quarterly production report. While delivery of key projects remain a major driver for the stock, UBS sees improved value following recent share price weakness, which justifies the upgrade in rating.

The June quarter production report also saw UBS upgrade OZ Minerals (OZL) to Neutral, the move again based on improved valuation stemming from recent share price weakness. The quarterly report resulted in cuts to UBS’s earnings estimates and price target, a move matched by others in the market.

A positive trading update from Nufarm (NUF) included an increase in full-year earnings guidance. JP Morgan lifted its rating upgrade to Neutral, which reflects both favourable conditions in Australia and positive momentum in the ongoing process of repositioning the business.

While trimming its earnings estimates and price target, Credit Suisse upgraded QR National (QRN) to Neutral based on revised total expected shareholder return expectations. A softening demand profile remains the broker’s main concern.

RBS Australia thinks recent share price weakness has presented a buying opportunity in Seek (SEK) as buying the stock in periods when job ads are under pressure has typically paid off. Minor changes to forecasts caused the broker to trim its price target.

Citi says there is potential for Sigma Pharmaceutical (SIP) to start distributing excess capital to shareholders, with any such increase in payouts likely to generate a share price re-rating. It’s recommendation has been upgraded to Buy.

Downgrades

Among the downgrades, BC Iron (BCI) continues to deliver operationally according to UBS, but revisions to iron ore price expectations see the broker lower earnings forecasts from full-year 2013. The changes mean a cut in price target and cause the broker to downgrade to a Neutral rating.

Both UBS and Citi downgraded GUD Holdings (GUD) to a Sell, the former from Buy and the latter from Neutral. The changes came after a full year profit result lower than had been expected and limited upside potential given what remains difficult operating conditions.

Limited total return potential is also the reason behind Credit Suisse downgrading Goodman Fielder (GFF) to Sell, as the broker simply sees little scope for outperformance in the current environment.

BA-Merrill Lynch has downgraded a couple of resource plays, moving to Sell ratings on both Grange Resources (GRR) and Intrepid Mines (IAU) from Buy in both cases. For Grange, operational issues have impacted production expectations and there are some management changes coming, while for Intrepid, the suspension of operations at Tujuh Buki has added significantly to the investment risk associated with the company.

Higher cash costs have impacted Macquarie’s earnings forecasts for Kingsgate (KCN), but the bigger issue is the potential for higher external funding requirements for the Nueva Esperanza project. This has been enough for Macquarie to downgrade it to Neutral.

Expectations for a continuation of the trend of declining traffic for Macquarie Atlas’s (MQA) core APRR asset has seen JP Morgan revise its model for the company. Along with a cut in price target, the broker has downgraded to a Sell rating from Neutral.

Recent share price outperformance and some minor changes to forecasts and price target have been enough for Credit Suisse to downgrade Stockland (SGP) to Neutral, while UBS has similarly downgraded Westfield Retail Trust (WRT) on valuation grounds.

Changes to earnings forecasts (EF) in cents per share

[2]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.

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