Australia | Oct 26 2015
This story features QBE INSURANCE GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: QBE
By Rudi Filapek-Vandyck, Editor FNArena
Guide:
The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, Morgan Stanley, Morgans and UBS.
For the purpose of broker rating correlation, Outperform and Overweight ratings are grouped as Buy, Neutral is grouped with Hold and Underperform and Underweight are grouped as Sell to provide a Buy/Hold/Sell (B/H/S) ratio.
Ratings, consensus target price and forecast earnings tables are published at the bottom of this report.
Summary
Period: Monday October 19 to Friday October 23, 2015
Total Upgrades: 2
Total Downgrades: 10
Net Ratings Breakdown: Buy 45.71%; Hold 42.63%; Sell 11.67%
This might seem like a strange turn of events, given major share market indices in Australia are still in negative territory year-to-date (ex-divs), but the week ending on Friday, 23 October 2015, saw no less than ten downgrades for individual stocks against two upgrades only.
One of the upgrades was for Telstra, following recent underperformance, and went only up to Neutral. The other was for QBE Insurance, following in-depth research discovering the outlook might turn out better for the global insurer.
Broker downgrades for the week were mostly for resources stocks, and most were inspired by too-high share prices, at least for the short term. Gold producer Regis Resources copped three downgrades, but features positively elsewhere (proving the point broker downgrades are valuation oriented). The same can be said for sector peers Perseus Mining and Evolution Mining, though not for iron ore producer Grange Resources and for lithium hopeful Orocobre, whose market updates received a negative response.
Vitamin and nutrients producer Vitaco features also as more stockbrokers initiate coverage. Also remarkable are double-digit increases to profit estimates for iron ore producers Arrium and Rio Tinto. While Australian Pharmaceutical Industries and DUET make sure there's also an industrial (non-resources) contribution to last week's positive story.
Upgrade
QBE INSURANCE GROUP LIMITED ((QBE)) Upgrade to Buy from Neutral by UBS .B/H/S: 6/2/0
UBS has revisited its expectations for QBE and has become less negative on the cyclical trends in both personal and commercial lines in Australia.
Although the company still faces some unique challenges the broker believes it is the most attractive exposure across the general insurers.
UBS upgrades to Buy from Neutral. Target is steady at $14.50.
TELSTRA CORPORATION LIMITED ((TLS)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/6/2
Telstra has copped some selling recently on concerns over competition and uncertainty over the company's investment strategy, Macquarie notes. The broker nevertheless sees this as priced in and believes the macro backdrop remains broadly supportive for defensive stocks.
The sell-off has also pushed up Telstra's dividend yield. Ahead of the company's investor day on Oct 29, Macquarie has upgraded to Neutral. Target unchanged at $5.85.
Downgrade
ASCIANO GROUP ((AIO)) Downgrade to Underperform from Outperform by Credit Suisse .B/H/S: 1/5/1
Credit Suisse suspects that to get ACCC approval of the Brookfield acquisition there needs to be significant changes to the regulatory framework for Brookfield rail and the Dalrymple Bay coal terminal.
This could change the risk/reward profile for Brookfield and require a lengthy process. Credit Suisse lowers its valuation of Asciano to a standalone basis and downgrades to Underperform from Outperform. Target is reduced to $7.00 from $9.15.
BHP BILLITON LIMITED ((BHP)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/5/0
Citi analysts found BHP delivered a "solid" quarterly production report, but incorporating the latest commodity prices forecasts has once again triggered further reductions to profit estimates. This time copper and coking coal are the main culprits, only partially offset by a mark-to-market upgrade for iron ore.
Reductions in forecasts have triggered a fall in price target; $24 instead of $26. Rating has been downgraded to Neutral from Buy. On Citi's calculations further cuts to capex would need to be made "given the progressive dividend policy appears to be sacrosanct".
GRANGE RESOURCES LIMITED ((GRR)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/1/2
Grange saw better than expected prices in the Sep Q and lower costs, but sales were weaker and inventory build greater than Macquarie expected, while working capital appears to have increased significantly. The result is a $10m drop in the company's cash balance.
Grange is the only iron ore producer under coverage to have seen a fall in cash balance in the quarter, Macquarie notes. Downgrade to Underperform, target falls to 9c from 11c.
MANTRA GROUP LIMITED ((MTR)) Downgrade to Neutral from Buy by UBS .B/H/S: 4/2/0
The share price has appreciated 24% since the FY15 result and UBS observes, during this period, there has been continued downward pressure on the Australian dollar supporting the domestic travel market.
Earnings are likely to be driven by growth in accommodation demand and new property additions to the company's portfolio. With this in mind UBS downgrades to Neutral from Buy. Target is raised to $4.00 from $3.84.
NEWCREST MINING LIMITED ((NCM)) Downgrade to Neutral from Buy by Citi and Downgrade to Hold from Add by Morgans .B/H/S: 1/3/4
Citi has downgraded Newcrest Mining to Neutral from Buy following what the analysts label a "softer, as expected" quarterly performance. The downgrade itself, explain the analysts, is based on valuation.The shares are up 11% in October.
The analysts highlight Australia's largest gold producer (and copper) is in a much stronger position both operationally and financially than it was 12 months ago. Potential catalysts include AUD gold price, news of Cadia East ramp-up, mill throughput/recoveries and the optimisation study at Lihir. Target price has gained 10c to $14.60.
The company's September quarter production was slightly short of Morgans expectations. Maintenance issues tempered the upside but the broker expects a solid rebound in the December quarter.
Morgans believes the company is in a comfortable position to reach the lower end of its 2.5-2.6m oz guidance.
The broker downgrades to Hold from Add, given the stock is now trading close to valuation. Target is raised to $14.34 from $14.30.
PERSEUS MINING LIMITED ((PRU)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/4/0
Perseus' Sep Q production was below Macquarie's forecast on lower Edikan grades but met the lower end of the guidance range. Costs were lower than expected.
Cost reductions provide a positive trade-off against what now look like lower grades ahead after a sterling FY15, the broker suggests. But the company has introduced some uncertainty in deciding to look at self-funding Sissingue rather than borrowing as originally planned. Macquarie thus downgrades to Neutral. Target falls to 40c from 48c.
REGIS RESOURCES LIMITED ((RRL)) Downgrade to Sell from Hold by Deutsche Bank and Downgrade to Neutral from Buy by Citi and Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 2/3/3
The September quarter is tracking ahead of of FY16 guidance with the beat driven by Rosemont and gold output 21% above Deutsche Bank's forecasts.
As Garden Well is incrementally improving the broker's attention is now on the attempts to add to mine life. Results from Baneygo impressed Deutsche Bank and nominal exploration value is raised to $100m from $50m.
The price target is raised to $1.60 from $1.50. Rating is downgraded to Sell from Hold on valuation.
Regis' Sep Q production beat Citi's forecast and costs came in lower. The broker has increased forecast earnings on a sight upgrade to gold price expectations.
Sustained operational improvements at Duketon have seen Regis' share price rally 33% in a month and 66% in six months, hence Citi is pulling back its rating to Neutral. Target rises to $2.13 from $1.97.
The company has made a strong start to FY16, Credit Suisse observes, with a solid production outcome in the September quarter.
Credit Suisse believes the outlook has materially improved, driven by significant exploration success.
The broker downgrades to Underperform from Neutral given recent share price gains. Target is raised to $1.90 from $1.45.
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Negative Change Covered by > 2 Brokers
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CHARTS
For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED
For more info SHARE ANALYSIS: GRR - GRANGE RESOURCES LIMITED
For more info SHARE ANALYSIS: MTR - STRATA INVESTMENT HOLDINGS PLC
For more info SHARE ANALYSIS: NCM - NEWCREST MINING LIMITED
For more info SHARE ANALYSIS: PRU - PERSEUS MINING LIMITED
For more info SHARE ANALYSIS: QBE - QBE INSURANCE GROUP LIMITED
For more info SHARE ANALYSIS: RRL - REGIS RESOURCES LIMITED
For more info SHARE ANALYSIS: TLS - TELSTRA GROUP LIMITED