Treasure Chest: Broker Conviction

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By Greg Peel

When David Jones ((DJS)) announced its first half result last week, analysts were expecting a 20% fall in profit which proved accurate. They also expected guidance to another 20% fall in the second half, notwithstanding what the announcement of a new strategy might bring. As it was, the strategy entailed DJS going on a spending binge in order to bring last century's failing department store model up to date with this century's multi-channel retail experience. After these costs were included, fresh guidance was for a 40% fall in FY12 profit followed by flat growth in FY13-14.

Analysts were a little taken aback, but all agreed this new strategy was both necessary and sound. However, it did imply a serious re-basing of earnings forecasts, and not all analysts believe the market has sufficiently de-rated the stock on this basis. Most were also of the belief that flat growth in FY13-14 might be an overly ambitious call at this stage. Hence three out of the eight brokers in the FNArena database downgraded DJS to Sell to make five Sell ratings in total. One (Citi) decided to stay bravely on Neutral, but another decided to swim against the tide of opinion.

Macquarie took a couple of days to think about it, and then decided to upgrade DJS to Buy (Outperform). On Friday the analysts went one step further and added DJS to their positive conviction list, that which they call Macquarie Marquee Ideas. These are stocks with Outperform ratings for which the analysts hold a particularly strong conviction.

In bucking the peer trend on DJS, Macquarie admits it is throwing up a bit of a “what if” proposition. Sure, earnings forecasts have been slashed but so has the DJS stock price, the analysts note, and it has not been this low since 2006. The analysts are now looking for a typical “relief rally” and investment from those bold enough to take a bet on the company actually succeeding is restoring sales growth, with its transformation improving perception on the department store's ability to compete in the new multi-channel retail age.

Not nearly as controversial is the addition to Marquee Ideas of resource sector engineering solutions provider RCR Tomlinson ((RCR)). Macquarie has great faith in the newly appointed management team and likely realisation of earnings potential over the medium term. RCR has trimmed back to be leaner and meaner and the recently won $600m Fortescue Metals ((FMG)) contract provides a springboard for RCR to the tier one level of engineering service provision, Macquarie analysts believe.

Fortescue itself has provided around a 25% return since Macquarie added the stock to its Marquee Ideas in January. While the analysts retain an Outperform rating on FMG, the rally suggests an easing of conviction at the new valuation and hence FMG is no longer a Marquee Idea.

Macquarie now has high conviction calls on AGL Energy ((AGK)), CSL ((CSL)), David Jones, Newcrest ((NCM)), Rio Tinto ((RIO)), CFS Retail Property ((CFX)), Mermaid Marine ((MRM)), RCR Tomlinson, SAI Global ((SAI)), Seven Group ((SVW) and Virgin Australia ((VAH)).

JP Morgan's Asia Pacific research team has launched a new list of high conviction calls from across the region, which it calls its Asia Analyst Focus List, for the benefit of Asian investors. On the basis of the analysts' valuations, JPM's Focus List includes stocks on Overweight ratings which have a current average of 30% upside, along with stocks on Underweight ratings which currently show an average 17% downside.

The list includes stocks from China, India, Indonesia, Malaysia, the Philippines, South Korea, Taiwan, Thailand, Japan and Australia. At present there are two stocks included from Australia, being AGL Energy on Overweight and Treasury Wine Estates ((TWE)) on Underweight.
 

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