Some Conviction, Some Lack Of, And A Warning

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This story features BHP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: BHP
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Rudi Filapek-Vandyck

Goldman Sachs has returned from Potash Corp-related research restriction with a Conviction Buy on BHP Billiton ((BHP)). This means the stockbroker has not only reinstated its previous positive view on BHP shares as an investment, it has elevated the stock to its select list of Buys-with-Conviction. The new twelve month price target of $59.85 suggests, on yesterday's closing share price, upside of no less than 37.9%.

It has to be noted, Goldman Sachs' new price target is by far the highest we have seen (so far) and none of the eight major stockbrokerages covered daily via the Australian Broker Call Report comes even close, with UBS's price target, though the highest among peers, still "only" at $52. As such, the consensus price target as calculated by FNArena doesn't reach higher than $49.15. Mind you, this is still more than 10% above where BHP shares are trading at on Tuesday morning.

Adding BHP to the Conviction List wasn't the only change made at Goldman Sachs this week, iron ore stock Mount Gibson ((MGX)) was removed at the same time, with Goldmans suggesting the value of the shares have become somewhat of a problem, also because the inhouse view is that iron ore prices have but one way to go, on a 2-5 year horizon, and that is south. On a shorter-term timeframe, however, strong prices continue to be expected. Note Mount Gibson may have lost its spot on the Conviction List, but it has kept its Buy rating at Goldman Sachs.

Other stocks that remain on the Conviction List are Aquarius Platinum ((AQP)), Iluka ((ILU)), News Corp ((NCP)), PanAust ((PNA)), Seek ((SEK)), Ten Network ((TEN)) and Wesfarmers ((WES)).

In summary, it is only fair to conclude Goldman Sachs' conviction at this point lies with the overall resources theme plus media which would be a laggard/valuation catch up argument.

Talking about resources, commodity analysts at Citi do little to hide their disappointment with the fact they are being forced to issue a negative view on copper equity stocks in Australia. This comes despite recent price increases and despite Citi being among the copper bulls in the market (most experts are). The reason is simple: too high valuations being priced in by investors already. Hence why Citi decided to downgrade, to Sell, OZ Minerals ((OZL)) and the above mentioned PanAust. Obviously, one would have to conclude that Goldman Sachs is projecting much more upside for copper price ahead than Citi is willing to contemplate.

For what it's worth, Citi analysts have lined up all the good things that have supported share prices for copper companies over the months past, and they include:

– Increasing M&A activity in the mining space;
– Operational de-risking as projects have ramped up to nameplate capacity;
– QE2, associated US$ weakness and commodity price strength;
– A general increase in risk-appetite

Strategists at RBS have revised the formula behind their High Conviction Calls, which now come in pairs: one long, one short inside peer groups. The last update of this list was released on Friday. As such, RBS would recommend investors should sell stock in CommBank ((CBA)) and use the proceeds to buy shares in ANZ Bank ((ANZ)) instead. Also, and on similar peer-comparison, Boart Longyear ((BLY)) is expected to outperform Leighton Holdings ((LEI)), while Tabcorp ((TAH)) should do much better than Tatts ((TTS)). Asciano ((AIO)) should outperform Brambles ((BXB)), Rio Tinto ((RIO)) should outperform Energy Resources of Australia ((ERA)), and Coca-Cola Amatil ((CCL)) should perform better than Foster's ((FGL)).

Other pair-suggestions are Sonic ((SHL)) versus Primary ((PRY)), Suncorp-Metway ((SUN)) versus AXA Asia-Pac ((AXA)) and OneSteel ((OST)) versus Simms ((SGM)). Now that we have had a positive market update by Brambles, plus a take-over for AXA Asia-Pac it will be interesting to see whether this has impacted on some of these pairs.

The remaining three pair suggestions are Fairfax ((FXJ)) versus Ten (which is one other discrepancy with Goldman Sachs), SingTel ((SGT)) versus Telecom NZ ((TEL)) and Macquarie Airports ((MAP)) versus Intoll ((ITO)).

Note also that RBS has pulled back its forecast for the ASX200 by late December to 5000 from 5300 previously. It's only six weeks before we head into a new calendar year.

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