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Price target lowered

Energy Resources Australia (ERA)

 

Chart: Share price over the year to versus ASX200 (XJO)

 

Share Price: $1.415

Price target: $1.08 (UBS), $1.40 (RBS)

Broker Calls: UBS – Sell, RBS – Sell

P/E: 113.33

Market Cap: $733 million

After plunging 88% over the past 12 months, ERA is still searching for the bottom. A rally along with the rest of the market in October was all but given back in November and the stock is now wallowing back near the low hit in early October of $1.34 a share.

In short, brokers believe the stock is a basket case and that there’s more pain to come. Nicholas Brooks from RBS Morgans has a sell on the beaten down uranium miner.  ‘The company recently announced a $500 million capital raising for works at its Ranger uranium mine in the Northern Territory,’ he says. ‘But we see significant risks around the upcoming wet season, difficulties in gaining a mining lease extension and potential upwards revision to several costs. Sell.’ 

Even after the rally in October brokers were warning investors off the stock. Citi sees it as high risk, while Credit Suisse, Macquarie and Merrill Lynch have an underperform on the company. UBS and RBS suggest investors flee while they can, with a sell on ERA. 

 

Downgrades

Nufarm (NUF)

 

Chart: Share price over the year versus ASX200 (XJO)

 

Share Price: $4.48

Price target: $4.40 (JP Morgan)

Broker Calls: JP Morgan – Underweight, RBS – Downgrade to Hold

P/E: 12.3

Market Cap:  $1,174 million

After running more than 15% over the past three months, brokers belive that this may be a good chance to exit Nufarm. Things just aren’t looking good at the agricultural giant.

Nufarm had some significant one-off charges the company made on both the Brazilian operations and Receivables due from Monsanto, impacting its bottom line.  While the drop in profit between FY 2008 and FY2009 could be attributed to the GFC, the numbers show that the company significantly underperformed in 2010.  The negative earnings surprise in that year stunned share market participants and share price dropped accordingly from over $10 to just $3.25.  The company’s decline in revenues continued unabated into Fiscal Year 2011.  

While these numbers are less than impressive, the share price movement for NUF over the last five years is even bleaker.  Here is a five year chart, comparing the share price movement of NUF against the performance of the ASX 200 – the XJO.

Prior to the GFC NUF was outperforming the market but its share price fell sharply as a result of the crisis.  As you can see, NUF’s share price began to recover sooner than the rest of the market but the drop in NPAT from 123 million in 2008 to 64 million in 2009 started the shares in a downward trend from which they have yet to recover.  Since the second quarter of 2010, NUF has unperformed against the XJO.

The group has recognized an impairment loss of $70,004,000 for its Brazil CGU.  The Brazil CGU has incurred losses in recent years and has not met financial targets due to a number of product, market, and economic factors that impacted the business.

Two issues should concern you. First, if these have been ongoing losses spanning years, why has management been so slow to react. The second is the nature of the Brazilian economy.  They are already the world’s largest exporter of orange juice, sugar, coffee, and tobacco.  Experts tell us they will pass the United States as the world’s largest exporter of agricultural products within the next decade.

Even the most risk tolerant investors should take the time to see if they could learn how NUF can have “operational issues” in the world’s second largest agricultural producer.

 

Sells

Primary Health (PRY)

 

Chart: Share price over the year versus ASX200 (XJO)

 

Share Price: $3.24

Broker Calls: Morningstar – Sell, RBS – Sell

P/E: 14.38

Market Cap: $1,621 million

Peter Rae from Morningstar has a firm sell on Primary Health with a fair value estimate of just $2.57. ‘PRY is the largest domestic pathology provider, but also generates revenue from radiology and medical centres,’ says Rae. ‘While age demographics are favourable, pathology funding cuts and collection centre deregulation adds some industry uncertainty as market entrants adapt to the new regime.’ Rae notes that debt is high and interest cover is low at less than three times, which leaves little room for any downturn in profits.

Paul Shephard from RBS also has a sell on PRY. ‘Adjusted full-year 2011 results were weaker than expected, with flat top-line growth and declining margins,’ says Shephard. ‘Positive trends are evident across divisions, and capital structure concerns appear to be addressed…but we believe visibility is lacking and profitability metrics remain soft.’

Other brokers aren’t necessarily ready to give up on the service provider just yet, but they’re hardly glowing in their analysis. Sean Conlon from Macquarie has a hold on the stock but harbours ‘concerns about a possible rise in general practitioner churn given the material effect it may have on Primary’s cash flows.’

 

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