Forsyth Barr drops five-prong company rating system

Forsyth Barr says its new ratings system is simpler and has greater integrity.

Previously, the broking firm had an absolute return approach for the 66 listed companies it covers, but, from today, it has adopted a relative returns methodology.

That means each rating will be relative to all other companies under coverage.

A research note written by head of private wealth research Rob Mercer and private wealth analyst Florian Burch, and released on Friday, says relative returns is less “bulky”, with three ratings (outperform, neutral and underperform) compared to five (buy, accumulate, hold, reduce and sell) and will have greater integrity.

“The new rating approach will remove any underlying directional bias across our team (historically a low number of reduce and sell recommendations).”

Friday’s note showed the firm had eight buy recommendations, including five in the utilities sector, 22 tagged accumulate, 28 in the hold category, seven reduce calls and just one sell (Xero).

Now, there are 25 companies rated outperform, 23 neutral and 16 underperform.

An estimated total return (ETR) – the 12-month capital return, being the difference between the current share price and Forsyth Barr’s target price, plus the next 12 months’ dividend yield – will still be generated for each company but, the note says, the ETR hurdle for an existing “hold” recommendation will be lower than for a new “neutral” rating.

“As a result some companies with hold recommendations will be rated underperform under the new structure.”

One company to suffer under the new system is New Zealand’s largest listed company by market capitalisation Fletcher Building – which is rated underperform despite its positive ETR.

Another high-profile company, Air New Zealand, goes from buy to neutral.

On the new rating system, the top five stocks are: Pumpkin Patch, Bathurst Resources, Infratil, Chorus, and New Zealand Refining, while the bottom five are Xero, Wynyard Group, Fonterra Shareholders’ Fund, Auckland International Airport and Guinness Peat Group.

dwilliams@nbr.co.nz