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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.

More by David Williams

Comments and questions

Brilliant!, another new scorecard to be the envy of National Standards school reporting.... and a TLA, ETR, we can all rely on....

Forsyth Barr got it wrong when it came to Xero on one too many occasions. I wonder what everyone who listened to Forsyth Barr is thinking now that Xero is $40+? What is their word / system really worth when they missed the shuttle to the top of NZX?

Oh c'mon now. They can't get them all right, and there is more to the NZX than a tech company prices on anticipated 2020 earnings. Forsyth Barr were also big backers of Ryman, Mainfreight, Summerset, Fisher and Paykel appliances and countless others back in 2011 and early 2012. They may not be tech stock whizz kids like some other brokers, but they have their winners (and losers) just like all the others.

I think the job of an analyst is to attempt to predict intrinsic value rather than pick where irrational exuberance pushes a share price to.

They never got South Canterbury Finance wrong they just never told anyone.

The real issue is not relative to the other companies they follow (which is a very small subset of the market anyway), but more relative performance of the funds they manage to the competition.

If the FMA really want to look for a big improvement in the performance of the Funds Management Industry then they will force all firms and advisors undertaking discretionary management to publish portfolio performance by accounts - ie show what a variance exists between their few good accounts (often quoted) and their worst performaning accounts and the fees owed. That would stop churn over night.

With over $6 billlion in these managed accounts their is no transparency on the performance and no accountability. I cannot work out why the FMA havent focused on this - but then we know the FMA knows jack about the market aka David Ross. This would affect all advisors not just Forbar, and would be good to see publlished data on Craigs, Were's, Chris Lee and Hamilton Hindin in this area.

Agree with the top 5 rated - especially companies as Chorus which will come back with >100% growth within 24 month. If the price regulations aren't dropped then current price levels can be kept by charging for bandwidth. Better agreements with Crown Fibre and further cost reductions will ensure even far better returns/ devidends in the near future.

A simpler system designed to create more churn?