Weekly Reports | Oct 30 2017
This story features BLACKMORES LIMITED, and other companies. For more info SHARE ANALYSIS: BKL
By Rudi Filapek-Vandyck, Editor FNArena
Guide:
The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.
For the purpose of broker rating correlation, Outperform and Overweight ratings are grouped as Buy, Neutral is grouped with Hold and Underperform and Underweight are grouped as Sell to provide a Buy/Hold/Sell (B/H/S) ratio.
Ratings, consensus target price and forecast earnings tables are published at the bottom of this report.
Summary
Period: Monday October 23 to Friday October 27, 2017
Total Upgrades: 6
Total Downgrades: 10
Net Ratings Breakdown: Buy 41.68%; Hold 42.29%; Sell 16.03%
The Australian share market, as represented by the ASX200, has finally broken out of its tight trading range in October, effectively doubling total return for the calendar year to date within 31 days. But the move had no support to speak of from the stockbroking community with analysts continuing issuing more downgrades than upgrades in ratings for individual ASX-listed stocks, including the all-important major banks and diversified resources companies.
The general picture remained the same for the week ending Friday, 27th October 2017. FNArena counted a grand total of six upgrades during the week, again outnumbered by ten downgrades.
Of course, it doesn't help when long time suffering shareholders in iSentia are yet again being battered following yet another disappointing market update. The stock received one downgrade post the event, but target prices have been slashed further. Nickel/gold producer Independence Group received two downgrades to Sell on sharp share price appreciation.
ANZ Bank also failed to meet market expectations and it too received one downgrade post the FY17 release, with targets equally under downward pressure.
Four out of six upgrades moved to Buy, with Blackmores, GPT, Nufarm and Stockland all receiving one such upgrade each. Four out of the ten downgrades fell to Sell.
Blackmores was the surprise package for the week. Its consensus price target jumped by 28% easily taking top spot on the week's table for positive revisions. At arm's length follow Vocus, Stockland, and … Independence Group. The negative side is sparsely populated with a sharp fall in targets for Fletcher Building drawing attention, following yet more disappointing news.
The table for positive amendments to earnings estimates brings up different names; Mt Gibson on top, then Aristocrat Leisure, followed by Alumina Ltd, Santos and Synlait Milk. The negative side is almost an all-resources affair with Independence Group suffering most, followed by Fletcher Building, Senex Energy, Fortescue Metals, Western Areas, Northern Star, and others.
While ANZ disappointing doesn't necessarily prevent its banking peers from performing better in November, it does show the valuation limit struggles at the top end, while the many cuts and reductions for smaller energy producers and miners signals no free lunch on that part of the market either. Clearly, bullish dynamics in the Australian share market are favouring smaller cap industrials, though many are already trading at or above targets.
Investors will be hoping there's more positive news a la Macquarie Group to come out of the woodwork during AGM season which is now running at full speed.
Upgrade
BLACKMORES LIMITED ((BKL)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/1/0
The company has reported 28% growth in its China "direct" channel and is confident about brand health and sales activity emanating from China. Credit Suisse upgrades expectations for growth in direct sales to China to 25% from 10%.
The change in view results in an upgrade to earnings for FY19-23 of 8-17%. The broker abandons its DCF valuation, upgrades to Outperform from Neutral and raises the target to $150 from $95.
GPT ((GPT)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/2/1
REIT specialists at Citi remain of the view that changing conditions for bricks and mortar retailers in Australia are structural, not cyclical. As a direct result, argue the analysts, retail landlords (as in: retail REITs) are not as attractive as their weak share prices might suggest.
Citi analysts believe retail exposure through diversified property owners such as GPT is a much better option, as they benefit from significant non-retail parts of the portfolio. GPT has now been upgraded to Buy from Neutral. Target price lifts to $5.59.
JAMES HARDIE INDUSTRIES N.V. ((JHX)) Upgrade to Neutral from Sell by Citi .B/H/S: 4/3/0
Citi expects the Texas re-build to be protracted, limiting the pressure on the James Hardie network capacity that has been re-configured to meet market demand and recapture some market share leakage. Hence, the broker upgrades to Neutral from Sell. Target is raised to $20.10 from $16.00.
Citi expects pricing growth will exceed inflation and the more profitable renovation segment act as a tailwind. Network configuration could provide margin benefits on lower unit manufacturing costs and freight.
The broker is increasingly confident that the issues of capacity are behind the company and that management has market share firmly in hand.
NUFARM LIMITED ((NUF)) Upgrade to Add from Hold by Morgans .B/H/S: 3/3/1
The company will purchase the European product portfolio called "Century", to be divested because of competition requirements arising from ChemChina's acquisition of Syngenta.
Morgans notes, importantly, the acquisition generates materially higher margins and has a stronger cash flow conversion than Nufarm. The acquisition is expected to significantly strengthen the scale and product offering of the company's European business.
Based on an attractive growth profile and undemanding valuation Morgans upgrades to Add from Hold and raises the target to $10.00 from $9.20.
STOCKLAND ((SGP)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/1
Credit Suisse calculates a $470m build up of deferred profit with underlying residential price growth not taken into account by the company on lots sold over the past three years.
Moreover, strong price growth in Melbourne land markets over FY17 means the Victorian portfolio is now deeply in the money.
On conservative forecasts the broker envisages margins averaging 18% to FY20. Credit Suisse upgrades to Outperform from Neutral. Target is raised to $4.71 from $4.56.
VOCUS COMMUNICATIONS LIMITED ((VOC)) Upgrade to Hold from Reduce by Morgans .B/H/S: 1/7/0
Morgans is now more confident that management is making progress on reshaping the business. FY18 guidance is unchanged and the company has announced plans to sell the NZ business.
Morgans calculates a divestment would mean operating earnings drop by -17% but gearing would also fall and take pressure off the balance sheet.
Morgans upgrades to Hold from Reduce. Target is raised to $2.78 from $2.22.
Downgrade
ABACUS PROPERTY GROUP ((ABP)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/0/1
REIT specialists at Citi remain of the view that changing conditions for bricks and mortar retailers in Australia are structural, not cyclical. As a direct result, argue the analysts, retail landlords (as in: retail REITs) are not as attractive as their weak share prices might suggest.
Abacus Property's rating has been downgraded to Sell from Neutral, while the price target has been pushed up slightly; to $3.30 from $3.27.
ASALEO CARE LIMITED ((AHY)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/3/0
Credit Suisse downgrades 2018 forecasts for earnings per share by -15% on the back of its recent paper/pulp research. China's import restrictions on recycled paper are creating distortions in other paper commodities, the broker observes.
The broker suspects pulp price relief may come in December as China must ultimately relax its restrictions to avoid a shortage of paper products. Rating is downgraded to Neutral from Outperform. Target is reduced to $1.55 from $1.70.
AUSTRALIA & NEW ZEALAND BANKING GROUP ((ANZ)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/6/0
Citi found the FY17 cash earnings results weak. A substantial fall in bad debts in the second half enabled the bank to deliver a result in-line with forecasts.
Despite the re-balancing, Citi believes the institutional division remains a structural disadvantage for ANZ.
Rating is downgraded to Neutral from Buy as activity is not converting into a commensurate uplift in returns. Target is reduced to $30.00 from $31.50.
FLETCHER BUILDING LIMITED ((FBU)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/2/1
The company's Board has indicated another strategic review of the portfolio is in place, even prior to the arrival of the newly appointed CEO, point out analysts at Citi. They don't like it. It is seen as creating a lot of uncertainty at a time when underlying earnings growth is uncertain already.
Rating has been downgraded to Neutral from Buy, with a new target price of NZ$8.00. The analysts are asking the question whether a flat market outlook suggests a construction cycle peak is near?
Earnings estimates have been culled.
INDEPENDENCE GROUP NL ((IGO)) Downgrade to Underperform from Neutral by Credit Suisse and Downgrade to Sell from Neutral by Citi .B/H/S: 1/3/2
September quarter revealed a solid start as Nova ramps up to nameplate. Credit Suisse notes material movements were sustained at Tropicana and the underground study is progressing.
The broker downgrades to Underperform from Neutral on valuation. Target is raised to $3.70 from $3.35.
Citi analysts agree with Mr Market; production performance is meeting expectations and the Nova ramp up is on schedule. It's just that the share price has run too far up. Hence, Citi has now downgraded to Sell from Neutral.
On the analysts' calculation, the share price is now incorporating nickel priced at US$6.15/lb; this is well above spot and what Citi analysts at this stage are prepared to put into their modeling.
Target price falls to $3.50 from $3.67 as earnings estimates have been trimmed.
ISENTIA GROUP LIMITED ((ISD)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 0/3/0
Deutsche Bank believes the trading update highlights serious questions regarding the handling of the business. The company has guided to FY18 operating earnings of $32-36m, representing a miss of -21-30% to prior consensus estimates.
The decline has been attributed to churn experienced over the first half but Deutsche Bank believes the shortfall should have been apparent earlier.
A blow-out in operating expenditure is even more perplexing for the broker and suggests the business is under competitive and structural pressure. Rating is downgraded to Hold from Buy. Target is reduced to $1.10 from $2.20.
LIVEHIRE LIMITED ((LVH)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0
Morgans downgrades to Hold from Add because of the strong share price performance recently. Target lifts to $1.10 from $0.86.
The broker notes the company continues to deliver strong quarterly revenue and remains hopeful of winning new enterprise customers for its Talent Community technology in coming months.
SHOPPING CENTRES AUSTRALASIA PROPERTY GROUP ((SCP)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/3/2
REIT specialists at Citi remain of the view that changing conditions for bricks and mortar retailers in Australia are structural, not cyclical. As a direct result, argue the analysts, retail landlords (as in: retail REITs) are not as attractive as their weak share prices might suggest.
The rating for SCA Property Group has now been pulled back to Sell from Neutral. Target price $2.21.
SENEX ENERGY LIMITED ((SXY)) Downgrade to Neutral from Buy by Citi .B/H/S: 4/3/0
Citi analysts saw a solid, better-than-expected quarterly performance, but the share price has rallied too, and they now think it's best to pull back to Neutral from Buy.
Citi continues to like the assets and management, but would prefer a cheaper entry point. On an unrisked basis, the analysts state their valuation is $0.77/share at US$55/bbl long-term oil price, all else being equal.
Also, the analysts remind investors ramping up CSM projects often go hand in hand with teething problems. Target price lifts to 37c from 35c.
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Technical limitations
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CHARTS
For more info SHARE ANALYSIS: ABP - ABACUS PROPERTY GROUP
For more info SHARE ANALYSIS: ANZ - ANZ GROUP HOLDINGS LIMITED
For more info SHARE ANALYSIS: BKL - BLACKMORES LIMITED
For more info SHARE ANALYSIS: FBU - FLETCHER BUILDING LIMITED
For more info SHARE ANALYSIS: GPT - GPT GROUP
For more info SHARE ANALYSIS: IGO - IGO LIMITED
For more info SHARE ANALYSIS: JHX - JAMES HARDIE INDUSTRIES PLC
For more info SHARE ANALYSIS: LVH - LIVEHIRE LIMITED
For more info SHARE ANALYSIS: NUF - NUFARM LIMITED
For more info SHARE ANALYSIS: SGP - STOCKLAND