Weekly Reports | Nov 20 2017
By Rudi Filapek-Vandyck, Editor FNArena
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.
Period: Monday November 13 to Friday November 17, 2017
Total Upgrades: 6
Total Downgrades: 20
Net Ratings Breakdown: Buy 40.78%; Hold 43.46%; Sell 15.76%
Six upgrades for individual ASX-listed stocks versus twenty downgrades. The stockbrokers of Australia have spoken.
In earlier editions of this weekly update, I pointed out the relentless rally in Australian shares received little support from the local community of stockbroking analysts. It is certainly becoming more apparent that an ASX200 targeting 6000 and beyond is not finding support from fundamental analysis and/or near-term earnings projections.
Hence why downgrades outnumbered upgrades by more than a factor 3x.
This, of course, shines the spotlight on the few that are still receiving upgrades. The good news here is five out of the six received an upgrade to Buy (or an equivalent thereof) and those are Aurizon Holdings, Iluka Resources, Nine Entertainment, Tabcorp Holdings and Trade Me.
On the flipside of the week's tally, rising share prices were the main cause for downgrades. Six out of the twenty moved to Sell, of which Xero received two. REA Group received three downgrades during the week of which one was to Sell. DuluxGroup also received a downgrade to Sell, as did Incitec Pivot, as well as Saracen Mineral Holdings.
The table for positive revisions to target prices (and thus to underlying valuations) shows a plethora of company names whose share price has been on fire recently. This at the very least suggests investors are not just pushing up stocks with no reason other than short term momentum.
Highest on the table sits Costa Group, followed by Altium, Orocobre, DuluxGroup, James Hardie, Incitec Pivot and Tabcorp. Even Santos, which ranks tenth for the week still enjoyed a target increase of 5%. Momentum here is clearly strong.
The negative side is sparsely populated with only two names worth mentioning; Iress Market Technology suffered a blow of -10% following its profit warning, and Fairfax Media saw -2% shaved off forecasts post the spin-off of property portal Domain. Not that this reduction reflects on the impact on the operation; it means analysts have been paring back further their forecasts for the remaining traditional media operations.
Positive amendments to profit forecasts are equally strong with Karoon Gas and Western Areas both enjoying revisions of 34%, followed mostly by other miners and energy companies. Number ten on the table, DulucGroup, still enjoyed a boost of 6%.
Here the negative side looks equally impressive with Virgin Australia's forecasts suffering -66%, followed by Xero (-17%), ERM Power (-16%), HT&E ltd (-11%) and Janus Henderson suffering -8%. Number ten on the table, Qube Holdings, still received cuts in excess of -4%.
The overall summary of the above seems to be that the Australian share market is enjoying a welcome boost from analysts upgrading forecasts and valuations, but also that share prices in large numbers already reflect the positive news.
AURIZON HOLDINGS LIMITED ((AZJ)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/4/3
The company is working with other investors to restructure the port and coal business around Wiggins Island, Queensland. Macquarie finds the concept interesting, albeit with numerous challenges.
The main issue in the structure, the broker believes, is the take-or-pay obligations to the port which are material for the miners. Upside for Aurizon is likely to emerge from the lifting of volumes and the lowering of operating costs.
Target is $5.33. Upgrade to Outperform from Neutral, as valuation is the core driver and the stock appears attractive against the target.
COCA-COLA AMATIL LIMITED ((CCL)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 2/5/1
Ord Minnett reviews the business operations prior to the upcoming investor tour to Indonesia. The broker notes the performance of the fast-moving consumer goods segment has slowed despite the fact Indonesia is a developing market with strong growth potential.
The broker upgrades to Hold from Lighten because of the share price performance and valuation support. Target is raised to $8.25 from $8.00.
ILUKA RESOURCES LIMITED ((ILU)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/2/2
Credit Suisse was impressed with the investor briefing, which included asset upgrades and confirmed a disciplined approach to capital allocation.
The broker believes the company is well placed to capitalise on recovery in mineral sands prices. Rating is upgraded to Outperform from Neutral. Target is raised to $11.10 from $9.90.
NINE ENTERTAINMENT CO. HOLDINGS LIMITED ((NEC)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 2/2/1
The company has upgraded its FY18 guidance for operating earnings to the upper end of consensus estimates of $204-230m, a rise of 11.1% at the high point.
Macquarie suggests the second half will be a little trickier for the business, as it faces competition from a locally-hosted Commonwealth Games as well as the Winter Olympics.
Still, the company is executing well and has strong momentum and Macquarie upgrades to Outperform from Underperform. Target is increased to $1.65 from $1.40.
TABCORP HOLDINGS LIMITED ((TAH)) Upgrade to Buy from Sell by Citi .B/H/S: 3/0/0
Citi finds compelling upside in Tabcorp, even in the absence of a merger with Tatts ((TTS)). The broker upgrades to Buy from Sell on the back of upgrades to wagering growth assumptions following recent improvement in the trends.
The broker now expects wagering growth to accelerate from FY19. Target is raised to $5.25 from $3.95.
Despite the upgrades, the broker lowers FY18-19 earnings per share estimates by -2-4%, and now assumes the company will exit SunBets by December 31, 2019.
TRADE ME GROUP LIMITED ((TME)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/1/2
Citi observes the stock has been sold down since its peak in July on concerns about the potential impact of Amazon and Facebook Marketplace, as well as rising costs. Citi considers the competitive threat is overdone and the cost base should now reached a sustainable level.
The broker raises estimates for earnings per share by 1-2% to reflect the acceleration of revenue growth in motors and envisages scope for upgrades as cyclical headwinds in property subside. Rating is upgraded to Buy from Neutral and the target to $4.80 from $4.55.
ABACUS PROPERTY GROUP ((ABP)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/1/1
Ord Minnett observes the stock has performed strongly since November 2016, rising more than 55%. The broker notes strong direct property markets are conducive to the company's business and, unlike many listed peers, Abacus is willing to sell assets to crystallise gains.
Further strong profit realisations are expected in FY18 and the broker raises the target to $3.80 from $3.70. Nevertheless, the strong share price moves have taken the stock past the target and the rating is downgraded to Hold from Buy.
AUSNET SERVICES ((AST)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/5/1
First half results were ahead of Credit Suisse estimates amid strong volumes. The broker suspects the company is lagging behind its electricity distribution peers in delivering operating efficiencies.
The broker increases net profit estimates by 16.8% and 15.8% for FY18 and FY19 respectively, based on the first half performance. Rating is downgraded to Neutral from Outperform. Target is raised to $1.85 from $1.80.
AWE LIMITED ((AWE)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/4/2
Waitsia 2P reserves have been upgraded by 78%, exceeding Citi's expectations.
The broker believes the fact the company is yet to contract its phase 2 gas is indicative of a competitive Western Australian domestic gas market and therefore finds it difficult to believe the large increase in 2P would contribute to a phase 3 development.
The broker suspects marketing efforts are progressing slower than originally anticipated. Rating is downgraded to Neutral/High Risk from Buy/High Risk as the value proposition appears to be less compelling. Target is $0.60.
COSTA GROUP HOLDINGS LIMITED ((CGC)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/2/0
The company has upgraded FY18 guidance for net profit to be up 20%, versus prior guidance of a 10% increase. UBS suggests this has already been priced in.
The company attributes the upgrade to the increased contribution from African Blue. The broker believes the near and long-term opportunities have been priced in and downgrades to Neutral from Buy. Target is raised to $6.80 from $5.70.
CSL LIMITED ((CSL)) Downgrade to Neutral from Buy by UBS .B/H/S: 5/2/0
UBS expects that trading post the FY17 result has been sufficiently positive to support revised market estimates.
Yet, with the stock price closing the value gap, and despite the mark-up on a gain in exchange rates, UBS believes the metrics warrant a downgrade to Neutral from Buy. Target is raised to $147 from $141.
DULUX GROUP LIMITED ((DLX)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/3/3
FY17 results were solid and, as market conditions are broadly supportive, guidance is for further profit growth in FY18.
Nevertheless, Citi observes headwinds are emerging from rising raw material costs and softening lead indicators for construction approvals and turnover.
The broker downgrades to Sell from Neutral on valuation grounds. Target is raised to $7.50 from $6.64.
ELDERS LIMITED ((ELD)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0
FY17 results beat expectations on all key metrics. Morgans believes the company is now firmly on a path to sustainable earnings growth out to FY20.
The balance sheet has been restored to a position of strength and a dividend has been declared for the first time since FY08. Management remains confident of delivering 5-10% operating earnings growth out to FY20. Morgans upgrades forecasts by 10%.
Given the stock is now trading within 10% of the new target of $6.00, up from $5.05, the broker downgrades to Hold from Add.
GALAXY RESOURCES LIMITED ((GXY)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 1/3/0
Recent moves in the share price now incorporate most of the opportunities on a risk-weighted basis, Morgan Stanley believes. Despite downgrading the stock to Equal-weight from Overweight the broker remains constructive on the industry, at least for the short-term.
Attractive industry view retained. Target is raised to $3.80 from $3.00.
HEALTHSCOPE LIMITED ((HSO)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 2/4/1
In the light of weak data from APRA, Ord Minnett believes Healthscope will face greater margin pressure than previously expected.
The broker reduces earnings estimates to reflect a weak start to the year and downgrades to Hold from Buy. Target is reduced to $1.95 from $2.00.
INCITEC PIVOT LIMITED ((IPL)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/3/1
FY17 results were solid and Credit Suisse believes the $300m buyback should also provide some near-term support for the share price.
Nevertheless, the broker considers the stock expensive, in a fertiliser market that is likely to weaken in FY18 amid company-specific headwinds.
Rating is downgraded to Underperform from Neutral. Target is raised to $3.49 from $3.29.
MOTORCYCLE HOLDINGS LIMITED ((MTO)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0
The company recently acquired Cassons, an Australian importer and distributor of motorcycle apparel and accessories. Morgan Stanley believes the deal stacks up well by virtue of the accretion to earnings alone.
The broker likes the fact that acquisition diversifies earnings away from motorcycle sales and provides the ability to gain wholesale margin via a vertical integration.
Rating is downgraded to Hold from Add, as the stock has been duly rewarded by the market after this strongly accretive deal. Target is raised to $5.41 from $4.37.
OROCOBRE LIMITED ((ORE)) Downgrade to Hold from Add by Morgans .B/H/S: 3/2/1
Morgans interprets the stronger share price as a response to stronger lithium carbonate equivalent pricing amid expectations for a tighter market and short covering.
The broker notes the company, with a 66.5% interest in the Olaroz lithium brine project, was the most shorted stock listed on the ASX through August/September 2017.
The broker downgrades to Hold from Add, given the share price strength. Target is raised to $5.85 from $5.36.
REA GROUP LIMITED ((REA)) Downgrade to Neutral from Buy by Citi and Downgrade to Sell from Neutral by UBS and Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/6/1
Earnings momentum has accelerated for REA Group and this has -predictably- triggered a rally in the share price, but Citi analysts nevertheless believe it has been too hard, too soon.
While maintaining their $80 price target (the highest in the FNArena universe), the rating has been pulled back to Neutral from Buy.
The analysts point out developer revenues grew modestly in 1Q as weaker market conditions were offset by the need for developers to advertise for longer periods to sell their projects. The same dynamic is anticipated for Residential revenues ahead.
UBS suggests the first quarter may be a high water mark for FY18, helped by a strong rebound in Sydney and Melbourne residential listings volumes. Cost growth was below expectations.
The results beat estimates purely because of the timing of operating expenditure and a softer second-fourth quarter revenue outlook is considered likely.
UBS downgrades to Sell from Neutral on valuation alone and raises the target to $68 from $64.
First quarter revenue growth was 21% and Credit Suisse estimates underlying growth was around 18% after stripping out the two months from the new financial services division.
The broker now includes a higher valuation for the financial services opportunity and a slightly higher valuation for Move. Target is raised to $75 from $72. Rating is downgraded to Neutral from Outperform.
RIO TINTO LIMITED ((RIO)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 5/3/0
Ord Minnett reviews its forecasts for the iron ore sector. The broker notes global growth is at its strongest level in seven years and Chinese data, although off the highs, remains robust.
Despite being positive the broker downgrades its rating to Hold from Accumulate following Rio Tinto's 25% re-rating in the year to date. The target is $75 and unchanged.
SOUTH32 LIMITED ((S32)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 1/6/1
Higher costs and lower metallurgical coal production have resulted in material cuts to Morgan Stanley's estimates. FY18 is reduced by -8% and FY19 by -12%.
As a result the broker now considers the stock fully valued and lowers the rating to Equal-weight from Overweight. Target is reduced to $3.40 from $3.50. Industry view is Attractive.
SARACEN MINERAL HOLDINGS LIMITED ((SAR)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/0/1
Citi suggests the price appreciation has more than factored in the strength of the past year and downgrades to Sell from Neutral based on valuation.
The broker expects limited production growth until mid 2019 and no sustained material improvement in costs. Target is raised to $1.38 from $1.35.
XERO LIMITED ((XRO)) Downgrade to Underperform from Neutral by Credit Suisse and Downgrade to Sell from Neutral by UBS .B/H/S: 1/1/3
Highlights from the first half included strong subscriber growth in Australia and continued ramp up in the UK. Credit Suisse is surprised that the company will consolidate its listing to the ASX. NZX trading will cease at the end of January.
While adopting more optimistic forecast assumptions, Credit Suisse is still concerned the valuation is well shy of the current price and suspects the market is ascribing significant value to long-dated growth.
Credit Suisse downgrades to Underperform from Neutral. Target rises to NZ$29.80 from NZ$23.50.
In the wake of the first half result UBS downgrades revenue forecasts by -5-10%, acknowledging it was too bullish regarding cloud adoption in the North American market.
The broker also notes the stock has appreciated by around 90% since the beginning of the year and is now more than 25% above its estimates of fair value.
Rating is downgraded to Sell from Neutral. Target is lowered to NZ$26.50 from NZ$27.00.
Broker Recommendation Breakup
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
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