Weekly Reports | Nov 27 2017
This story features AMCOR PLC, and other companies. For more info SHARE ANALYSIS: AMC
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 November 20 to Friday November 24, 2017
Total Upgrades: 8
Total Downgrades: 9
Net Ratings Breakdown: Buy 40.94%; Hold 43.14%; Sell 15.92%
In a market that seems to be intent on finishing the calendar year on a strong note, stockbroking analysts continue to issue more downgrades than upgrades in recommendations for ASX-listed stocks, albeit the gap between the two narrowed to the absolute minimum during the week ending Friday, 24th November 2017.
FNArena registered eight upgrades and nine downgrades with Macquarie Atlas' decision to cut the umbilical cord from its previous parent attracting no less than three upgrades. ALS Ltd's financial report disappointed and was good for two downgrades. Most changes in ratings were valuation based.
a2 Milk led the charge in positive revisions to price targets, enjoying a further gain of no less than 47.50%, handsomely beating Costa Group, Santos and Automotive Holdings. On the flipside, Webjet was responsible for the largest reduction throughout the week (-8.7%) thanks to a disappointing AGM update. Class also disappointed and suffered a reduction of -6%.
The good news remains that with the exception of the latter two names, analysts' focus remains on further upside.
The week's table for positive amendments to profit forecasts is dominated by resources stocks, led by Karoon Gas, Western Areas and Alacer Gold. Further down we also find TechnologyOne, CYBG, Macquarie Atlas and, of course, a2 Milk. Suffering significant cuts to forecasts were AWE Ltd, Virgin Australia, Graincorp, Webjet, and Fairfax Media, among others.
This week sees the final batch of domestic company reports while the AGM season is becoming thinner as well. In the background, political instability may be brewing.
Upgrade
AUTOMOTIVE HOLDINGS GROUP LIMITED ((AHG)) Upgrade to Overweight from Underweight by Morgan Stanley .B/H/S: 6/1/0
Auto Holdings has pulled off a game changer, Morgan Stanley believes, in selling its troublesome refrigerated logistics business for a much better than expected $400m. This will leave around $300m in the kitty for acquisitions and/or a special dividend while only representing around -2% in lost earnings.
The remaining auto division has had a slow start to the year but the worst is now behind WA, the broker suggests, and the new kitty provides greater confidence in growth. The end result is a double-upgrade from Morgan Stanley to Overweight from Underweight. Industry View is In-Line and target rises to $4.10 from $3.00.
AMCOR LIMITED ((AMC)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/5/0
Ord Minnett observes the stock has come under pressure in recent months following speculation it is looking to acquire Bemis Co, amid soft commentary at the AGM. The broker believes a deal with Bemis is unlikely at current levels and the trading headwinds that were flagged by management are temporary.
The stock stands out from other industrials under coverage and the broker also notes upside to earnings expectations may stem from free cash flow being deployed into value-accretive acquisitions.
Recommendation is upgraded to Accumulate from Hold. Target is raised to $16.85 from $16.10.
AWE LIMITED ((AWE)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/3/2
Credit Suisse observes valuation support is heavily dependent on the Perth Basin success, but there is potential upside in other areas of the portfolio as well.
Following on from the equity raising, the broker believes the risk/reward is interesting at current levels.
With a change of analyst, the broker upgrades to Outperform from Neutral. Target is raised to $0.65 from $0.50.
MACQUARIE ATLAS ROADS GROUP ((MQA)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Add from Hold by Morgans and Upgrade to Buy from Neutral by UBS .B/H/S: 4/1/0
A transition to internalise management has now been agreed. Credit Suisse expects a vote at the AGM in May, or earlier. This will reduce costs and improve transparency. The broker upgrades to Outperform from Neutral and raises the target to $6.50 from $5.50.
Previously waived fees will become payable to Macquarie Group ((MQG)) for managing the APRR investment on behalf of Macquarie Atlas. There is also a risk of performance fees but Credit Suisse estimates these are not likely to be significant.
The company intends to internalise its management and will provide an update no later than the next AGM. Morgans finds the impact difficult to ascertain until it knows how much will be paid away in fees.
Internalisation will remove a layer of complexity, nonetheless, and should improve cash flow. Subsequently, the broker observes, collapsing the APRR structure would make the stock even more appealing as a takeover target.
Morgans upgrades to Add from Hold. Target is reduced to $6.24 from $6.27.
The board's decision to commence discussions with Macquarie Group ((MQG)) regarding the internalisation of management is considered a materially positive step.
UBS also makes a number of changes to forecasts to reflect the additional 5% stake acquired in APRR. A weaker outlook for Dulles Greenway traffic pushes out the inaugural distribution assumptions until 2020.
The net result is an increase in the target to $6.65 from $5.80. Rating is upgraded to Buy from Neutral.
RCG CORPORATION LIMITED ((RCG)) Upgrade to Buy from Neutral by Citi .B/H/S: 1/1/0
Green shoots are emerging, declare analysts at Citi. They have decided it's time to upgrade to Buy from Neutral, encouraged by like-for-like sales momentum leading into Christmas, while year-on-year comparison should get easier from here onwards due to lacklustre performance last year.
An undemanding valuation, as Citi sees it, further supports the move. Q1 performance proved slightly above expectations, and is consistent with industry feedback, report the analysts.
Citi acknowledges Amazon represents downside risk to earnings, but licenced brands (40% of the company's retail sales) should provide some protection, argue the analysts. Target increases by 6% to $0.95.
SANTOS LIMITED ((STO)) Upgrade to Neutral from Sell by UBS .B/H/S: 4/3/0
UBS factors in a rally in oil prices and the realistic probability of a takeover emerging for Santos. This comes amid speculation that US-based firm Harbour Energy is planning to make a bid for the company at $5.30 a share.
The broker suspects the probability of a corporate approach is high and any potential acquirer may have a more optimistic view around the portfolio and a more positive view of future oil prices. The broker considers the risk of underperformance in the stock in the near-term has been lowered.
Rating is upgraded to Neutral from Sell. Target rises to $5.10 from $4.05.
Downgrade
THE A2 MILK COMPANY LIMITED ((A2M)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/3/0
The company has delivered 69% revenue growth year-on-year so far, ahead of Credit Suisse estimates. This is because of larger-than-expected infant formula sales ahead of the major retail events in China.
Credit Suisse raises estimates for operating earnings in FY18-20 by 8-12%. The broker believes growth projections for FY18 and FY19 are substantially reflected in current multiples and downgrades to Neutral from Outperform.
Target raised to NZ$8.50 from NZ$7.65.
ACONEX LIMITED ((ACX)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/5/0
Citi believes the sale cycle will be longer than most anticipate and this, in turn, will result in sales momentum taking longer to be realised in financials. The broker downgrades to Neutral from Buy.
The company has begun signing contracts with Chinese enterprises and will increase its marketing intensity in the US to match peers. Target is raised to $5.32 from $4.82, because of the expansion in peer multiples.
ALS LIMITED ((ALQ)) Downgrade to Lighten from Hold by Ord Minnett and Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/3/0
After the first half result Ord Minnett believes the opportunities for acquisitions and organic growth in life sciences, and potential for upgrades from the recovering resource market, have diminished.
The broker now believes there is some risk to FY19 forecasts. Net profit estimates for FY18 and FY19 are lowered by -6% and -13% respectively.
The broker downgrades to Lighten from Hold. Target drops to $6.50 from $6.88.
First half net profit was below expectations while Credit Suisse considers the FY18 guidance to be soft. Management remains optimistic regarding continued recovery in commodities.
Given the strong share price performance and the potential slowdown in earnings growth for the next six months, the broker downgrades to Neutral from Outperform. $7.80 target retained.
CLASS LIMITED ((CL1)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/1/0
UBS observes sales momentum has improved after the addition of the Class Super accounts in the first quarter. The December and March quarters are typically quieter, but 3300 accounts have been added in the December quarter so far, 50% above the prior corresponding period.
The broker does not expect these customers to stop using the Class Super product when fees begin on July 1, 2018 but does suspect the move will hit the top line by -2-3%.
Rating is downgraded to Neutral from Buy. Target is reduced to $2.85 from $3.30.
FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED ((FPH)) Downgrade to Underperform from Outperform by Macquarie .B/H/S: 0/2/3
F&P Health's result was weaker than Macquarie had expected on lower than forecast mask growth. Management sees the introduction of new products as providing for a pick-up in the second half.
Macquarie still believe F&P is a quality company but a share price that has run up 60% in a year reflects a stretched valuation and a premium to ASX peers. Outperformance from here is thus unlikely. Downgrade to Underperform, noting extreme NZD sensitivity is the biggest risk to this recommendation.
Target rises to NZ$12.00 from NZ$11.00.
MANTRA GROUP LIMITED ((MTR)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/7/0
The ACCC has indicated it will undertake a public review process as part of the Accor transaction. Citi does not believe the review will derail the deal.
The combined entity would have a material market share in certain areas that may mean carve-outs are required. If this were to occur, the broker suspects some BreakFree properties could be targeted, as these are most exposed to Airbnb.
Target is raised to $3.96 from $3.20. Rating is downgraded to Neutral from Buy, given limited upside to the current share price.
WEBJET LIMITED ((WEB)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/2/1
Guidance was clearly soft while Credit Suisse notes the market was looking for some certainty after the significant M&A activity over the past 18 months.
The need for clarity on various matters is likely to mean the stock is range bound in the near-term. That said, the broker remains a believer in the value proposition of the B2B offering but the proving up of this thesis is expected to be an FY19-20 story.
Rating is downgraded to Neutral from Outperform. Target is reduced to $11.80 from $13.15.
WISETECH GLOBAL LIMITED ((WTC)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/1/2
Citi analysts make an extra effort to highlight they remain a huge fan of this company and its capable management, it's just that the share price valuation is now at stratospheric highs that can no longer be justified on standard financial numbers.
Hence the downgrade to Sell from Hold. Revenue forecasts have been upped slightly, the price target goes up by 23% to $9.19. The latter, explain the analysts, is to better reflect strong organic growth, growing global footprint and strong, ongoing R&D investments.
Recent acceleration in global freight volumes is seen as yet another positive.
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Negative Change Covered by > 2 Brokers
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Technical limitations
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CHARTS
For more info SHARE ANALYSIS: A2M - A2 MILK COMPANY LIMITED
For more info SHARE ANALYSIS: ALQ - ALS LIMITED
For more info SHARE ANALYSIS: AMC - AMCOR PLC
For more info SHARE ANALYSIS: FPH - FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED
For more info SHARE ANALYSIS: MQG - MACQUARIE GROUP LIMITED
For more info SHARE ANALYSIS: MTR - STRATA INVESTMENT HOLDINGS PLC
For more info SHARE ANALYSIS: STO - SANTOS LIMITED
For more info SHARE ANALYSIS: WEB - WEBJET LIMITED
For more info SHARE ANALYSIS: WTC - WISETECH GLOBAL LIMITED