Weekly Reports | Jan 29 2018
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 January 22 to Friday January 26, 2018
Total Upgrades: 16
Total Downgrades: 11
Net Ratings Breakdown: Buy 41.20%; Hold 42.06%; Sell 16.74%
The Australian share market is experiencing a corporate earnings upgrade cycle. Not that anyone can tell from the share market's performance year-to-date thus far, but since the closing quarter of calendar 2017 analysts have been forced to succumb to higher for longer commodity prices, and it shows up in steadily rising profit estimates for the year(s) ahead.
The positive undercurrent is not just a commodities affair. Growth over-achievers such as a2 Milk, CSL and Aristocrat Leisure are putting in their positive contributions as well.
This upgrade cycle is robust and still ongoing, as clearly visible in this week's tables for positive revisions to earnings estimates and valuations/price targets. The week's overview for negative adjustments to broker price targets is not even worth mentioning.
Things are a little more complicated when we zoom in on stock specific ratings published by stockbroking analysts. For the week ending Friday, 26 January 2018, FNArena registered 16 upgrades in recommendations for individual stocks versus 11 downgrades.
Resources stocks remain prominently involved on both sides of the ledger, with the likes of Alumina Ltd, Graincorp, Orica and Pilbara Minerals receiving upgrades during the week, while Galaxy Resources and St Barbara (2x) are amongst the receivers of downgrades. Outside of the resources space, Fairfax offshoot Domain received two upgrades following its hefty price fall after the CEO's sudden departure, with QBE Insurance also receiving two upgrades following an initial bad reception of its market update accompanied by yet more write-downs.
All in all, total Hold/Neutral ratings for the eight stockbrokers monitored daily by FNArena remain the largest group, at 42% of total recommendations, with Buys totalling 41.20% and the remaining 16.74% filled with Sell ratings. Morgans, Morgan Stanley and Macquarie are the only three (out of eight) with more Buy ratings than Neutral/Holds under coverage.
This week the local reporting season starts warming up. Time to assess whether the underlying optimism is justified, if not already in the share price.
ALUMINA LIMITED ((AWC)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/3/1
Higher alumina prices are expected to underpin a strong year for earnings and dividends and Macquarie expects Alumina Ltd to deliver a 10% yield in 2018.
Rating is upgraded to Outperform from Neutral. Target is raised to $2.70 from $2.50.
BORAL LIMITED ((BLD)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 5/0/1
Ord Minnett believes Boral has entered a prolonged period of strong earnings growth that is not fully reflected in the share price.
The broker believes investment in infrastructure will be the main driver of growth domestically. In the US, the single family sector appears to be trending higher and repair activity should expand.
The broker upgrades to Accumulate from Hold and raises the target to $8.50 from $6.70.
DOMAIN HOLDINGS AUSTRALIA LIMITED ((DHG)) Upgrade to Buy from Sell by UBS and Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 2/3/2
CEO Antony Catalano has unexpectedly resigned, citing family commitments and difficulties with relocating to Sydney.
Regardless of the reasons for his departure, UBS believes investors were partly pricing the stock at a premium to the REA Group ((REA)) because of a belief that he could help drive significant growth in the business.
Even if the risk to forward growth has increased UBS believes the uncertainty is more than priced in and upgrades to Buy from Sell. Target is $3.20.
Deutsche Bank had initiated with a Sell in November last year, but after share price weakness following the sudden departure of the CEO, the broker thinks it is time for an upgrade to Hold. Price target has remained $3.35.
The analysts acknowledge the immediate outlook is now clouded with uncertainty, but they also believe this is now well and truly reflected in the share price.
GRAINCORP LIMITED ((GNC)) Upgrade to Add from Hold by Morgans .B/H/S: 3/2/0
Graincorp's winter grain receivals were down some -50% on the previous winter. Given high fixed costs, Morgans notes a below average year means crunched margins, increased competition and potential loss of market share.
The summer crop is not looking too good either, given ongoing dry conditions. The broker has slashed earnings forecasts and lowered its target to $8.51 from $8.73. The broker nevertheless notes that the time the buy Graincorp is in a bad year, rewarding the patient investor when crops normalise.
Upgrade to Add.