Weekly Reports | Apr 03 2018
This story features CSR LIMITED, and other companies. For more info SHARE ANALYSIS: CSR
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 March 26 to Friday March 30, 2018
Total Upgrades: 7
Total Downgrades: 4
Net Ratings Breakdown: Buy 44.33%; Hold 40.01%; Sell 15.66%
The upgrade cycle for metals and mining stocks remains very much alive and last week four of the six stocks upgraded by stockbroking analysts were resources companies, with Whitehaven Coal the recipient of two upgrades; both to Buy.
But it's no longer a straightforward affair as illustrated by the fact that stockbrokers also issued four downgrades, all to Sell, during the week and three of these downgrades affected recommendations for mining stocks. It's a similar mixed picture for revisions to price targets/individual stock valuations and earnings forecasts.
Six out of the seven upgrades in recommendations moved to Buy. Baby Bunting is the sole non-resources stock featuring amongst stocks being downgraded, illustrating ongoing tough times for discretionary retailers in Australia.
Agri-company Nufarm and Whitehaven Coal top the week's table for upward adjustments to price targets, both enjoying a boost in excess of 3%, but the numbers on the flipside are much heavier with gold miner Perseus Mining enduring a blow of -10%, followed by Fortescue Metals (-5%), and Baby Bunting (-4%).
Fueled by ongoing upgrades for the resources sector, changes to earnings forecasts for the week ending the Thursday before the Easter weekend are eye-catching on both sides of the ledger. On the positive side, Galaxy Resources and Syrah Resources lead the pack with gains of 177% and 161% respectively, followed by Janus Henderson, Brickworks and Alacer Gold.
Suffering heavy negative revisons are Myer (-33%), Perseus Mining (-23%), Sigma Healthcare (-9.5%), Fortescue Metals (-9.4%), Nufarm (-9.3%), and many more others.
In the meantime, macro themes continue to impact on investor sentiment, and are likely to continue to dominate the short term outlook.
Upgrade
APOLLO TOURISM & LEISURE LTD ((ATL)) Upgrade to Add from Hold by Morgans .B/H/S: 1/1/0
The company has acquired Camperco, a motor home rental company operating in Ireland and the UK, for $8.2m. This marks the company's first move into the UK/Ireland rental market and provides options to grow in a substantial market as well as in Europe.
Morgans expects the acquisition to be 5% accretive in FY19/20. Following recent share price weakness the broker upgrades to Add from Hold. Target is raised to $1.98 from $1.93.
CSR LIMITED ((CSR)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 1/4/0
Housing construction is more robust than previously anticipated, which coincides with favourable aluminium pricing. Morgan Stanley upgrades earnings estimates on this basis.
The broker considers the valuation fair and would look for evidence the company is trading at a meaningful discount to its historical multiple, or showing value through the cycle, before adopting a more positive stance.
Rating is upgraded to Equal-weight from Underweight. Target is raised to $5.00 from $4.25. Industry view: Cautious.
IOOF HOLDINGS LIMITED ((IFL)) Upgrade to Buy from Neutral by UBS .B/H/S: 5/0/0
UBS notes the shares have fallen -11% since the October announcement of the acquisition of ANZ Wealth and suggests this reflects concerns regarding earnings attrition from the acquisition.
Nevertheless, the broker expects earnings prospects are better going forward, supported by re-pricing opportunities.
Rating is upgraded to Buy from Neutral, as the broker considers the stock trading at an unwarranted -12% discount to the market by FY21, with an average dividend yield of 6.4% over the interim. Target is raised to $11.50 from $10.75.
OROCOBRE LIMITED ((ORE)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 6/0/1
After the significant fall in the share price Macquarie upgrades Orocobre to Outperform from Neutral. Target is reduced to $6.80 from $7.15.
SOUTH32 LIMITED ((S32)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 1/3/3
Macquarie upgrades the price target to $3.70 from $3.10, largely because of significant increases to its long-term manganese ore and thermal coal price forecasts but also from higher long-term aluminium and alumina prices.
The most significant changes are upgrades to manganese ore prices, which have benefited from Chinese environmental reforms.
These price upgrades have transformed the company's longer-term earnings outlook and the broker upgrades to Outperform from Underperform.
WHITEHAVEN COAL LIMITED ((WHC)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 5/2/1
Macquarie has improved its long-term outlook for the coal price which drives an increase in the target by 10% to $4.60. The changes to coal price forecasts, combined with adjustments to the coal sales mix, have tempered earnings downgrades in the near term.
With the stock now offering a 16% total shareholder return the broker upgrades to Outperform from Neutral.
The company is benefiting from higher coal prices and Morgan Stanley finds value in the equity, despite the rally on repairs to the balance sheet having run its course.
The broker upgrades to Overweight from Equal-weight and raises the target to $5.70 from $5.05. Morgan Stanley believes the company's cash flow and future growth potential underpin compelling value.
The stock also looks cheap versus global thermal coal peers. Industry view: Attractive.
Downgrade
BABY BUNTING GROUP LIMITED ((BBN)) Downgrade to Sell from Neutral by Citi .B/H/S: 2/1/1
One would be inclined to think the pending closure and retreat from Australian soil by competitor Babies R Us (see also Toys R Us) would be a positive development longer term, but Citi analysts point out in the short term this could translate into competitive product being dumped upon Australian consumers at give-away prices.
On that basis, Citi has now decided to downgrade to Sell from Neutral. Target drops to $1.20 from $1.50. On Citi's analysis, there is significant overlap between Baby Bunting stores and stores operated by the failing competitor. Forecasts have been lowered.
FORTESCUE METALS GROUP LTD ((FMG)) Downgrade to Sell from Buy by Citi .B/H/S: 4/2/1
The realisation that price discounts for lower grade iron ore have become more structural than cyclical, balanced 2/3 plus 1/3 by Citi analysts, has led to reduced forecasts, a lower valuation and subsequently a downgrade to Sell from Buy.
The new price target of $4.10 compares with $5.40 previously. There are offsets through early repayment of debt, but in the end the now structural price discount prevails.
NORTHERN STAR RESOURCES LTD ((NST)) Downgrade to Sell from Neutral by UBS .B/H/S: 0/3/4
UBS notes the share price has lifted around 15% since the end of 2017. While continuing to believe the stock is a quality gold name with exploration success, the market is seen paying for this going forward.
Hence, UBS downgrades to Sell from Neutral. As Newcrest ((NCM)) has suffered from another setback at Cadia the broker envisages a rotation into Northern Star, although later in the year flows could return to Newcrest. Target is raised to $6.06 from $5.68.
SANDFIRE RESOURCES NL ((SFR)) Downgrade to Sell from Neutral by UBS .B/H/S: 1/3/3
UBS considers the stock fully valued as the share price is now 36% above the levels of June 30, 2017. While the stock does offer exposure to rising copper prices UBS believes it is too expensive, considering the short four-year mine life at DeGrussa.
While Black Butte offers a longer-term growth option the broker envisages a number of risks in terms of timing, permits and cost. UBS downgrades to Sell from Neutral and raises the target to $6.74 from $6.66.
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Negative Change Covered by > 2 Brokers
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CHARTS
For more info SHARE ANALYSIS: BBN - BABY BUNTING GROUP LIMITED
For more info SHARE ANALYSIS: CSR - CSR LIMITED
For more info SHARE ANALYSIS: FMG - FORTESCUE LIMITED
For more info SHARE ANALYSIS: IFL - INSIGNIA FINANCIAL LIMITED
For more info SHARE ANALYSIS: NCM - NEWCREST MINING LIMITED
For more info SHARE ANALYSIS: NST - NORTHERN STAR RESOURCES LIMITED
For more info SHARE ANALYSIS: S32 - SOUTH32 LIMITED
For more info SHARE ANALYSIS: SFR - SANDFIRE RESOURCES LIMITED
For more info SHARE ANALYSIS: WHC - WHITEHAVEN COAL LIMITED