Weekly Ratings, Targets, Forecast Changes

This story features BABY BUNTING GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BBN

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 May 7 to Friday May 11, 2018
Total Upgrades: 12
Total Downgrades: 19
Net Ratings Breakdown: Buy 44.93%; Hold 40.29%; Sell 14.78%

The sharp recovery in (in particular) cyclicals and other laggards in the Australian share market has triggered a flurry in rating changes among stockbroking analysts. For the week ending Friday, 11th May 2018, FNArena counted twelve upgrades for individual ASX-listed stocks versus 19 downgrades.

Also obvious: most companies releasing financial results and quarterly market updates this month are triggering negative responses. If it weren't for exceptions such as Macquarie Group, Xeroa and REA Group, and for positive momentum behind miners and energy producers, underlying momentum would be a lot weaker.

Only six out of the twelve upgrades leapt to a Buy, with Platinum Asset Management receiving three upgrades during the week, but only one to Buy. Challenger received two upgrades to Buy following the Federal Budget's attempt to stimulate retirees into buying more annuities.

On the flipside, seven out of the 19 downgrades moved to Sell. AMP received two downgrades, with only one moving to Sell. Other stocks receiving a Sell downgrade include Greencross (profit warning), Independence Group (profit warning), Incitec Pivot (disappointing FY18 result) and Woodside Petroleum (Citi taking a negative view on LNG outlook).

Premium priced outperformer Macquarie Group commanded pole position for the highest gain in consensus price target for the week, on the back of yet another strong result, followed by CSR (FY18 report), Super Retail, and Challenger. Negative adjustments on average were larger with the biggest hit for AMP, followed by Incitec Pivot, Link Administration, and IOOF Holdings.

Macquarie Group equally took top position for positive revisions to earnings estimates, followed by Downer EDI, Pendal Group, and Oil Search. Again, negative adjustments are larger, with Incitec Pivot suffering the largest blow to forecasts, followed by Baby Bunting, CSR, Independence Group, then National Australia Bank.

Local reporting season continues this week, alongside investor days, AGMs, quarterly updates and major banks going ex-dividend.

Upgrade

BABY BUNTING GROUP LIMITED ((BBN)) Upgrade to Neutral from Sell by Citi .B/H/S: 2/2/0

Citi believes its sell thesis surrounding disruption from competitor closures has played out quicker than expected. The broker upgrades to Neutral/High Risk from Sell, envisaging the risks over the next 12 months as evenly balanced. Operating momentum is expected to improve following the latest round of competitor closures.

The broker trims FY18 forecasts to reflect downgraded guidance but upgrades FY19 forecasts to reflect market share gains, and believes the company is well-placed to be the winner in the fall-out from competitors. Target is raised $1.50 from $1.20.

CHALLENGER LIMITED ((CGF)) Upgrade to Buy from Neutral by Citi and Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/1

The changes mooted in the 2018 federal budget to the age pension suggest test requirements for retirement products are more favourable for the product providers than previously proposed.

The rules change the way in which lifetime annuities interact with the age pension by altering the amount to be included in means test calculations.

Aged care changes may also be favourable for the company's CarePlus product. Partly offsetting this positive news for the company, Citi suggests Japan may not be as strong a growth option as previously thought.

Rating is upgraded to Buy from Neutral. Target is raised to $13.60 from $11.20.

Credit Suisse has become more optimistic around the growth drivers for Challenger. The stock has underperformed the market by around -15% in the past 12 months and the broker considers the share price is now attractive again.

There had been some concern that means testing of lifetime products would be negative for annuities and lead to a slowdown in the company's annuity sales. However, Credit Suisse observes there remains a strong case for the purchase of a lifetime annuity by those with higher assets, although account-based pension still offer better value for those with less assets.

The broker upgrades to Outperform from Neutral. Target is steady at $13.20.

DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Upgrade to Neutral from Sell by Citi .B/H/S: 2/5/1

Citi analysts now believe the specific risks surrounding Domino's Pizza have been priced in, suggesting limited downside, apart from day-to-day volatility. Hence the rating is upgraded to Neutral from Sell.

Interestingly, the analysts do not think the company will achieve its 20% growth target for the running year, but forecast 16% instead, with the added comment this is in line with market consensus.

The analysts are anticipating a tighter trading range. Price target $44.60.

MACQUARIE GROUP LIMITED ((MQG)) Upgrade to Neutral from Sell by Citi .B/H/S: 3/4/0

Macquarie is "firing on all cylinders", in Citi's words, with Friday's FY18 result boosted by lower taxes. Plenty of growth opportunities are on the horizon. So what's not to like?

Citi had, until now, stoically stuck with a below the market price target accompanied by a Sell rating, but today is the day. Sell rating upgraded to Neutral while the price target makes a leap all the way to $110.15 from a miserly $79.50. It's called vindication, or from a different angle: egg on the face.

The analysts have now joined the chorus of peers predicting guidance for the year ahead will prove conservative.

PLATINUM ASSET MANAGEMENT LIMITED ((PTM)) Upgrade to Neutral from Underperform by Credit Suisse and Upgrade to Buy from Sell by Ord Minnett and Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/3/0

The fund manager has underperformed the market by some -30% since its first half result, Credit Suisse notes, as sentiment drove the PE down to 16x from 21x. It is still the most expensive under the broker's coverage, but net flows are positive and fund performance remains strong.

On that basis the broker has left its target unchanged at $5.50 but upgraded to Neutral from Underperform.

Ord Minnett observes the business performed well in April, with weighted average investment returns of over 2.5% and over $50m of net inflows. Following a marking to market, the broker's forecasts are little changed.

The target is reduced to $6.50 from $6.64, which now offers 16% upside in addition to a fully franked FY19 yield of 5.5%. With over 20% total shareholder return on offer, sustained net inflows and the stock trading at the low end of its PE range the broker upgrades to Buy from Sell.

Macquarie estimates $500m in net inflows in April and suggests the announcement that Kerr Neilson was stepping down as CEO of the flagship fund is having less impact than initially anticipated.

Rating is upgraded to Neutral from Underperform. Target is raised to $6.25 from $6.11.

RESAPP HEALTH LIMITED ((RAP)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

The company expects to report the headline results from two clinical studies by mid this year. The company has now enrolled 640 patients in its SMARTCOUGH-C-2 study to evaluate the efficacy of the ResAppDx smartphone application in the diagnosis of childhood respiratory diseases.

Morgans makes no changes to forecasts but reduces the discount to valuation ahead of the expected release of the key clinical results. Rating is upgraded to Add from Hold and the target to $0.28 from $0.12.

SUPER RETAIL GROUP LIMITED ((SUL)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 4/4/0

Ord Minnett considers the Australian consumer outlook robust because of employment growth, while the launch of Amazon has been underwhelming.

Despite the company's recent share price performance, the broker considers the risk/reward ratio for investors is attractive, even if only the automotive and capital targets are met. The broker upgrades to Buy from Hold and raises the target to $9 from $8.

WISETECH GLOBAL LIMITED ((WTC)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/1/1

Following the company's inaugural investor briefing Citi upgrades to Buy from Neutral and increases revenue forecasts for FY19-20 by 3-10%.

The target jumps to $14.12 from $9.51 because of the expansion in FY19 peer multiples and an increase to the stock's premium, reflecting greater confidence in the company's organic growth trajectory.

Growth is expected to be led by new product developments and the ability to integrate acquisitions over the medium term.

XERO LIMITED ((XRO)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/3/1

The company reported a net loss of NZ$27.8m, better than expected. Macquarie observes FY18 was a transition year as the company reported its first positive EBITDA and operating cash flow. The improvement reflects ongoing growth in the subscriber base.

Earnings are beginning to highlight the significant operating leverage within the business and Macquarie upgrades assumptions. Rating is raised to Neutral from Underperform. Target is increase to $37.00 from $27.19.

Downgrade

AMP LIMITED ((AMP)) Downgrade to Neutral from Outperform by Macquarie and Downgrade to Sell from Neutral by UBS .B/H/S: 3/4/1

AMP sustained net outflows of -$200m in the March quarter. As this reflects the performance prior to the Royal Commission, Macquarie expects a further negative impact on flows to be evident from the June quarter onwards.

The broker envisages limited upside to the share price amid the continued distraction from the fall-out of the Royal Commission and downgrades to Neutral from Outperform. The broker also transfers coverage to another analyst. Target is reduced to $4.30 from $5.65.

UBS believes there are numerous risks and operating challenges that cannot be readily quantified and the business faces a 2-3-year rebuild before management, structure, governance and operating stability return. Moreover, turnarounds in insurance always take longer.

Accordingly, the broker is unable to recommend the shares on a 12-month view and downgrades to Sell from Neutral. Target is reduced to $3.80 from $5.40.

AURIZON HOLDINGS LIMITED ((AZJ)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 2/2/3

Morgan Stanley believes the company's activist regulatory campaign adds uncertainty and reduces the opportunity for cost reductions and top-line growth.

The broker suspects the market may not be fully pricing in the low margin for safety as the campaign will be long, public and drawn out and the Queensland intermodal sale may not proceed.

Morgan Stanley downgrades to Underweight from Equal-weight. Target is reduced to $4.00 from $4.88. Industry view: Cautious.

CSR LIMITED ((CSR)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 1/3/2

FY18 results were broadly in line with Morgan Stanley. The main negative came from energy cost pressures in aluminium. The broker suggests earnings have likely peaked and downgrades to Underweight from Equal-weight. Target is reduced to $4.75 from $5.00.

The inevitable decline in overall Australian housing construction suggests that FY18 is almost certainly to be the peak and the broker suggests a one-off spike in property sales may be the only thing that can change this scenario. Industry view: Cautious.

GOODMAN GROUP ((GMG)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 3/4/0

Guidance for FY18 has been reaffirmed at 46.5c in earnings per share, up 8%.

Although Deutsche Bank expects ongoing strength in the e-commerce sector will drive demand for industrial assets, the share price has increased 14% since it previously upgraded to Buy.

Hence, now the stock is trading ahead of the target of $8.80 the rating is downgraded to Hold.

GRAINCORP LIMITED ((GNC)) Downgrade to Hold from Add by Morgans .B/H/S: 1/4/0

While it is early in the new season, Morgans believes it prudent to revise FY19 forecasts given the poor start to cropping conditions on the east coast.

Over February to April rainfall across most cropping regions, particularly in NSW and Victoria, was very much below average. These regions also experienced some of the warmest temperatures on record.

The broker downgrades to Hold from Add. Target is reduced to $8.00 from $8.47.

GREENCROSS LIMITED ((GXL)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 0/3/1

The company's update highlighted a sudden deterioration in the veterinary business, a segment which Deutsche Bank had expected to be more stable. Revenue has been affected by a reduction in visits to stand-alone clinics.

The broker believes the earnings trajectory bodes poorly for FY19, especially given the competitive intensity in the industry and the large debt the group is carrying. Rating is downgraded to Sell from Hold. Target is $3.70.

IOOF HOLDINGS LIMITED ((IFL)) Downgrade to Neutral from Buy by UBS .B/H/S: 4/1/0

The business has not yet appeared in front of the Royal Commission and, therefore, UBS observes, sidestepped the direct fall-out affecting other vertically integrated operators.

Still, as an almost pure play in the sector, the broker believes cost and flow implications are more pronounced. The business would be most impacted under a scenario where advice and platforms are structurally separated, and UBS ascribes a notional 20% probability to this.

The broker downgrades to Neutral from Buy, given the value constraints until the risk dissipates. Target is reduced to $10.00 from $11.50.

INDEPENDENCE GROUP NL ((IGO)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/4/2

March quarter production was weak, Macquarie observes. Given the increased risk of misses to production and cost guidance the broker downgrades to Underperform from Neutral.

Incorporating the weaker result drives a -10% reduction to earnings estimates for FY19 and FY20. Target is reduced to $4.60 from $4.90.

INCITEC PIVOT LIMITED ((IPL)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/3/1

Headwinds in Australian explosives are increasingly apparent, and there is some uncertainty around capital expenditure and costs from an extended maintenance cycle, Credit Suisse observes.

In the absence of a significantly improved outlook for fertiliser prices the broker suggests earnings are likely to be relatively flat for the next two years. Rating is downgraded to Underperform from Neutral. Target is reduced to $3.39 from $3.85.

ISELECT LIMITED ((ISU)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/1/0

Credit Suisse considers the company could be a contender for the downgrade of the year. While shifting too far away from search engine marketing in the second half was a key misstep that could be rectified, rising customer acquisition costs may be an ongoing issue.

Missteps have played a large role, although the size and speed of the reduction in earnings in the second half has raised questions about the profitability of the business model. Credit Suisse believes extremely low earnings visibility is matched only by a low conviction in forecasts.

Rating is downgraded to Neutral from Outperform. Target is reduced to $0.58 from $1.95.

JB HI-FI LIMITED ((JBH)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 3/3/2

Deutsche Bank's investigations indicate that, while competition has been an issue for The Good Guys in terms of margins, the sales mix has been a larger problem.

The business is without enough skilled sales staff and incentive structures, as a result of the takeover, to up-sell consumers to high margin premium appliances.

The broker suggests margins are likely to remain weak for some time. While JB Hi-Fi's valuation is not demanding, Deutsche Bank downgrades to Hold from Buy. Target is $24.

LINK ADMINISTRATION HOLDINGS LIMITED ((LNK)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/4/0

It's the "material uncertainty" that has triggered the downgrade to Neutral from Buy, with Citi analysts adding the loss of the CareSuper contract, while small in impact, is not helping sentiment either.

The proposed measures in the Federal Budget are now overshadowing the positive narrative, and Citi analysts have decided to slightly reduce their forecasts, and cut their target to $8.10 from $9.85, on the uncertainty that will linger for longer.

MINERAL RESOURCES LIMITED ((MIN)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/2/0

The company intends to sell 49% of Wodgina as part of an offtake and partnering process. Ord Minnett values Wodgina at $2.4bn on a 100% basis. Wodgina accounts for $12.60 a share or 65% of valuation.

The broker believes Wodgina can largely self-fund its vertical integration, so Mineral Resources will need to consider how much of the sale proceeds should stay with the joint venture, how much should be spent on other businesses and how much returned to shareholders.

Ord Minnett downgrades to Hold from Accumulate. Target is $19.50.

ORIGIN ENERGY LIMITED ((ORG)) Downgrade to Neutral from Buy by Citi .B/H/S: 5/3/0

Citi transfers coverage of Australian energy to another analyst. In the large cap stocks the broker's top pick is Caltex ((CTX)) followed by Origin Energy, which is downgraded to Neutral from Buy. The broker raises the target to $10.13 from $10.06.

SUNCORP GROUP LIMITED ((SUN)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 5/2/1

The share price has risen 10% since mid February and Credit Suisse downgrades the rating back to Neutral from Outperform. Target is unchanged at $14.50.

The broker remains confident the business will deliver a significant turnaround in underlying insurance margin in the second half and supports the business improvement program.

However, Suncorp has suffered from volume loss recently and ongoing premium rate increases may mean this continues and reduces some of the potential earnings upside.

SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Downgrade to Hold from Add by Morgans .B/H/S: 5/2/0

The company has outlined its growth opportunities at the investor briefing. After the NSW and federal elections the business intends to lobby for an easing of regulatory restrictions related to aircraft movement caps and regional flights.

Morgans makes reductions to long-term forecasts and assumes a slowing of distribution growth beyond FY18. The broker downgrades to Hold from Add because of the recent strength in the share price. Target is reduced to $7.12 from $7.45.

TPI ENTERPRISES LIMITED ((TPE)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

Morgans downgrades to Hold from Add, given the ongoing uncertainty and a lack of visibility as the business transitions. The broker continues to expect a strong operating performance will be needed to restore investor faith in management.

Post the acquisition of the API and contract manufacturing divisions of Norwegian based Vistin the company has made a strategic decision to focus on narcotic raw material production and higher opiates ingredients downstream processing, reducing the emphasis on external sales and toll processing. Target is reduced to $1.77 from $2.79.

WOODSIDE PETROLEUM LIMITED ((WPL)) Downgrade to Sell from Neutral by Citi .B/H/S: 2/4/2

Citi transfers coverage of its Australian energy sector to another analyst. The broker's pecking order now places LNG-exposed names such as Woodside and Oil Search ((OSH)) as its least preferred.

There is speculation that changes to the Petroleum Resource Rent Tax may be introduced in the federal budget, although Citi points out that last year's budget was also flagged as one where changes would be made that never transpired. This year may be different as the government is not preoccupied with gas market reform.

The broker envisages potential for the market to over-react if the media articles prove accurate regarding proposed changes. A bear scenario is one where the government introduces more drastic measures, such as an offshore royalty.

Citi downgrades to Sell from Neutral. Target is raised to $28.68 from $28.34.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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