Weekly Reports | May 21 2018
This story features GRAINCORP LIMITED, and other companies. For more info SHARE ANALYSIS: GNC
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 14 to Friday May 18, 2018
Total Upgrades: 7
Total Downgrades: 8
Net Ratings Breakdown: Buy 45.00%; Hold 40.24%; Sell 14.76%
Link Administration was the sole recipient of more than one upgrade in recommendation for the week ending Friday, 18th May 2018. Both upgrades went to Buy, lifting the total of upgrades for the week to seven, of which six moved to Buy. Others that joined Link included AusNet, Graincorp, and InvoCare.
On the flipside, eight stocks received downgrades with only one shifting to Sell; ALS ltd. In most cases the downgrades were linked to disappointing market updates, including from Automotive Holdings, CYBG, and a2 Milk.
Total number of Buy ratings for the eight stockbrokers monitored daily by FNArena stands now at a firm 45%, with the margin widening versus 40.24% Neutral and 14.76% Sell ratings. History suggests, when Buy ratings are this far ahead of Neutral/Holds, this might herald tougher times for the local share market.
This time around, the market is very much bifurcated between highly valued, high growth stocks and lowly valued cyclicals and structurally challenged financials and industrials. It is noted most disappointing market updates stem from the latter, not from the former in recent weeks.
Bling retailer Lovisa enjoyed the largest jump in consensus price target for the week, up 15%, beating Seven Group, BlueScope Steel, and Treasury Wine Estates. On the negative side, average declines were notably larger, with Automotive Holdings' target suffering most (-14%), followed by a2 Milk, Link Administration, Xero, and AMP.
A similar pattern emerges for adjustments to earnings estimates with negative updates carrying much higher numbers. On the positive side, Pendal Group (formerly BT Investment) took the week's honours enjoying a 5% increase, followed by Boral, BlueScope Steel, and Downer EDI.
Negative adjustments were largest for Myer, followed by Xero, Automotive Holdings, Galaxy Resources, and a2 Milk.
Upgrade
AUSNET SERVICES ((AST)) Upgrade to Add from Hold by Morgans .B/H/S: 2/3/2
FY18 results beat estimates. Morgans upgrades FY19-21 materially, assuming efficiency initiatives are able to hold underlying costs flat until the next regulatory re-sets are applicable.
With cash flow in FY18 stronger than expected and capital expenditure lower, concerns the broker previously had about the key credit metric for the company's credit rating have dissipated.
Rating is upgraded to Add from Hold. Target rises to $1.88 from $1.77.
GRAINCORP LIMITED ((GNC)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/3/0
Graincorp's share price had been weak of late, Credit Suisse notes, due to a poor harvest. At the same time, the company has signalled several initiatives that are likely to deliver better profit and capital utilisation over the medium term.
A significantly more diversified grain marketing business, asset sale opportunities, improving earnings in refined oils and opportunities in craft malt whisky support valuation, the broker suggests, in the face of short-term weather impacts. To that end Credit Suisse upgrades to Outperform from Neutral while trimming its target to $8.80 from $9.06.
INVOCARE LIMITED ((IVC)) Upgrade to Buy from Sell by Citi .B/H/S: 1/4/1
InvoCare failed to impress the broker in February, but Citi analysts have now made a 180 degrees turnaround declaring the company's Protect & Growth capex plan, costing $200m, is going to deliver.
In addition, the share price valuation is seen as too low. The analysts see a case for additional upside potential from cost savings, market share gains (yes), stronger case average growth, as well as from acquisitions in rural areas.
Estimates are, on their own admission, between 2-7% higher than market consensus. Price target improves to $14 from $13.50. Upgrade to Buy from Sell.
LINK ADMINISTRATION HOLDINGS LIMITED ((LNK)) Upgrade to Buy from Neutral by Citi and Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/3/0
The company has suggested that, offsetting market concerns about the outlook from regulatory changes, smaller funds would become less competitive and the increasing regulatory complexity makes its offering more compelling.
The company will be arguing in its submission to the government on the proposed regulatory changes that the 13-month period of inactivity is too short.
While there is some concern regarding recent developments, Citi suggests current prices offer enough upside to compensate investors for the uncertainties. The broker upgrades to Buy from Neutral. Target is raised to $8.50 from $8.10.
Management has provided clarity on the bear case scenario given the federal government's budget policy on low-balance super accounts. Credit Suisse estimates the impact of the new legislation is -8% in FY21 but suggests the policy stands a good chance of being watered down.
The broker downgrades FY20 EPS estimates by -7% and FY21 by -10%. This includes the proposed changes to superannuation and the loss of CareSuper from FY20.
Rating is upgraded to Outperform from Neutral as a broker believes the stock offers a buying opportunity. Target is reduced to $8.10 from $9.00.
SPECIALTY FASHION GROUP LIMITED ((SFH)) Upgrade to Buy from Neutral by Citi .B/H/S: 1/0/0
Specialty Fashion has sold its Autograph, Katies, Millers and Rivers brands to Noni B ((NBL)) for $31m, leaving City Chic as Specialty's only remaining brand. City Chic is growing sales at 5-10% on improving margins, Citi notes.
Net of the cost of the exit, Specialty will now be cash positive from the sale and on the free cash flow City Chic can generate, and will possibly resume dividend payments, Citi suggests. Upgrade to Buy (High Risk). Target rises to 75c from 48c.
TREASURY WINE ESTATES LIMITED ((TWE)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 3/3/1
Credit Suisse had already identified issues in China with regard the Rawson's Retreat brand as early as July last year. Treasury Wine acknowledged the problem at the time and began taking steps to rectify it. Hence the press reports sparking the sell-off in the stock yesterday are old news and, as far as the broker is concerned, exaggerated.
Credit Suisse still believes FY19 guidance of 25% earnings growth is achievable, but the broker also believes consensus forecasts for FY20 are too high. Hence an upgrade to Neutral from Underperform on the stock price fall, with an unchanged $15.65 target.
Downgrade
THE A2 MILK COMPANY LIMITED ((A2M)) Downgrade to Neutral from Buy by Citi .B/H/S: 4/2/0
Citi downgrades to Neutral from Buy given the increased uncertainty around the short-term outlook. The planned transition to new infant formula packaging should be a one-off but the broker is concerned about re-seller price reductions.
Citi downgrades FY18-20 estimates for earnings per share by -9-10%. Target is reduced to $11 from $14.
AUTOMOTIVE HOLDINGS GROUP LIMITED ((AHG)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/4/0
Subsequent to the company's downgrade to FY18 guidance, Macquarie suggests challenging market conditions are likely to weigh in the near term with the risk of broader contagion.
The implied reversal in automotive margin performance requires consideration and the broker acknowledges the underlying drivers are difficult to ascertain at this point. Macquarie downgrades to Neutral from Outperform. Target is reduced to $3.30 from $4.20.
ALS LIMITED ((ALQ)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 2/2/1
The company has benefited from a recovery in mineral drilling activity but Deutsche Bank does not expect it can sustain above-industry growth. Life sciences is supported by structural growth drivers but this is being offset by price pressure across key markets.
Deutsche Bank downgrades to Sell from Hold as the stock appears expensive relative to the growth it offers. Target is $6.99.
CROWN RESORTS LIMITED ((CWN)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 1/5/0
Ord Minnett reviews its investment thesis and downgrades to Hold from Buy. The share price has increased 12.2% in the year to date and VIPs appear to have have shifted in favour of Star Entertainment ((SGR)).
Crown must rebuild its turnover, or gain slots, the broker suggests. CrownBet was a key driver of Ord Minnett's upgrade in July last year and its subsequent sale has removed that growth opportunity. Target is unchanged at $13.50.
CYBG PLC ((CYB)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/3/1
First half results missed Credit Suisse estimates at the top line. Still, the broker believes the bank continues to execute well on costs although the revenue story appears harder given competitive pressures.
The possibility of outperforming FY19 CTI targets now appears unlikely to Credit Suisse and the share price will be dependent on revenue upside.
Rating is downgraded to Neutral from Outperform. $6.00 target retained.
MACQUARIE ATLAS ROADS GROUP ((MQA)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 5/1/0
Morgan Stanley believes the company presents a complex, but ultimately positive, opportunity for investors based on the fundamental value of APRR relative to the share price, although recent share price gains may temper further gains in view of the performance fee accruing to Macquarie ((MQG)).
Morgan Stanley downgrades to Equal-weight from Overweight. Target is raised to $6.36 from $6.26. Industry view: Cautious.
SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 4/3/0
Morgan Stanley anticipates continued growth in the retail and accommodation development for the business. The passenger outlook remains constructive.
The broker suggests if the airport could move from its current movement/minutes base to a more modern time-based separation system then on-time performance and longer-term capacity would improve materially.
Morgan Stanley downgrades to Equal-weight from Overweight, amid a lack of near-term catalysts, and raises the target to $7.27 from $7.07. Cautious industry view.
XERO LIMITED ((XRO)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/3/1
Xero's FY18 performance may have met market consensus, but Citi analysts had been a little more ambitious, and thus the company slightly "missed". But only on operational costs affecting EBITDA; other numbers were either better or in-line.
Estimates have been slightly reduced to incorporate lower margin assumptions. Valuation increases to $40.60 from $39.09, but that's not enough to keep the Buy rating in place given the strong rally in the share price, hence the downgrade to Neutral.
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Negative Change Covered by > 2 Brokers
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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: GNC - GRAINCORP LIMITED
For more info SHARE ANALYSIS: IVC - INVOCARE LIMITED
For more info SHARE ANALYSIS: LNK - LINK ADMINISTRATION HOLDINGS LIMITED
For more info SHARE ANALYSIS: MQG - MACQUARIE GROUP LIMITED
For more info SHARE ANALYSIS: SGR - STAR ENTERTAINMENT GROUP LIMITED
For more info SHARE ANALYSIS: TWE - TREASURY WINE ESTATES LIMITED
For more info SHARE ANALYSIS: XRO - XERO LIMITED