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Weekly Ratings, Targets, Forecast Changes

Weekly Reports | Jun 04 2018

This story features APA GROUP, and other companies. For more info SHARE ANALYSIS: APA

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 28 to Friday June 1, 2018
Total Upgrades: 6
Total Downgrades: 13
Net Ratings Breakdown: Buy 44.98%; Hold 39.87%; Sell 15.15%

The month of May has been rather two-faced: full of buoyancy at first, troubled next and barely keeping a positive return at the finish line. The closing week endured most pressure to the downside, but that did not stop stockbroking analysts from issuing more downgrades than upgrades for individual ASX-listed companies.

For the week ending Friday, 1st June 2018, FNArena counted six upgrades and 13 downgrades. Spark New Zealand contributed the sole upgrade that did not go all the way to a Buy recommendation, whereas Domino's Pizza attracted two upgrades during the week.

On the flipside, REA Group was downgraded twice, following a strong performance, while ERM Power's disappointing market update attracted no less than three downgrades. Both downgrades for REA Group moved to Sell, while ERM Power only received one new Sell rating.

Meanwhile, the gap between total Buy ratings versus Neutral/Holds and Sells remains noticeably wide: 44.98% versus 39.87% and 15.15% respectively. History shows this can mark a tough time for the domestic share market but in the present context it most likely also signals a heavily polarised share market, seldom as bifurcated between the "Haves" and the "Have Nots".

The week saw some hefty increases to consensus price targets, with APN Outdoor on top, enjoying a boost of 17%, followed by Aristocrat Leisure (+15%) and Reliance Worldwide (+7%). Reductions were heaviest for ERM Power (-9%), MYOB Group (-6%) and Monadelphous (-4%).

Market bulls can draw confidence from the fact increases are more significant than reductions, and the former are larger in numbers too.

The table for positive revisions for earnings estimates similarly shows a positive current with ALS ltd grabbing honours for the week, enjoying a boost of 32%. Equally noticeable gains were booked by Fisher & Paykel Healthcare, APN Outdoor and Aristocrat Leisure.

Here the flipside looks equally impressive with medium sized miner Independence Group's forecasts suffering -27% following the sale of an underperforming asset, followed by -15% for ERM Power, and -10.5% for Galaxy Resources.

Upgrade

APA GROUP ((APA)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/2/2

Macquarie upgrades earnings estimates for FY18 by 1.8% and FY19 by 2.8%. The broker believes the drag from the regulatory threat has run its course.

The regulator risk discount is removed and the broker believes the US is emerging as an attractive growth option. Rating is upgraded to Outperform from Neutral. Target is raised 11% to $8.67.

DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Add from Hold by Morgans .B/H/S: 4/3/1

Macquarie estimates the downside risk to Australasian franchising and FY18 guidance is less than previously thought. Meanwhile, the upside for Europe appears greater and there is potential now to drive scale benefits.

While FY18 net profit guidance for growth of 20% requires 35% growth in the second half, a challenge the broker acknowledges after a soft first half, headwinds are reduced and the upcoming World Cup should support business.

Macquarie upgrades to Outperform from Neutral. Target is raised to $55 from $45. The broker believes the stock has valuation support for a business that is expected to grow in excess of double digits per annum.

Morgans continues to believe that 20% net profit growth in FY18 will be a tall order, although any miss is likely to be modest. The broker expects the company can deliver around 15% net profit growth per annum over the next 3-5 years.

The broker also notes potential upside from further acquisitions and suspects the company will not launch a new category/territory without material accretion being on the cards. Rating is upgraded to Add from Hold. Target is raised to $51.51 from $50.39.

GALAXY RESOURCES LIMITED ((GXY)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 2/2/0

The company has entered a non-binding agreement with POSCO to sell 28% of its Sal de Vida resource for US$280m. This is a better outcome than Macquarie envisaged as the company is now able to sole fund the development.

In the longer term, the delivery of a substantial brine project, that has proved challenging for others, in an expansionary environment becomes a key catalyst for the stock.

Rating is upgraded to Outperform from Underperform. Target is raised to $3.90 from $3.00.

SPARK NEW ZEALAND LIMITED ((SPK)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 2/2/1

The company has confirmed the acceleration of its Quantum program, bringing forward implementation costs of $25-30m in FY18. Macquarie observes competitive pressures remain but cost reductions provide an offset.

The broker envisages modest earnings growth in the next two years. Rating is upgraded to Neutral from Underperform. Target is raised to NZ$3.60 from NZ$3.50.

VICINITY CENTRES ((VCX)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/2/0

Macquarie reviews the mixed use opportunity for the business as well as the Chatswood Chase development. Near term catalysts in the business strategy suggest the valuation is attractive.

An in specie distribution of second-tier retail assets is still considered to be on the agenda and presents potential upside.

The broker upgrades to Outperform from Neutral. Target is steady at $2.92.

Downgrade

AMP LIMITED ((AMP)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/4/1

The Productivity Commission has published a draft report assessing the superannuation system and recommending a radical overhaul.

On balance, the broker believes the report's major proposals pose a threat to the retail sector, to both corporate super and fees on choice products.

The practical detail of what is proposed will be difficult to achieve, the broker suggests, and the politics are also unclear.

This leads the broker to downgrade its recommendation to Hold from Accumulate. Target is reduced to $4.20 from $4.84.

DOMAIN HOLDINGS AUSTRALIA LIMITED ((DHG)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/2/2

As the stock is trading near fundamental valuation, UBS downgrades to Neutral from Buy. The broker believes the company is on track to meet FY18 expectations.

Admittedly, since the May 1 update, there has been a softening of new listing volumes but the broker suggests there are offsets to manage the earnings impact. Target is raised to $3.30 from $3.20.

ERM POWER LIMITED ((EPW)) Downgrade to Hold from Add by Morgans and Downgrade to Hold from Buy by Ord Minnett and Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/2/1

The company's business update indicated domestic operations are performing well but the loss-making US venture is less profitable than previously expected. Morgans materially reduces expectations for the US retail business.

The broker downgrades to Hold from Add, given the outlook for total returns. Target is reduced to $1.64 from $1.93.

The company has guided to lower sales volumes and margins in its US business, the second downgrade since the beginning of 2018. Ord Minnett understands the reasons but believes this reduces the market's confidence in the outlook for the US retail business.

Ord Minnett now values the US business at $34m, equivalent to less than 9% of the overall discounted cash flow valuation. The broker downgrades to Hold from Buy and lowers the target to $1.69 from $1.75.

The company has lowered its FY18-19 outlook and guidance for US gross margins but reiterated its expectations for Australia. Macquarie observes the company has a buyback, which will reduce liquidity and slow the weakness, but considers the fundamental value remains stretched.

Cash flow is attractive but another disappointment in the US suggests predictability is low. Target is reduced to $1.39 from $1.51, but the broker believes there is potential upside to $1.50 if management divests the US operation. Rating is downgraded to Underperform from Neutral.

HANSEN TECHNOLOGIES LIMITED ((HSN)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 1/1/0

Ord Minnett observes the share price is now 15% higher since the February result. The broker upgrades FY18 operating earnings estimates by 1% but downgrades to Hold from Buy on valuation.

Forecasts imply a margin of 27.4%, consistent with company guidance. While the broker leaves some room for the company to outperform, it suspects the share price is now factoring in a bigger upgrade than is likely. Target is raised to $4.54 from $4.47.

MONADELPHOUS GROUP LIMITED ((MND)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/3/2

Macquarie now forecasts a -16% decline in the company's FY19 construction revenue, given the low level of wins this year and the time lag for new work flowing through to revenue. The Ichthys work should largely be completed by June 30 and the focus is now on the replacement of around $300m in revenue run-off in FY19.

Macquarie downgrades to Neutral from Outperform. Target is reduced to $15.87 from $19.18. The broker estimates 28% revenue growth in construction in FY20, assuming the company wins its share of upcoming work from the major miners.

MYOB GROUP LIMITED ((MYO)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/3/0

MYOB has abandoned its planned acquisition of Reckon's ((RKN)) Accountant Group assets due to ACCC concerns, choosing to pursue organic growth instead using the money it had allocated. Credit Suisse has lowered earnings forecasts by -15% to reflect the lost opportunity.

The hit to earnings per share is less due to interest savings and an acceleration of the buyback now the acquisition is off, but the broker has cut its target to $3.00 from $3.75 and downgraded to Neutral from Outperform.

REA GROUP LIMITED ((REA)) Downgrade to Lighten from Hold by Ord Minnett and Downgrade to Underperform from Neutral by Macquarie .B/H/S: 2/3/2

The company has received approval from the ACCC to proceed with its planned acquisition of Hometrack Australia. The acquisition is considered neutral to Ord Minnett's discounted cash flow valuation.

Nevertheless, the broker downgrades its rating to Lighten from Hold because of weaker real estate listings data, weaker third-quarter earnings and overall valuation. Target is $78.

Macquarie considers the valuation stretched at current levels and downgrades to Underperform from Neutral. While operating momentum is strong the broker envisages a risk that future growth in earnings will be absorbed by a relative de-rating.

Listing volumes are down moderately, the broker observes, but price/mix remain the key drivers of the stock. Target is raised to $86 from $74 after the rolling forward of valuation.

STOCKLAND ((SGP)) Downgrade to Sell from Neutral by UBS .B/H/S: 4/2/1

UBS expects house prices will fall by -5% or more in 2019 as lending standards tighten and higher living expenses limit borrowing capacity. The broker downgrades Stockland FY20 and FY21 earnings estimates by -3% and -8% respectively on lower residential settlements.

UBS does not believe the company is able to achieve the operating profit margin of 23% that is required to deliver 4% growth in earnings. Rating is downgraded to Sell from Neutral. Target is reduced to $4.08 from $4.20.

SMARTGROUP CORPORATION LTD ((SIQ)) Downgrade to Hold from Add by Morgans .B/H/S: 4/2/0

Morgans suggests Smartgroup has sufficient debt capacity to fund an acquisition, although given the remaining salary packaging businesses are small, it would likely have to be in a adjacent sector. This means lower synergies and greater capital investment, the broker notes.

The market is already pricing in growth through acquisition, but it would be more prudent to wait to see what and how it goes. Morgans pulls back to Hold from Add for now. Target unchanged at $11.60.

WESFARMERS LIMITED ((WES)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/4/2

Wesfarmers has announced the sale of Bunnings UK & Ireland. The 24 Bunnings pilot stores will revert back to the Homebase brand following completion of the transaction.

Wesfarmers expects to recognise a -GBP200-230m loss on disposal in its FY18 results. While the acquisition was a poor one, Citi observes the costs of exit are much better than expected and remove a risk hanging over the stock, improving the balance sheet.

Following recent share price appreciation, Citi downgrades to Sell from Neutral. Target lifts to $41.50 from $40.10.

Total Recommendations
Recommendation Changes

Broker Recommendation Breakup

Broker Rating

 

Order Company New Rating Old Rating Broker
Upgrade
1 APA GROUP Buy Neutral Macquarie
2 DOMINO'S PIZZA ENTERPRISES LIMITED Buy Neutral Morgans
3 DOMINO'S PIZZA ENTERPRISES LIMITED Buy Neutral Macquarie
4 GALAXY RESOURCES LIMITED Buy Sell Macquarie
5 SPARK NEW ZEALAND LIMITED Neutral Sell Macquarie
6 VICINITY CENTRES Buy Neutral Macquarie
Downgrade
7 AMP LIMITED Neutral Buy Ord Minnett
8 DOMAIN HOLDINGS AUSTRALIA LIMITED Neutral Buy UBS
9 ERM POWER LIMITED Neutral Buy Morgans
10 ERM POWER LIMITED Sell Neutral Macquarie
11 ERM POWER LIMITED Neutral Buy Ord Minnett
12 HANSEN TECHNOLOGIES LIMITED Neutral Buy Ord Minnett
13 MONADELPHOUS GROUP LIMITED Neutral Buy Macquarie
14 MYOB GROUP LIMITED Neutral Buy Credit Suisse
15 REA GROUP LIMITED Sell Neutral Macquarie
16 REA GROUP LIMITED Sell Neutral Ord Minnett
17 SMARTGROUP CORPORATION LTD Neutral Buy Morgans
18 STOCKLAND Sell Neutral UBS
19 WESFARMERS LIMITED Sell Neutral Citi

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Company New Rating Previous Rating Change Recs
1 SPK SPARK NEW ZEALAND LIMITED 20.0% -25.0% 45.0% 5
2 RWC RELIANCE WORLDWIDE CORPORATION LIMITED 50.0% 13.0% 37.0% 3
3 GXY GALAXY RESOURCES LIMITED 50.0% 20.0% 30.0% 4
4 DMP DOMINO'S PIZZA ENTERPRISES LIMITED 38.0% 13.0% 25.0% 8
5 VCX VICINITY CENTRES 58.0% 42.0% 16.0% 6
6 APO APN OUTDOOR GROUP LIMITED 33.0% 20.0% 13.0% 6
7 ALL ARISTOCRAT LEISURE LIMITED 81.0% 69.0% 12.0% 8
8 TLS TELSTRA CORPORATION LIMITED 25.0% 13.0% 12.0% 8
9 APA APA GROUP 25.0% 13.0% 12.0% 8
10 CWY CLEANAWAY WASTE MANAGEMENT LIMITED 67.0% 60.0% 7.0% 6

Negative Change Covered by > 2 Brokers

Order Symbol Company New Rating Previous Rating Change Recs
1 EPW ERM POWER LIMITED -33.0% 67.0% -100.0% 3
2 MND MONADELPHOUS GROUP LIMITED -40.0% -20.0% -20.0% 5
3 REA REA GROUP LIMITED -6.0% 13.0% -19.0% 8
4 MYO MYOB GROUP LIMITED 50.0% 67.0% -17.0% 6
5 SIQ SMARTGROUP CORPORATION LTD 67.0% 83.0% -16.0% 6
6 SGP STOCKLAND 36.0% 50.0% -14.0% 7
7 FPH FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED -67.0% -60.0% -7.0% 3
8 AMP AMP LIMITED 25.0% 31.0% -6.0% 8

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Company New Target Previous Target Change Recs
1 APO APN OUTDOOR GROUP LIMITED 5.575 4.762 17.07% 6
2 ALL ARISTOCRAT LEISURE LIMITED 34.159 29.645 15.23% 8
3 RWC RELIANCE WORLDWIDE CORPORATION LIMITED 4.870 4.533 7.43% 3
4 CWY CLEANAWAY WASTE MANAGEMENT LIMITED 1.713 1.656 3.44% 6
5 DMP DOMINO'S PIZZA ENTERPRISES LIMITED 48.635 47.245 2.94% 8
6 GXY GALAXY RESOURCES LIMITED 3.563 3.480 2.39% 4
7 REA REA GROUP LIMITED 83.458 81.958 1.83% 8
8 APA APA GROUP 8.735 8.629 1.23% 8
9 TLS TELSTRA CORPORATION LIMITED 3.380 3.355 0.75% 8

Negative Change Covered by > 2 Brokers

Order Symbol Company New Target Previous Target Change Recs
1 EPW ERM POWER LIMITED 1.573 1.730 -9.08% 3
2 MYO MYOB GROUP LIMITED 3.707 3.948 -6.10% 6
3 MND MONADELPHOUS GROUP LIMITED 15.224 15.886 -4.17% 5
4 AMP AMP LIMITED 4.289 4.369 -1.83% 8
5 SGP STOCKLAND 4.483 4.500 -0.38% 7

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Company New EF Previous EF Change Recs
1 ALQ ALS LIMITED 34.890 26.395 32.18% 6
2 FPH FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED 34.291 30.689 11.74% 3
3 APO APN OUTDOOR GROUP LIMITED 32.952 29.684 11.01% 6
4 ALL ARISTOCRAT LEISURE LIMITED 116.457 107.443 8.39% 8
5 RWC RELIANCE WORLDWIDE CORPORATION LIMITED 16.150 15.825 2.05% 3
6 NHC NEW HOPE CORPORATION LIMITED 28.367 27.890 1.71% 3
7 SVW SEVEN GROUP HOLDINGS LIMITED 99.500 97.975 1.56% 5
8 SGR THE STAR ENTERTAINMENT GROUP LIMITED 27.200 26.929 1.01% 8
9 CWY CLEANAWAY WASTE MANAGEMENT LIMITED 4.817 4.800 0.35% 6
10 S32 SOUTH32 LIMITED 31.089 30.995 0.30% 7

Negative Change Covered by > 2 Brokers

Order Symbol Company New EF Previous EF Change Recs
1 IGO INDEPENDENCE GROUP NL 9.464 13.044 -27.45% 6
2 EPW ERM POWER LIMITED 8.367 9.867 -15.20% 3
3 GXY GALAXY RESOURCES LIMITED 12.680 14.180 -10.58% 4
4 OZL OZ MINERALS LIMITED 73.200 75.629 -3.21% 6
5 BBN BABY BUNTING GROUP LIMITED 7.675 7.925 -3.15% 4
6 NWS NEWS CORPORATION 57.803 59.407 -2.70% 6
7 MTS METCASH LIMITED 21.535 22.047 -2.32% 7
8 SPK SPARK NEW ZEALAND LIMITED 19.662 19.949 -1.44% 5
9 MYO MYOB GROUP LIMITED 18.400 18.658 -1.38% 6
10 ANZ AUSTRALIA & NEW ZEALAND BANKING GROUP 229.243 231.043 -0.78% 8

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CHARTS

AMP APA DHG DMP HSN MND REA RKN SGP SIQ SPK VCX WES

For more info SHARE ANALYSIS: AMP - AMP LIMITED

For more info SHARE ANALYSIS: APA - APA GROUP

For more info SHARE ANALYSIS: DHG - DOMAIN HOLDINGS AUSTRALIA LIMITED

For more info SHARE ANALYSIS: DMP - DOMINO'S PIZZA ENTERPRISES LIMITED

For more info SHARE ANALYSIS: HSN - HANSEN TECHNOLOGIES LIMITED

For more info SHARE ANALYSIS: MND - MONADELPHOUS GROUP LIMITED

For more info SHARE ANALYSIS: REA - REA GROUP LIMITED

For more info SHARE ANALYSIS: RKN - RECKON LIMITED

For more info SHARE ANALYSIS: SGP - STOCKLAND

For more info SHARE ANALYSIS: SIQ - SMARTGROUP CORPORATION LIMITED

For more info SHARE ANALYSIS: SPK - SPARK NEW ZEALAND LIMITED

For more info SHARE ANALYSIS: VCX - VICINITY CENTRES

For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED