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Weekly Ratings, Targets, Forecast Changes

Weekly Reports | Jun 12 2018

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

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 June 4 to Friday June 8, 2018
Total Upgrades: 6
Total Downgrades: 15
Net Ratings Breakdown: Buy 44.81%; Hold 39.59%; Sell 15.60%

It was the week before the long weekend. It was also the first week of June, which marks the end of the financial year in Australia and the period tends to carry its own characteristics ranging from portfolio re-shufflings to tax loss selling. It is also the time when companies 'fess up whether expectations are likely to be met for the year, or not.

In recent times this is equally turning into a period when many an ASX-listed entity organises an Investor Day, to get the masses outside of the ivory tower as excited about future growth avenues as the leaders are on the inside.

The Australian share market looked a bit shaky in the second half of May, but managed to catch up with more positive sentiment towards global risk assets in the first week of June. Only to be met by a wave of stockbroking analysts' downgrades for ASX-listed stocks.

For the week ending Friday, 8th June 2018, FNArena registered no less than 15 downgrades versus only six upgrades. Three of the downgrades were for resources stocks. Two of those are named BHP and Rio Tinto. Clearly, expectations for continuation of the upgrade cycle for the sector remain very much alive and that's also the reason behind both upgrades by JPMorgan/Ord Minnett.

On the negative side, we registered two downgrades for Wesfarmers, post investor day, as well as for Inghams Group, hamstrung by the sudden CEO departure.

Increases to target prices remain rather benign, considering Galaxy Resources leads the week's gainers with a lift of 5%, followed at arm's length by BHP, Domino's Pizza, and Rio Tinto. Domino's Pizza plans to drop the "pizza" part in order to broaden its appeal.

Noticeable reductions in consensus targets occurred for Regis Healthcare, Monadelphous, Santos, and Transurban.

Hardly any increases were registered for earnings forecasts, but there were plenty of negative adjustments with Metcash (yes, them again) grabbing the week's wooden spoon as forecasts suffered -27% after yet another write-down. Atlas Arteria (formerly known as Macquarie Atlas) saw estimates decline by -6.7%. Mineral Resources, RCR Tomlinson, and CommBank all experienced declines in forecasts during the week.

For the week ahead, macro-economics will take centre stage, along with REA Group holding its AGM, and with Challenger, Link Administration and Goodman Group hosting investor days.

Upgrade

BHP BILLITON LIMITED ((BHP)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 7/1/0

Ord Minnett expects strong prices are required to incentivise new supply to come on line in the iron ore and coal markets. This leads the broker to upgrade long-term forecasts to US$60/t for iron ore, US$140/t for hard coking coal and US$77/t for thermal coal.

Ord Minnett does not believe the sector is replenishing its project pipeline and that supports commodity prices. Therefore, the consensus upgrade cycle is likely to continue over the medium term. Moreover, low debt across the sector and a favourable macro backdrop are supportive of strong shareholder returns.

BHP is upgraded to Accumulate from Hold. Target is raised to $38 from $30.

CYBG PLC ((CYB)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/2/1

The bank has announced a 7% increase to its preliminary offer to acquire Virgin Money, noting the takeover panel and the board have agreed to extend the final bid deadline to June 18. Credit Suisse now believes the deal is more likely to proceed to a final offer.

As the stock has de-rated by -10% since a preliminary offer was announced the broker upgrades to Outperform from Neutral. Target is $6.

DULUXGROUP LIMITED ((DLX)) Upgrade to Neutral from Sell by Citi .B/H/S: 0/4/2

Following a site visit to the company's new Merrifield paint plant, and some weakness in the share price, Citi analysts have upgraded to Neutral from Sell. Price target has gained 10c to $7.60.

The analysts describe the new plant as "a world-class, highly automated operation with significant new product capabilities". They see upside potential for future revenues.

In addition, the company's strategic roll-out of Craig & Rose and Selleys brands in the UK market remains intact post the exit by Wesfarmers ((WES)). Here too Citi analysts see upside potential. All in all, they think DuluxGroup offers a solid platform for sustained growth, albeit with the notion the upside is likely to remain capped by weak indicators for new housing in Australia.

ESTIA HEALTH LIMITED ((EHE)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/2/0

Macquarie remains cautious about the aged care sector, as operating headwinds are unlikely to be alleviated in the short term. Estia Health remains the broker's preferred pick, having the most attractive distribution profile.

A conservative greenfield development book will reduce earnings drag in the near term, the broker suggests. Macquarie transfers coverage to another analyst. Upgrade to Outperform from Neutral. Target is raised to $3.60 from $3.37.

GALAXY RESOURCES LIMITED ((GXY)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/1/0

The company has updated the definitive feasibility study for the Sal de Vida project and announced the sale of the northern tenements to help fund its development.

Capital expenditure guidance is lifted to US$474m. The agreement with POSCO for the sale of the northern tenements provides over half of this requirement.

UBS upgrades to Buy from Neutral. Continued de-risking of Sal de Vida could provide further upside, in the broker's view. Target is raised to $3.95 from $3.10.

RIO TINTO LIMITED ((RIO)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 8/0/0

Ord Minnett expects strong prices are required to incentivise new supply to come on line in the iron ore and coal markets. This leads the broker to upgrade long-term forecasts to US$60/t for iron ore, US$140/t for hard coking coal and US$77/t for thermal coal.

Ord Minnett does not believe the sector is replenishing its project pipeline and that supports commodity prices. Therefore, the consensus upgrade cycle is likely to continue over the medium term. Moreover, low debt across the sector and a favourable macro backdrop are supportive of strong shareholder returns.

Hence, Rio Tinto is upgraded to Accumulate from Hold. Target is raised to $96 from $78.

Downgrade

AINSWORTH GAME TECHNOLOGY LIMITED ((AGI)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/0/2

Macquarie suggests the FY19 growth outlook is challenging as new games are underperforming and there is low visibility on the sales to Churchill Downs and Novomatic. The broker's new pre-tax profit forecasts assume another step down in earnings.

Macquarie acknowledges that its forecasts are materially below consensus but highlights the high operating leverage and extremely low visibility.

Earnings per share estimates are cut by -26%. Rating is downgraded to Underperform from Neutral. Target is reduced to $0.95 from $1.05.

AGL ENERGY LIMITED ((AGL)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/4/0

Credit Suisse acknowledges that expectations for a moderate passing through of wholesale prices to end consumers in FY19 is unrealistic. Large customers are increasingly being offered below-market prices in exchange for committing to larger volumes and duration.

Moreover, government pressure, competition and a recent fall in both electricity and REC futures mean the expected increase in retail prices may not eventuate. Credit Suisse downgrades to Neutral from Outperform. Target is reduced to $23.25 from $26.00.

ATLAS ARTERIA ((ALX)) Downgrade to Hold from Add by Morgans .B/H/S: 4/2/0

Morgans continues to expect a strong rise in distributions over coming years, driven by growth in APRR operating earnings, a reduction in debt servicing and legislated tax cuts in France. Dulles Greenway will also pay first distributions after exiting lock-up in FY21.

Morgans reduces the target to $6.53 from $6.90, mainly as a result of updating AUD/EUR to current spot rates and also increasing the 2018 performance fee estimate while incorporating the new debt facility.

As a result, and because of the share price strength, the broker downgrades to Hold from Add.

ACCENT GROUP LIMITED ((AX1)) Downgrade to Reduce from Hold by Morgans .B/H/S: 1/0/1

Morgans has reviewed forecasts for Accent Group. The broker increases assumptions around store roll-out and margin given the improved hedging position and the move away from blanket discounting.

Nevertheless, a steep premium has now been factored into the stock and the broker is mindful of the competition intensity. Rating is downgraded to Reduce from Hold. Target is raised to $1.39 from $1.05.

CLEANAWAY WASTE MANAGEMENT LIMITED ((CWY)) Downgrade to Hold from Add by Morgans .B/H/S: 3/3/0

The company has indicated the China Sword policy restricting the import of contaminated recycling waste has impacted FY18 operating earnings (EBITDA) by -$3-6m. The Queensland government's landfill levy is not expected to have a material impact.

While Morgans remains attracted to the stock, the rating is downgraded to Hold from Add because of strength in the share price. Target is raised to $1.78 from $1.68.

INGHAMS GROUP LIMITED ((ING)) Downgrade to Hold from Add by Morgans and Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/4/0

Morgans has reviewed its investment thesis in the light of strong appreciation in the share price. The broker continues to expect the company to provide an impressive FY18 result.

Moreover, Morgans remains impressed with management's ability to significantly de-leverage the balance sheet in far from perfect operating conditions.

The broker downgrades forecasts for FY18-20 in the light of several emerging headwinds. Nevertheless, rolling forward the valuation, the target increases to $4.20 from $4.05. Rating is downgraded to Hold from Add, given less than 10% upside to the new target.

CEO, Mick McMahon, will be stepping down at the FY18 results. The transition has come earlier than Macquarie expected. The share price reaction has reflected this development and the strong regard in which the CEO is held, the broker suggests.

There is no change to the FY18 outlook, with feed cost increases being recovered via prices, both under contract and on the spot market.

While valuation is undemanding, the broker suggests uncertainty over new management is likely to persist until a permanent CEO arrives and there is clarity on the FY19 outlook.

Rating is downgraded to Neutral from Outperform. $4.00 target retained.

JUMBO INTERACTIVE LIMITED ((JIN)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

The company has flagged a strong trading period and expects total transaction value of around $182m for FY18. Morgans notes good cost control has also been in evidence, particularly in the low jackpot environment.

Forecasts have been upgraded and the broker currently sits ahead of guidance, given management's conservative track record.

With the stock trading above valuation, the broker downgrades to Hold from Add. Investors are expected to be rewarded over the next few years with a forecast 6%-plus gross dividend yield. Target has risen to $4.81 from $4.30.

MIRVAC GROUP ((MGR)) Downgrade to Sell from Neutral by UBS .B/H/S: 4/1/2

UBS economists are now forecasting a -5% plus fall in house prices over the next 12 months which leads the stock analysts to downgrade Mirvac to Sell. UBS believes Mirvac's best customer, the investor, and best market, Sydney, are likely to be most impacted by credit tightening.

The market is forecasting a soft landing for housing, the broker notes, suggesting positive earnings growth out to FY22. UBS sees downside risk beyond FY19, which is largely pre-sold. Target falls to $2.16 from $2.26.

MYOB GROUP LIMITED ((MYO)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 1/4/1

The company will not proceed with an acquisition of Reckon ((RKN)), instead investing $80m in R&D and sales and marketing. Ord Minnett concedes this is the right thing to do, as the longer term revenue growth guidance appeared a stretch.

The broker struggles to envisage why investors would increase positions until free cash flow has either bottomed in FY19 or there is clear evidence of improved returns.

Given limited upside to the new target the broker downgrades to Hold from Buy. Target is reduced $2.94 from $3.95.

REGIS HEALTHCARE LIMITED ((REG)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 2/1/1

RAD inflows from new facilities are likely to mean capital is recycled into developments and will not contribute to net debt reductions in FY19.

Macquarie expects EBITDA growth will be expensed to depreciation & interest payments and result in declines to distributions.

The broker transfers coverage to another analyst and downgrades to Underperform from Neutral. Target is reduced to $3.50 from $4.25.

RAMSAY HEALTH CARE LIMITED ((RHC)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 2/5/1

Credit Suisse believes Ramsay can continue to attract a more complex case mix versus other private hospital operators but will not be immune to a structural slowdown. The broker factors in 3% long-term organic volume growth and 1.5% pricing growth.

This reduces estimates for earnings by an average of -2.5% over the forecast period. The broker considers the stock overvalued and downgrades to Underperform from Neutral. Target is reduced to $56.50 from $68.60.

SANTOS LIMITED ((STO)) Downgrade to Sell from Neutral by UBS .B/H/S: 1/2/3

As part of a general sector review, UBS has decided to downgrade Santos to Sell, preferring Woodside Petroleum ((WPL)) and Origin Energy ((ORG)) instead. Target tumbles to $5.45 from $6.40 for Santos.

UBS has lifted oil price forecasts for the years ahead, but nevertheless finds the Santos share price at present represents a price of US$73/bbl, deemed the highest of all the major energy stocks in Australia, and this is seen as excessive.

WESFARMERS LIMITED ((WES)) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 0/4/2

Wesfarmers has emphasised more disciplined capital allocation and a higher risk threshold for M&A at its investor briefing. Credit Suisse envisages no lack of internal opportunities to support improved returns on capital over time.

While FY18 earnings appear supported by a strong performance in chemicals and growth in Bunnings and Kmart ,the recent share price appreciation causes the broker to downgrade to Neutral from Outperform. Target is reduced to $47.31 from $47.36.

The company's strategy briefing outlined growth prospects for various divisions. Yet,Ord Minnett finds a lack of valuation support because of the challenges to the Coles business and the risks emerging at Bunnings because of the consumer & housing environment.

There is also the risk of an oversupply of ammonium nitrate for industrial businesses and execution risk at Target that the broker cites. Ord Minnett downgrades to Lighten from Hold and lowers the target to $42.50 from $43.00.

Total Recommendations
Recommendation Changes

Broker Recommendation Breakup

Broker Rating

 

Order Company New Rating Old Rating Broker
Upgrade
1 BHP BILLITON LIMITED Buy Neutral Ord Minnett
2 CYBG PLC Buy Neutral Credit Suisse
3 DULUXGROUP LIMITED Neutral Sell Citi
4 ESTIA HEALTH LIMITED Buy Neutral Macquarie
5 GALAXY RESOURCES LIMITED Buy Neutral UBS
6 RIO TINTO LIMITED Buy Neutral Ord Minnett
Downgrade
7 ACCENT GROUP LIMITED Sell Neutral Morgans
8 AGL ENERGY LIMITED Neutral Buy Credit Suisse
9 AINSWORTH GAME TECHNOLOGY LIMITED Sell Neutral Macquarie
10 ATLAS ARTERIA Neutral Buy Morgans
11 CLEANAWAY WASTE MANAGEMENT LIMITED Neutral Buy Morgans
12 INGHAMS GROUP LIMITED Neutral Buy Morgans
13 INGHAMS GROUP LIMITED Neutral Buy Macquarie
14 JUMBO INTERACTIVE LIMITED Neutral Buy Morgans
15 MIRVAC GROUP Sell Neutral UBS
16 MYOB GROUP LIMITED Neutral Buy Ord Minnett
17 RAMSAY HEALTH CARE LIMITED Sell Neutral Credit Suisse
18 REGIS HEALTHCARE LIMITED Sell Neutral Macquarie
19 SANTOS LIMITED Sell Neutral UBS
20 WESFARMERS LIMITED Neutral Buy Credit Suisse
21 WESFARMERS LIMITED Sell Neutral Ord Minnett

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Company New Rating Previous Rating Change Recs
1 JHC JAPARA HEALTHCARE LIMITED -10.0% -38.0% 28.0% 5
2 GXY GALAXY RESOURCES LIMITED 75.0% 50.0% 25.0% 4
3 EHE ESTIA HEALTH LIMITED 50.0% 33.0% 17.0% 4
4 DLX DULUXGROUP LIMITED -36.0% -50.0% 14.0% 7
5 DMP DOMINO'S PIZZA ENTERPRISES LIMITED 38.0% 25.0% 13.0% 8
6 VCX VICINITY CENTRES 50.0% 42.0% 8.0% 5
7 SYD SYDNEY AIRPORT HOLDINGS LIMITED 63.0% 57.0% 6.0% 8
8 RIO RIO TINTO LIMITED 94.0% 88.0% 6.0% 8
9 BHP BHP BILLITON LIMITED 81.0% 75.0% 6.0% 8

Negative Change Covered by > 2 Brokers

Order Symbol Company New Rating Previous Rating Change Recs
1 REG REGIS HEALTHCARE LIMITED 25.0% 67.0% -42.0% 4
2 ING INGHAMS GROUP LIMITED 33.0% 67.0% -34.0% 6
3 TCL TRANSURBAN GROUP 63.0% 86.0% -23.0% 8
4 WES WESFARMERS LIMITED -36.0% -14.0% -22.0% 7
5 MND MONADELPHOUS GROUP LIMITED -40.0% -20.0% -20.0% 5
6 CWY CLEANAWAY WASTE MANAGEMENT LIMITED 50.0% 67.0% -17.0% 6
7 ALX ATLAS ARTERIA 67.0% 83.0% -16.0% 6
8 AGL AGL ENERGY LIMITED 36.0% 50.0% -14.0% 7
9 MGR MIRVAC GROUP 29.0% 43.0% -14.0% 7
10 STO SANTOS LIMITED -33.0% -20.0% -13.0% 6

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Company New Target Previous Target Change Recs
1 GXY GALAXY RESOURCES LIMITED 3.775 3.563 5.95% 4
2 BHP BHP BILLITON LIMITED 34.128 33.128 3.02% 8
3 DMP DOMINO'S PIZZA ENTERPRISES LIMITED 48.635 47.385 2.64% 8
4 RIO RIO TINTO LIMITED 88.064 85.814 2.62% 8
5 SYD SYDNEY AIRPORT HOLDINGS LIMITED 7.378 7.299 1.08% 8
6 CWY CLEANAWAY WASTE MANAGEMENT LIMITED 1.730 1.713 0.99% 6
7 WES WESFARMERS LIMITED 43.321 42.943 0.88% 7
8 ING INGHAMS GROUP LIMITED 3.950 3.925 0.64% 6
9 JHC JAPARA HEALTHCARE LIMITED 1.824 1.815 0.50% 5
10 DLX DULUXGROUP LIMITED 7.241 7.227 0.19% 7

Negative Change Covered by > 2 Brokers

Order Symbol Company New Target Previous Target Change Recs
1 REG REGIS HEALTHCARE LIMITED 4.250 4.500 -5.56% 4
2 MND MONADELPHOUS GROUP LIMITED 15.224 15.886 -4.17% 5
3 STO SANTOS LIMITED 5.542 5.690 -2.60% 6
4 TCL TRANSURBAN GROUP 12.820 13.149 -2.50% 8
5 RHC RAMSAY HEALTH CARE LIMITED 68.236 69.749 -2.17% 8
6 AGL AGL ENERGY LIMITED 24.169 24.561 -1.60% 7
7 ALX ATLAS ARTERIA 6.540 6.638 -1.48% 6
8 VCX VICINITY CENTRES 2.806 2.825 -0.67% 5
9 MGR MIRVAC GROUP 2.361 2.376 -0.63% 7
10 EHE ESTIA HEALTH LIMITED 3.650 3.667 -0.46% 4

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Company New EF Previous EF Change Recs
1 EHE ESTIA HEALTH LIMITED 17.167 17.000 0.98% 4
2 WOR WORLEYPARSONS LIMITED 61.368 61.035 0.55% 6
3 AIZ AIR NEW ZEALAND LIMITED 32.011 31.856 0.49% 4
4 LNK LINK ADMINISTRATION HOLDINGS LIMITED 38.440 38.290 0.39% 7
5 CTX CALTEX AUSTRALIA LIMITED 233.586 232.729 0.37% 7
6 MFG MAGELLAN FINANCIAL GROUP LIMITED 129.560 129.360 0.15% 5
7 BSL BLUESCOPE STEEL LIMITED 148.817 148.650 0.11% 6
8 SYD SYDNEY AIRPORT HOLDINGS LIMITED 18.190 18.172 0.10% 8
9 TCL TRANSURBAN GROUP 26.953 26.928 0.09% 8
10 DLX DULUXGROUP LIMITED 38.383 38.350 0.09% 7

Negative Change Covered by > 2 Brokers

Order Symbol Company New EF Previous EF Change Recs
1 MTS METCASH LIMITED 15.535 21.535 -27.86% 7
2 ALX ATLAS ARTERIA 30.608 32.808 -6.71% 6
3 MIN MINERAL RESOURCES LIMITED 164.250 173.500 -5.33% 4
4 RCR RCR TOMLINSON LIMITED 24.333 24.900 -2.28% 3
5 CBA COMMONWEALTH BANK OF AUSTRALIA 536.975 544.938 -1.46% 8
6 FPH FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED 34.291 34.758 -1.34% 3
7 HVN HARVEY NORMAN HOLDINGS LIMITED 32.651 33.066 -1.26% 7
8 ALQ ALS LIMITED 34.512 34.890 -1.08% 6
9 REG REGIS HEALTHCARE LIMITED 18.300 18.500 -1.08% 4
10 JHC JAPARA HEALTHCARE LIMITED 7.975 8.033 -0.72% 5

Technical limitations

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CHARTS

AGI AGL ALX AX1 BHP CWY EHE ING JIN MGR ORG REG RHC RIO RKN STO WES

For more info SHARE ANALYSIS: AGI - AINSWORTH GAME TECHNOLOGY LIMITED

For more info SHARE ANALYSIS: AGL - AGL ENERGY LIMITED

For more info SHARE ANALYSIS: ALX - ATLAS ARTERIA

For more info SHARE ANALYSIS: AX1 - ACCENT GROUP LIMITED

For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED

For more info SHARE ANALYSIS: CWY - CLEANAWAY WASTE MANAGEMENT LIMITED

For more info SHARE ANALYSIS: EHE - ESTIA HEALTH LIMITED

For more info SHARE ANALYSIS: ING - INGHAMS GROUP LIMITED

For more info SHARE ANALYSIS: JIN - JUMBO INTERACTIVE LIMITED

For more info SHARE ANALYSIS: MGR - MIRVAC GROUP

For more info SHARE ANALYSIS: ORG - ORIGIN ENERGY LIMITED

For more info SHARE ANALYSIS: REG - REGIS HEALTHCARE LIMITED

For more info SHARE ANALYSIS: RHC - RAMSAY HEALTH CARE LIMITED

For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED

For more info SHARE ANALYSIS: RKN - RECKON LIMITED

For more info SHARE ANALYSIS: STO - SANTOS LIMITED

For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED