Weekly Ratings, Targets, Forecast Changes

This story features ORORA LIMITED, and other companies. For more info SHARE ANALYSIS: ORA

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 July 9 to Friday July 13, 2018
Total Upgrades: 8
Total Downgrades: 15
Net Ratings Breakdown: Buy 44.55%; Hold 39.95%; Sell 15.51%

This seldom happens, but we missed Deutsche Bank's downgrade of Orora ((ORA)) on Friday, which has been updated since. The result is, however, this downgrade is not as yet reflected in the overview of the week's upgrades and downgrades.

Total downgrades for the week ending Friday, 13th July 2018 (how fitting!) thus stand at 16 versus eight upgrades. Clearly, the buoyant mood in the Australian share market is being met with the usual opposite response from stockbroking analysts.

Commodities stocks feature prominently on the positive side, with Western Areas receiving two upgrades (only one to Buy) as nickel price forecasts continue to rise. Independence Group and Origin Energy also received upgrades during the week.

Apart from Orora, many more high flyers are starting to receive downgrades from analysts, including NextDC, Altium, Appen, Sydney Airport and Fisher & Paykel Healthcare.

Equally noteworthy, ten of the sixteen downgrades moved to Sell, including Orora's.

Consensus target prices are still rising, with the week's top dog, Integral Diagnostics, enjoying a boost of 9%, beating WiseTech Global, Sonic Healthcare and Woolworths for the week. On the other side of the ledger, we find fewer stocks suffering from declining price targets with Magellan Financial, Mineral Resources and Spark Infrastructure the only ones worth mentioning.

The underlying trend for earnings estimates is a mixed one, with both sides amply represented. Ansell takes home the upper crown for the week, enjoying an increase to estimates of 10%, followed by Healthscope, Magellan Financial and Alacer Gold. Those with the largest decreases include gold miner Perseus Mining, Mineral Resources, NextDC, and struggling jeweller Michael Hill.

Upgrade

BANK OF QUEENSLAND LIMITED ((BOQ)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/1/2

Bank of Queensland has underperformed in 2018 and is now more attractively priced in Citi's view. The stock now largely reflects the weaker outlook ahead for retail banking and regional banks.

Moreover, the broker argues that consolidation is probable among regionals, and Bank of Queensland shareholders should be set to benefit. Rating is upgraded to Buy from Neutral. Target is raised to $11.50 from $11.00.

INTEGRAL DIAGNOSTICS LIMITED ((IDX)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 2/1/0

Morgan Stanley has integrated recent acquisitions into its model which brings a material rise in valuation and the growth outlook. The broker believes the outlook is now more certain and, moreover, FY18 guidance for 20% net profit growth has been reaffirmed.

Rating is upgraded to Equal-weight from Underweight. Target is raised to $3.05 from $2.25. Industry view: In-Line.

INDEPENDENCE GROUP NL ((IGO)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 2/3/2

In a general sector update, Deutsche Bank analysts observe how trade war tensions between China and the USA have had a downward impact on metals prices. The analysts see weakness in aluminium, copper and nickel providing opportunities for investors.

All three metals mentioned should be supported by short term supply limitations. Nickel has commenced a bullish uptrend, in the analysts' opinion. Net present Value (NPV) for Independence Group has jumped to $5.50 from $4.40 on higher nickel price forecasts. Upgrade to Buy from Hold.

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

Tabcorp ((TAH)) has exercised its option to acquire 3.5m shares in Jumbo Interactive at $2.37 each. Subsequently Tabcorp sold around 2.85m shares at $4.26 each and now holds 12.5% of the stock.

Morgans believes the decline in the share price has been caused by investors speculating that Tabcorp will not take over the company. The broker never anticipated such a move believing that, while the business is a good fit down the track, Tabcorp has a significant amount of work to do internally.

Rating is upgraded to Add from Hold. Target is raised to $4.84 from $4.81.

ORIGIN ENERGY LIMITED ((ORG)) Upgrade to Buy from Neutral by Citi .B/H/S: 6/2/0

Citi adjusts its estimates, marking to market for oil and FX in the June quarter and reflecting pipeline flow and LNG cargo data in production forecasts. The broker also makes adjustments to the debt schedule leading to lower interest expense.

As a result, near-term earnings for FY18-20 are raised by up to 6%. Rating is upgraded to Buy from Neutral and the broker continues to prefer Origin Energy over AGL ((AGL)), given it has less exposure to lower wholesale prices. Target is raised to $11.02 from $10.38.

SONIC HEALTHCARE LIMITED ((SHL)) Upgrade to Neutral from Sell by Citi .B/H/S: 3/5/0

Ahead of upcoming reporting season, Citi has transferred coverage of healthcare stocks to a new lead analyst, which has led to a general re-assessment of preferences, forecasts and valuations.

In a general sense, the new king in town remains most positive on those with international exposure, even with elevated valuations suggesting a little bit of caution seems justified.

The latter also applies for Sonic Healthcare, but more so because of ongoing risks and not because of valuation. Upgrade to Neutral from Sell. New price target $26 (was $21.75).

WESTERN AREAS NL ((WSA)) Upgrade to Buy from Sell by Deutsche Bank and Upgrade to Hold from Sell by Ord Minnett .B/H/S: 3/2/2

In a general sector update, Deutsche Bank analysts observe how trade war tensions between China and the USA have had a downward impact on metals prices. The analysts see weakness in aluminium, copper and nickel providing opportunities for investors.

All three metals mentioned should be supported by short term supply limitations. Nickel has commenced a bullish uptrend, in the analysts' opinion. Net present Value (NPV) for Western Areas has jumped to $4 on higher nickel price forecasts; from $2.90 previously.

Double-whammy upgrade to Buy from Sell.

Ord Minnett expects the nickel market to remain in deficit beyond 2018, while higher prices are required to provide the incentive for new supply to keep up with the growth in demand.

The broker considers nickel one of the few commodities that is trading below its long-run real average price. New sources of supply will be higher cost and technically challenging as well.

The broker upgrades to Hold from Sell and raises the target to $3.70 from $2.65.

Downgrade

ALTIUM LIMITED ((ALU)) Downgrade to Sell from Neutral by UBS .B/H/S: 0/2/2

UBS believes the valuation has become stretched and the minimal downside risks are now priced in. Business momentum remains strong and earnings risks in the medium term are to the upside.

As valuation risks are now heightened the broker downgrades to Sell from Neutral. Target is raised to $18.50 from $15.60.

APPEN LIMITED ((APX)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/1/0

Following the strong share price performance UBS downgrades to Neutral from Buy. The broker's core investment thesis is intact and the earnings outlook for the medium term remains positive.

UBS estimates first half earnings of $24m. Target is raised to $13.10 from $12.00.

CHARTER HALL LONG WALE REIT ((CLW)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/1/1

UBS downgrades to Neutral from Buy on the back of a strong performance in the share price. The broker expects the asset mix to remain in demand but this is incorporated in the price, while there is increased uncertainty around acquisitions.

Security holders are being asked to approve the sale of the ATO building in Adelaide. After taking into account the divestment of Grace Logistics, WW Dandenong's final payment and this building sale, UBS expects the company to swiftly deploy proceeds to maintain a growing distribution profile. Target is unchanged at $4.25.

EVOLUTION MINING LIMITED ((EVN)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 1/4/3

It appears, analysts at Deutsche Bank have used a general sector update on mining to re-assess valuations and outlooks for gold mining operations listed on the ASX. The report suggests a lot of detailed analysis has preceded.

Despite a general increase in Net Present Value (NPV) of about 9% across gold miners, Evolution Mining has been downgraded to Sell on valuation.

FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED ((FPH)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/0/3

Ahead of upcoming reporting season, Citi has transferred coverage of healthcare stocks to a new lead analyst, which has led to a general re-assessment of preferences, forecasts and valuations.

In a general sense, the new king in town remains most positive on those with international exposure, even with elevated valuations suggesting a little bit of caution seems justified.

Rating is downgraded to Sell from Neutral following share price rally. Price target falls to NZ$12.50 from NZ$13.40.

GATEWAY LIFESTYLE GROUP ((GTY)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/1/0

Hometown has come back with a $2.30 ($2.35 pre-dividend) bid for Gateway, gazumping Brookfield's bid which gazumped Hometown's initial bid. Hometown now holds 18.2% of the company, UBS notes.

UBS does not rule out another counter from Brookfield, or someone else, but believes an even higher price is pushing into overvalued territory. Hence a downgrade to Neutral from Buy, given the share price is aligned with the latest bid. Target rises to $2.30 from $2.10.

INGHAMS GROUP LIMITED ((ING)) Downgrade to Sell from Neutral by UBS .B/H/S: 1/4/1

UBS downgrades to Sell from Neutral, believing consensus expectations are too high for FY19. FY19-21 forecasts are reduced by -6-7%. Target is reduced to $3.40 from $3.70.

The broker believes the market is over estimating cost reductions and the ability to pass through costs. The main risk to the stock's Sell rating, UBS acknowledges, is capital management at the FY18 result.

INVOCARE LIMITED ((IVC)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/5/1

Ahead of upcoming reporting season, Citi has transferred coverage of healthcare stocks to a new lead analyst, which has led to a general re-assessment of preferences, forecasts and valuations.

In a general sense, the new king in town remains most positive on those with international exposure, even with elevated valuations suggesting a little bit of caution seems justified.

Ironically, InvoCare is part of the healthcare sector at Citi. Rating downgraded to Neutral from Buy following share price appreciation. Price target improves to $14.25 from $14.

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

Morgan Stanley believes Lovisa is an expensive stock. While acknowledging the options in a global roll-out the broker suggests that maintaining the multiple is crucial to the steeper and longer-dated growth profile.

Regardless of the potential, the broker envisages the stock has elevated execution risks and lower terminal multiple than others which have engaged in such a roll-out. Rating is downgraded to Underweight from Equal-weight. Target is raised to $9.50 from $5.05. Industry view is In-Line.

MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Downgrade to Hold from Add by Morgans .B/H/S: 2/2/1

The company reported funds under management of $69.51bn, up 3.2% in June. Flows weakened over the second half, as expected. Morgans believes the balance sheet and the acquisition of Airlie provide options for growth.

Airlie is expected to raise retail funds in the near term which can add some growth, although Morgans believes the US low-carbon strategies need to attract meaningful flows, or further acquisitions may be required.

Rating is downgraded to Hold from Add. Target is reduced to $26.05 from $28.30.

NEXTDC LIMITED ((NXT)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 4/2/1

Deutsche Bank has downgraded to Sell from Hold, arguing the market is ignoring the risks that are attached to the company's significant expansion. The broker also points at the valuation premium vis-a-vis offshore peers.

The current significant increase in capex will weigh on NextDC's free cash flow generation, point out the analysts. Their negative stance is centred around the prediction that greater demand driven by hyperscale service providers is likely to lead to a deterioration in pricing. Target $6.50 (was $7.10).

PENDAL GROUP LIMITED ((PDL)) Downgrade to Hold from Add by Morgans .B/H/S: 2/4/0

The company reported funds under management were up 1% in the June quarter. Further minor outflows were experienced by JO Hambro. The annualised risk is relatively minor, although Morgans envisages some risk of small outflows in the coming six months.

The broker downgrades to Hold from Add, believing the prospect for further outflows, concentration of performance fees, high fixed cost growth and the potential sell down by Westpac ((WBC)) will weigh on sentiment. Target is reduced to $11.00 from $11.60.

ST BARBARA LIMITED ((SBM)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 0/3/2

It appears, analysts at Deutsche Bank have used a general sector update on mining to re-assess valuations and outlooks for gold mining operations listed on the ASX. The report suggests a lot of detailed analysis has preceded.

Despite a general increase in Net Present Value (NPV) of about 9% across gold miners, St Barbara has been downgraded to Sell on valuation.

SPARK INFRASTRUCTURE GROUP ((SKI)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/3/1

Draft rate of return guidelines have been released by the Australian Energy Regulator to determine the next five-year periods from 2020. The reduction to allowed equity risk premium is worse than Credit Suisse expected.

A clear agenda to reduce the network outperformance versus allowances has emerged as a response to high energy prices, in the broker's view.

Several factors are expected to constrain Spark Infrastructure's cash flow and the broker downgrades to Underperform from Neutral. Target is reduced to $2.20 from $2.45.

SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 4/3/1

The company faces a period of higher regulatory and contracting risk, Credit Suisse observes. Dividend growth for the next five years is expected to be lower than the growth over the past five years.

Sydney Airport is expected to start paying tax in 2021 and the broker expects management to smooth dividend growth to avoid any decline post 2021. Dividend estimates are reduced by -5% and -3% for 2019 and 2020 respectively.

The broker lowers the rating to Underperform from Neutral and trims the target to $6.75 from $6.80.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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