Weekly Reports | Aug 13 2018
This story features EVOLUTION MINING LIMITED, and other companies. For more info SHARE ANALYSIS: EVN
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 August 6 to Friday August 10, 2018
Total Upgrades: 6
Total Downgrades: 16
Net Ratings Breakdown: Buy 44.46%; Hold 39.80%; Sell 15.74%
The ASX is clearly not part of Wall Street, where businesses report better than expected, and in large percentage numbers. In contrast, the local reporting season has started off on a much more benign footing, and last week's response from stockbroking analysts reflects just that.
For the week ending Friday, 10th August 2018, FNArena registered 16 downgrades in ratings for individual ASX-listed stocks against only six upgrades, and that pretty much tells the story for the opening week of the August reporting season.
Credit provider and re-seller of heavy equipment and cars EclipX received no less than three downgrades following its shock profit warning. AGL Energy received two downgrades. Only two of the six upgrades moved to Buy. Six of the 16 downgrades moved to Sell.
Magellan Financial delivered a positive surprise and enjoyed the largest positive adjustment to consensus price target for the week, followed by Speedcast International and ALS ltd. But negative revisions were equally large, with EclipX' large reduction (-36%) followed at a distance by AGL Energy, a2 Milk, Ardent Leisure and AMP.
The table for positive revisions to estimates shows a number of large increases, headed by Tabcorp, followed by Magellan Financial, IOOF Holdings, Crown Resorts and Suncorp. On the flipside, there are large reductions for Ardent Leisure, AMP, Independence Group, Mineral Resources, and, yes, EclipX.
Reporting season continues for the next three weeks.
Upgrade
EVOLUTION MINING LIMITED ((EVN)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 2/5/1
Evolution Mining has corrected significantly from its peak and now shows modest downside to Morgan Stanley's target, revised to $2.60 from $2.70. This has prompted the broker to upgrade to Equal-weight from Underweight, largely driven by better multiples on the base case scenario. Industry view is: In-Line.
REGIS RESOURCES LIMITED ((RRL)) Upgrade to Hold from Reduce by Morgans .B/H/S: 1/2/4
Gold production for the June quarter was up 7.8%, only marginally below the record in the December quarter. Guidance is for production of 340-370,000 ounces at AISC in the range of $985-1055/oz for FY19.
Morgans increases valuation, raising the target to $4.40 from $3.65 on the back of the updated resource and reserve base, approval of the Rosemont development and advances at McPhillamys.
Rating is upgraded to Hold from Reduce, using the spot gold price and a zero discount rate.
SPEEDCAST INTERNATIONAL LIMITED ((SDA)) Upgrade to Add from Hold by Morgans .B/H/S: 2/2/0
Morgans observes the company is cutting costs to gain growth and expects the first half will be negatively affected by higher costs. Cycling six months of UltiSat is expected to produce an incremental US$30m in revenue. Offsetting this will be integration costs to realise UltiSat and Harris CapRock synergies.
The company will report its results in August 28. Morgans upgrades its rating to Add from Hold and raises the target to $7.21 from $5.57.
SEEK LIMITED ((SEK)) Upgrade to Hold from Reduce by Morgans .B/H/S: 2/3/3
Morgans observes Seek has pushed out a lift off in profit, committing to another increase in operating and capital expenditure to grow market share in China, Southeast Asia and Australia. The company intends to pursue market dominance and more durable long-term growth.
This has prompted a downgrade in the broker's forecasts to reflect both the FY18 result and the guidance for FY19. Morgans notes, to date, the company has shown the ability to respond to competitive threats and, as the stock is now in line with the target, upgrades its rating to Hold from Reduce. Target is raised to $20.24 from $19.06.
TABCORP HOLDINGS LIMITED ((TAH)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 6/1/0
Tabcorp's FY18 results were in line with Ord Minnett forecasts. EBIT was below estimates due to declines in gaming, lotteries and Keno, plus wagering margins. Synergy guidance of $130m per annum by FY21 was reiterated with significant upside risk.
Ord Minnett has increased its normalised earnings forecasts by 7.5% for FY19 and 9.6% for FY20. Target is lifted to $4.50 from $4.20 and rating upgraded to Hold from Lighten in line with the increased valuation.
VICINITY CENTRES ((VCX)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/1/0
The company has an MoU with Keppel Capital to establish and manage a wholesale property fund via a 50/50 JV. Vicinity proposes to seed the fund with $1bn in shopping centres from its balance sheet.
The fund is expected to contain eight real assets across five Australian states, offering a yield in the mid 6% range. Credit Suisse suggests the next hurdle will be securing additional investor interest in the vehicle.
Rating is upgraded to Outperform from Neutral, given more certainty regarding the outlook for asset sales. $2.79 target maintained.
Downgrade
THE A2 MILK COMPANY LIMITED ((A2M)) Downgrade to Sell from Neutral by Citi .B/H/S: 4/1/1
Citi has cut earnings forecasts for a2 ahead of its earnings result to reflect the increasing likelihood excess inventory is building domestically. Given the FY18 result has largely been pre-released, this is more of a call on FY19, the broker notes.
Given the risk the broker sees to the first half FY19 result the broker downgrades to Sell from Neutral, despite a2's strong brand. Target falls to $9.50 from $10.90.
ADELAIDE BRIGHTON LIMITED ((ABC)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/2/2
Ahead of the release of Adelaide Brighton's half year results on August 22, Ord Minnett downgrades to Lighten from Hold and raises the target price to $6.00 from $5.70.
AGL ENERGY LIMITED ((AGL)) Downgrade to Underweight from Equal-weight by Morgan Stanley and Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 2/4/1
Morgan Stanley believes AGL's earnings will peak in FY19, which drives a downgrade to Underweight from Equal-weight. The main policy catalysts are the National Energy Guarantee, the ACCC recommendations and potential direct intervention with respect to Liddell power station.
AGL has the highest earnings exposure to policy changes in the broker's coverage but the risks are considered manageable. Morgan Stanley reduces the target to $19.44 from $22.88. Industry view: Cautious.
The company has guided to a flat result in FY19 and Morgan Stanley suspects there is significant downside revision possible to FY20 and FY21 estimates.
AGL reported FY18 results that were better than Deutsche Bank expected. Strong wholesale earnings more than offset a significant fall in customer returns and higher costs. The broker downgrades to Hold from Buy and reduces the target to $22.25 from $25.45.
The outlook is for flat earnings for at least FY19 and the broker lowers forecasts accordingly, noting wholesale electricity prices are falling and energy retailing and regulatory headwinds continue to confront the company.
AMP LIMITED ((AMP)) Downgrade to Hold from Add by Morgans .B/H/S: 3/4/1
AMP reported in line with recent guidance. Cost controls in the half were the big positive, Morgans notes, yet management has not altered prior full-year cost guidance, suggesting conservatism.
That said, Morgans believes that despite its de-rating, lingering pressures remain on wealth management and wealth protection with regard funds outflow risk and whatever the Royal Commission might yet do. The broker had not yet updated forecasts for the May profit warning so a -54% downgrade to 2018 earnings follows.
Target falls to $3.88 from $4.56. Downgrade to Hold from Add.
BLUESCOPE STEEL LIMITED ((BSL)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 6/1/0
Deutsche Bank increases 2018 steel price estimates for east Asia and the US midwest. The uplift is likely to be short term and the broker expects steel spreads to decline from here on.
While recognising this is the high point in the cycle, the broker also believes there is additional risk to earnings given the enterprise agreement that is currently being re-negotiated. Rating is downgraded to Hold from Buy. Target is raised to $18 from $17.
ECLIPX GROUP LIMITED ((ECX)) Downgrade to Hold from Buy by Deutsche Bank and Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Neutral from Buy by Citi .B/H/S: 3/3/0
Deutsche Bank observes the company's business has been increasing in complexity for some time, supported by significant investment in acquisitions, working capital and capitalised expenditure. This increases the risks in an already leveraged operating model.
Deutsche Bank was willing, previously, to accept these higher risks, given the market opportunity, however the downgrade to profit expectations raises questions about execution and visibility over parts of the business. Rating is downgraded to Hold from Buy. Target is reduced to $2.10 from $4.50.
Credit Suisse downgrades to Neutral from Outperform but also suggests there is a possibility the market's reaction to the company's profit warning might have been overdone.
Ascribing zero valuation to Right2Drive and GraysOnline, with a similar multiple for fleet operations as has SG Fleet ((SGF)), still generates a valuation of $2.10 for the business, calculate the analysts.
But risks have risen and material questions are now being asked given the quick deterioration in the outlook. Target price cut to $1.90 from $4.10.
The company issued a profit warning after market yesterday and Citi analysts have responded by pulling back their recommendation to Neutral from Buy. Price target tumbles to $3.17 from $4.50 on reduced forecasts.
The company's net profit growth forecasts have been halved, with FY18 guidance reduced to 13-17% growth from 27-30%.
Not exactly helping is the fact Citi analysts continue to see downside risks in the short term from increased infrastructure spending, competition for Right2Drive, lower used car pricing and declining new vehicle sales.
FLETCHER BUILDING LIMITED ((FBU)) Downgrade to Underperform from Outperform by Credit Suisse .B/H/S: 0/4/1
Following a change in analyst, Credit Suisse reviews forecasts, noting the company is emerging from a major re-setting of the business. The broker remains well disposed towards the new CEO, the strategy and the Australian turnaround but factors in a reversion to mid-cycle activity levels in New Zealand.
Rating is downgraded to Underperform from Outperform. Target is reduced to NZ$6.08 from NZ$8.40. Potential for more confidence to emerge in the next 12 months exists, Credit Suisse asserts, if Fletcher can get early traction in Australia and successfully exit Formica and the B&I business.
FLIGHT CENTRE LIMITED ((FLT)) Downgrade to Sell from Neutral by Citi .B/H/S: 2/3/3
The share price has been on strong uptrend with Citi analysts referencing a positive turn in the industry's cycle with oil prices having increased by circa 40% over the past 12 months; this is driving up airfares, helping revenue growth for travel agents such as Flight Centre.
However, the immediate outlook will be all about cost out, say analysts at Citi, and with the share price already factoring in material upside, they have decided to downgrade to Sell from Neutral.
Target price rises a further 9% to $59, but remains well short of where the share price is trading. Forecasts have been lifted by 3-4%.
INDEPENDENCE GROUP NL ((IGO)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 2/2/3
Following the updated reserves at Nova Morgan Stanley remodels the asset and expects negative revisions to consensus estimates for FY19 and FY20. The valuation for Nova has decreased -12% despite accounting for an expanded throughput rate from the second half of FY20.
The broker downgrades to Underweight from Equal-weight and lowers the target to $3.85 from $4.45. Industry view is: In-Line.
MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/2/1
Following a 20% run up in the share price over several months the stock has re-rated from historical PE lows. Hence, Credit Suisse downgrades to Neutral from Outperform.
The broker also has some concerns over fee margins in the medium term, given a recent decision to introduce a new class for the High Conviction fund with a lower management fee. FY18 results were slightly ahead of estimates. The broker raises the target to $29 from $28.
MIRVAC GROUP ((MGR)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/2/2
It appears Citi analysts had been expecting more, but they do note FY19 guidance came out in-line with market consensus for EPS growth and slightly above it in terms of funds from operations (FFO).
All in all, Citi believes the FY18 result combined with guidance shows the resilience that is embedded in the business. Nevertheless, a downgrade to Neutral as suggested upside is insufficient to warrant a Buy rating. Target gains 2c to $2.47.
SIMS METAL MANAGEMENT LIMITED ((SGM)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/3/2
Ord Minnett believes the business is likely to have received benefits from a supportive ferrous scrap environment, with strong export volumes out of both the US and UK.
However, the broker is somewhat concerned about a temperate ban on scrap into China that may have had a disproportionately large impact on second half earnings.
Rating is downgraded to Hold from Accumulate because of the uncertain outlook. Target is reduced to $17.00 from $17.20.
TRANSURBAN GROUP ((TCL)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 5/2/1
The main takeaway from Transurban's result for Credit Suisse was guidance to 5.5-7.5% compound growth in free cash flow over three years, down from an average midpoint of 11% for the past five. Dividend guidance also fell short of the broker.
The company appears to be entering a more intensive investment phase, Credit Suisse notes, while asset prices remain elevated, and more exposed to delivery challenges for its star NorthConnex project than the broker had expected. NorthConnex is likely to be delayed.
Downgrade to Neutral from Outperform. Target falls to $12.30 from $12.80.
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CHARTS
For more info SHARE ANALYSIS: A2M - A2 MILK COMPANY LIMITED
For more info SHARE ANALYSIS: ABC - ADBRI LIMITED
For more info SHARE ANALYSIS: AGL - AGL ENERGY LIMITED
For more info SHARE ANALYSIS: AMP - AMP LIMITED
For more info SHARE ANALYSIS: BSL - BLUESCOPE STEEL LIMITED
For more info SHARE ANALYSIS: EVN - EVOLUTION MINING LIMITED
For more info SHARE ANALYSIS: FBU - FLETCHER BUILDING LIMITED
For more info SHARE ANALYSIS: FLT - FLIGHT CENTRE TRAVEL GROUP LIMITED
For more info SHARE ANALYSIS: IGO - IGO LIMITED
For more info SHARE ANALYSIS: MFG - MAGELLAN FINANCIAL GROUP LIMITED
For more info SHARE ANALYSIS: MGR - MIRVAC GROUP
For more info SHARE ANALYSIS: RRL - REGIS RESOURCES LIMITED
For more info SHARE ANALYSIS: SEK - SEEK LIMITED
For more info SHARE ANALYSIS: SGF - SG FLEET GROUP LIMITED
For more info SHARE ANALYSIS: SGM - SIMS LIMITED
For more info SHARE ANALYSIS: TAH - TABCORP HOLDINGS LIMITED
For more info SHARE ANALYSIS: TCL - TRANSURBAN GROUP LIMITED
For more info SHARE ANALYSIS: VCX - VICINITY CENTRES