Weekly Reports | Aug 20 2018
By Rudi Filapek-Vandyck, Editor FNArena
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.
Period: Monday August 13 to Friday August 17, 2018
Total Upgrades: 12
Total Downgrades: 28
Net Ratings Breakdown: Buy 43.19%; Hold 41.16%; Sell 15.64%
We are past the halfway mark of the month, and past halfway in the local reporting season if we measure by market capitalisation, but far from it in terms of numbers of Australian companies reporting.
And it is raining downgrades for individual ASX-listed entities. For the week ending Friday, 17th August 2018, FNArena registered no less than 28 downgrades against twelve upgrades. Six out of the dozen upgrades only moved as far as Neutral/Hold.
REA Group was the sole recipient of two upgrades, with only one moving to Buy.
Clearly, there was more action going on in the downgrade department, though only five out of the 28 moved to a Sell rating. Aurizon received two downgrades, CSL did so too, GPT was downgraded four times, while ASX20 members Origin Energy and Telstra also received two downgrades each. Telstra was the only one on that list to receive a fresh Sell rating.
Consensus target prices provided a positive offset in that average increases proved larger than downward adjustments. Resurrected Phoenix Baby Bunting enjoyed the week’s largest gain (67%), followed by CSL, New Hope, Magellan Financial and Wesfarmers. On the negative side, the largest blow was aimed at Pact Group (-18%), followed by AGL Energy, SG Fleet, Origin Energy and Challenger.
Baby Bunting also tops the table for positive revisions to earnings estimates, handsomely beating BlueScope Steel, Origin Energy, Treasury Wine Estates, REA Group and Magellan Financial. Note the gains booked by these stocks range between 60% for Baby Bunting and 20% for Magelllan.
The table for negative adjustments is this week cut short due to a technical problem, but it is clear nevertheless negative adjustments have been smaller than positive revisions during the week; that can only be a further positive. Aveo Group was hit hardest, followed by Telstra and Pilbara Minerals.
The local reporting season accelerates into much higher numbers in the week ahead.
BELLAMY’S AUSTRALIA LIMITED ((BAL)) Upgrade to Add from Hold by Morgans .B/H/S: 2/0/0
The company’s share price has fallen around -60% from its March high, which Morgans attributes to the delay in receiving registration for its Chinese labelled infant formula products. The delay is likely due to the merger of several of China’s agencies into a single regulatory body.
Morgans likes the stock and believes the delay has afforded investors the opportunity to acquire a company with a premium brand operating in a growing category.
With the stock oversold and evidence that China’s regulatory agency SAMR is back in business Morgans upgrades to an Add rating from Hold. Target is reduced to $13.00 from $18.50.
COMPUTERSHARE LIMITED ((CPU)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 0/6/1
FY18 results were in line with guidance and growth was supported by higher margin income and an improved performance in the US, Deutsche Bank observes. Management EPS was up 14.1% in constant currency terms.
The broker upgrades to Hold from Sell on the back of stronger than expected margins in the US mortgage services. Target is $19.20.
DOWNER EDI LIMITED ((DOW)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 5/0/0
Downer delivered a full-year result in line with guidance for the seventh year in a row. Management provided a very confident FY19 outlook, Credit Suisse notes, underpinned by expected significant improvement from Spotless.
Ongoing state government investment in infrastructure and a strong resources sector translate to attractive growth opportunities for Downer. The risk profile is thus improving, leading Credit Suisse to upgrade to Outperform from Neutral. Target rises to $8.25 from $7.00.
INDEPENDENCE GROUP NL ((IGO)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 2/3/2
While the ramp up at Nova is complete, Macquarie notes hitting guidance remains key to the outlook. The broker believes FY19 production and cost guidance is the critical target, given the number of downgrades to guidance the mine has suffered to date.
Following the fall in the share price stock is now trading at a modest discount to the target, raised to $4.70 from $4.50, and Macquarie upgrades to Neutral from Underperform.
JAMES HARDIE INDUSTRIES N.V. ((JHX)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 5/2/0
First quarter net profit was below estimates but Ord Minnett is pleased to observe that exterior volume growth has returned to a rate above the segment’s market index. The broker notes management is positive about the Fermacell business.
Rating is upgraded to Hold from Lighten based on valuation. Target is raised to $23.00 from $22.30.
MCMILLAN SHAKESPEARE LIMITED ((MMS)) Upgrade to Buy from Neutral by Citi .B/H/S: 1/3/0
Citi has made a valuation call, upgrading to Buy from Neutral. Target price has increased to $17.26 from $16.69.
It is the stockbroker’s view that organic growth in novated leasing and salary packaging remains robust, while discussions from industry participants seem to be indicating good opportunities for ongoing growth as some fleets transition from corporate to consumer.
OZ MINERALS LIMITED ((OZL)) Upgrade to Buy from Neutral by UBS .B/H/S: 5/2/0
UBS believes the share price has fallen too deeply, probably on the back of a weakening copper price. Hence the decision was made to upgrade to Buy from Neutral. Target price has lifted to $11.00 from $10.50.
About the FY18 result, the analysts suggest it came out ahead of expectations, with Carrapateena on schedule and on budget.
REA GROUP LIMITED ((REA)) Upgrade to Add from Hold by Morgans and Upgrade to Neutral from Underperform by Macquarie .B/H/S: 3/3/1
REA remains on track to deliver 20%+ earnings growth in FY19, Morgans suggests, following the recent expansion in the number of agents subscribing to Premiere All and Highlight All packages. The notable increase offsets the impact of a -5% drop in capital city listings.
REA is thus more insulated from the impact of falling house prices than market concerns would suggest, Morgans believes. The US and Asian businesses are also contributing, albeit at a slower pace than domestically. Target rises to $95.41 from $87.66. Upgrade to Add from Hold.
FY18 earnings were in line with expectations. Macquarie has a more positive outlook for mix and depth penetration heading into FY19, to offset volume weakness.
The broker lifts the target 4.7% to $90 and upgrades to Neutral from Underperform.
SG FLEET GROUP LIMITED ((SGF)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/1/0
Citi has decided to upgrade to Buy from Neutral on management’s signals that acquisitions remain very much on the agenda. The FY18 report itself was a “beat”, as already established on the day of the release (see Broker Call Report yesterday).
It is the analysts view that rather modest organic growth will be supplemented by increased penetration of clients with services offerings, apart from acquisitions. Target price loses -3% to $4.18.
Citi analysts have earlier speculated about potential synergies were SG Fleet to combine with EclipX ((ECX)) and that speculation is again hinted at today.
WESFARMERS LIMITED ((WES)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 0/5/2
Wesfarmers’ FY18 result beat the broker by a nose thanks to department store operations and the chemicals, energy and fertilisers business. The $1.20 dividend missed the broker’s $1.22 estimate.
Despite signs of slower sales from Bunnings, Ord Minnett believes sales will moderate rather than fall sharply.
The broker notes valuation support is emerging for Wesfarmers thanks to higher EBIT, lower capex, an improved business mix, and growing potential for capital management.
The broker upgrades to Hold from Lighten and increases the target price to $50 from $45.
WOODSIDE PETROLEUM LIMITED ((WPL)) Upgrade to Neutral from Sell by Citi .B/H/S: 2/5/1
First half results slightly missed forecasts. Citi increases the value for Browse in its analysis. However, tolling revenue for the North West Shelf is reduced, which is a net positive, the broker suggests, considering Woodside has a larger equity interest in Browse.
First half dividend exceeded the company’s 80% pay-out ratio but, assuming no repeat of one-offs, Citi suspects the second half dividend will return to normal. Rating is upgraded to Neutral from Sell. Target is raised to $34.14 from $30.07.
THE A2 MILK COMPANY LIMITED ((A2M)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/2/1
A new analyst has taken up coverage of a2 at Credit Suisse, with the broker having not updated since February. The result is a downgrade to Neutral from Outperform and a target reduction to NZ$11.90 from NZ$12.75.
Supply diversification, expended distribution and China growth are all positive drivers but there’s more to do, the broker suggests, and risks remain while the price is heavily influenced by momentum trading. The share price has been weak since May but is in line with the broker’s valuation.
AUSTRALIA & NEW ZEALAND BANKING GROUP ((ANZ)) Downgrade to Hold from Add by Morgans .B/H/S: 3/5/0
Morgans finds the extent of the slowdown in the bank’s owner-occupied home loan portfolio baffling and suspects that margin pressures in the institutional business may also be intensifying.
While the ongoing benign credit environment is assisting, the broker notes the low charge in the third quarter was also affected by a high level of write-backs and recoveries in the institutional loan book. Morgans downgrades to Hold from Add because of share price strength. Target is raised to $30 from $29.
AURIZON HOLDINGS LIMITED ((AZJ)) Downgrade to Neutral from Buy by UBS and Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/4/3
UBS analysts highlight the risks and challenges that lay ahead for this company, forecasting a flat EPS growth profile for the next four years. While observing the stock has recovered from its lows, the rating is being pulled back to Neutral from Buy.
Even though cash flows will settle at a lower level, UBS analysts still think Aurizon is now a true yield stock, forecast to still offer 7% after the UT5 regulated revenue step-down. Valuation/target remains unchanged at $4.60.
Aurizon’s result was slightly ahead of consensus, Credit Suisse reports. Looking ahead, the broker sees a company fighting on too many fronts. It is facing three material court cases, the UT5 regulatory review remains challenging, and labour negotiations with some 80% of staff remain ongoing in the face of a weak safety performance.
Credit Suisse forecasts lower earnings than FY18 right out to FY22. The dividend payout is expected to fall in FY19 before recovering in FY20. The broker drops its target to $4.60 from $4.75 and downgrades to Neutral from Outperform, suggesting a more attractive entry point lies ahead.
BEACH ENERGY LIMITED ((BPT)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 1/3/2
The company will announce FY18 results on August 20. Macquarie expects production for FY19 to be around 29.5mmboe, an increase in volume because of the higher Cooper and Otway Basins’ production.
The broker downgrades to Underperform from Neutral believing, with oil prices stabilising and cost reductions primarily completed, the path ahead will become more challenging and more costly to sustain. The target is $1.90.
CHALLENGER LIMITED ((CGF)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/4/1
Challenger’s FY18 results fell -4% shy of the broker, triggering a downgrade to Neutral from Outperform and a target reduction to $12 from $13.20.
Challenger posted a -22 basis point reduction in common operating environment margins, thanks largely to gyrations in capital markets. It also posted a one-off loss of income on Insurance Linked Securities.
Credit Suisse expects asset yield pressures to continue into FY19, and Challenger’s guidance flags a higher tax rate.
CSL LIMITED ((CSL)) Downgrade to Neutral from Buy by Citi and Downgrade to Neutral from Buy by UBS .B/H/S: 2/6/0
Citi analysts have downgraded, inspired by “valuation”, to Neutral from Buy while retaining a price target of $232. The analysts note the shares are now trading at a 31% and 35% premium over the 3-yr trading average P/E and EV/EBITDA, respectively.
In a general sense, Citi remains of the view this company’s investments in R&D and capex should allow it to maintain its market leading position in innovation and plasma. Citi sits above market consensus, anticipating 3-yr EPS CAGR of 12-14%.
FY18 net profit was in line with UBS estimates. The broker notes revenue growth in Behring product and a strong performance in Seqirus. The broker forecasts a similar outlook for FY19, albeit with a step up in R&D and capital expenditure.
Rating is downgraded to Neutral from Buy. Target rises to $220 from $196.
DOMINO’S PIZZA ENTERPRISES LIMITED ((DMP)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 3/1/3
Domino’s Pizza’s FY18 profit missed guidance of 20% growth and fell marginally short of the broker. FY19 guidance also missed consensus. Ord Minnett reduces FY19 and FY20 EPS estimates, reflecting weaker same-store sales.
Target price is reduced to $42.50 from $47. Ord Minnett notes that a question mark over expansion targets translates into a less attractive valuation on a discounted cash flow basis. Also, the price-earnings multiple is still too high in the broker’s opinion.
The broker downgrades to Lighten from Hold, noting growth headwinds, lower FY19 guidance and missed guidance for FY18. Risk rating is Higher.
DEXUS PROPERTY GROUP ((DXS)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/2/2
Dexus Property’s FY18 result was in line with the broker’s estimates. FY19 guidance outpaced the broker by 2%, triggering an earnings upgrade for FY19 through to FY21.
Ord Minnett notes 95% office occupancy and 98% industrial occupancy, a gearing ratio of 24% and an average debt maturity of seven years. Net tangible asset backing rose 14%, closing the gap with the broker’s valuation.
Ord Minnett downgrades to Hold from Accumulate. Target price jumps to $10.50 from $9.50.
GPT ((GPT)) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Neutral from Outperform by Macquarie and Downgrade to Neutral from Buy by Citi and Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/6/1
GPT Group’s half-year result beat the broker by a nose and maintained FY19 guidance. Credit Suisse is optimistic on the Office portfolio but cautious on the Retail portfolio, and reduces FFO forecasts -4% across FY18-20.
The broker downgrades to Neutral from Outperform, reflecting concern over timing of disposals, particularly Wollongong Central, and reduced assumptions for net operating income and higher debt costs. Rising risks from development overruns, leasing shortfalls and a further deterioration in retail are also of concern to the broker.
Target price rises to $5.39 from $5.35.
2018 guidance has been reaffirmed for growth in FFO of 3%. Macquarie had expected an upgrade to 2018 earnings growth estimates because the sale of Wollongong Central was not proceeding. However, this was not the case.
Despite the potential for re-gearing to supplement growth there are limited catalysts in the near term and the broker downgrades to Neutral from Outperform. Target is $5.47.
The interim report was in line but Citi analysts had been anticipating an upgrade with the FY18 guidance, and it didn’t arrive. Higher debt costs seem to be the culprit, the analysts comment today.
Citi analysts also found the tone on retail was more cautious than expected. Target price moves to $5.53 from $5.54. Downgrade to Neutral from Buy.
GPT reported a half-year profit in line with the broker. Higher than expected capital expenditure on retail assets has caused Ord Minnett to cut free-cash-flow forecasts by -6% for CY18, -11% for CY20 and -3% for CY21, which is dilutive to valuation.
The broker shifts it rating to Hold from Accumulate to reflect these changes and recent share-price strength. Target price eases to $5.15 from $5.35.
INFOMEDIA LTD ((IFM)) Downgrade to Neutral from Buy by UBS .B/H/S: 0/1/0
FY18 earnings beat UBS estimates, predominantly driven by revenue growth in Superservice. The broker expects strong earnings growth and margin expansion in FY19 but retains conservative forecasts, and does not extrapolate the second half FY18 outcome as it contained a few one-offs.
UBS downgrades to Neutral from Buy, believing the outlook is largely reflected in the share price. Targets raised to $1.30 from $0.95.
NEW HOPE CORPORATION LIMITED ((NHC)) Downgrade to Hold from Add by Morgans .B/H/S: 1/2/0
The company has negotiated to buy Wesfarmers’ ((WES)) 40% stake in Bengalla. A lift in Morgans’ long-term coal price assumptions amplifies the valuation uplift.
The broker suggests the stock now appears expensive for value investors, but ongoing coal price momentum and the company’s increasing leverage can sustain a premium for momentum investors. Rating is downgraded to Hold from Add. Target is raised to $3.20 from $2.36.
1300 SMILES LIMITED ((ONT)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0
1300 Smiles’ FY18 result fell well short of the broker, triggering a downgrade to Hold from Add. Morgans blames the weakness on the timing and scale of acquisitions and margin compression.
No guidance was provided so the broker reduces growth forecasts, assuming a benign environment. Target price falls to $6.85 from $6.69.
ORIGIN ENERGY LIMITED ((ORG)) Downgrade to Hold from Accumulate by Ord Minnett and Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 4/4/0
FY18 net profit was -14% below Ord Minnett’s estimates. The contribution from energy markets was above expectations but the performance of the APLNG business fell short.
Ord Minnett finds it difficult to remain positive, given the scale of the downgrades to its estimates, these being -32% for FY19 and -21% for FY20. Rating is downgraded to Hold from Accumulate. Target is reduced to $9.40 from $10.30.
Origin’s result missed Credit Suisse and consensus and FY19 energy markets guidance is well below the broker’s forecast. The impact of competition and concessionary measures is greater than expected implying retail margins are lower, as the broker found with peer AGL Energy ((AGL)).
The good news is dividends should be reinstated in FY19 as deleveraging continues, supported by strong oil prices, but the deleveraging story is no longer enough, Credit Suisse contends. Downgrade to Neutral from Outperform. Target falls to $9.70 from $10.50.
PACT GROUP HOLDINGS LTD ((PGH)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/4/0
Credit Suisse’s response to Pact’s “bad miss” is to cut forecast earnings by -20%, the target to $4.35 from $5.80 and downgrade to Neutral from Outperform.
Volumes were lower and costs higher than the broker expected, and FY19 is not yet offering much relief. The broker suggests Pact is prioritising acquisitions ahead of fixing the core business.
PLATINUM ASSET MANAGEMENT LIMITED ((PTM)) Downgrade to Sell from Buy by Ord Minnett .B/H/S: 0/2/2
Ord Minnett observes the relative and absolute performance has waned over the last six months. Flows remain reasonable but the broker envisages deterioration leading into FY19. Having upgraded in May on the back of flow momentum, Ord Minnett now downgrades on new evidence including a negative -2.2% absolute performance for the international fund for August.
Ord Minnett suspects a softer FY18 result will be forthcoming and several factors combine, leading to a downgrade to Sell from Buy. Target is reduced to $4.77 from $6.50.
SONIC HEALTHCARE LIMITED ((SHL)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/4/1
Sonic Healthcare’s result was in line with Credit Suisse and guidance. The broker is forecasting no earnings growth in FY19, as higher pathology volume growth is offset by German and US fee cuts and the rising cost of consumables.
Despite a stable regulatory environment for local pathology, the broker sees limited margin expansion in Australia, and sees ongoing risks in Germany. The stock’s premium valuation to the sector is overstretched, Credit Suisse believes. Downgrade to Underperform from Neutral. Target falls to $23.50 from $24.00.
SUNCORP GROUP LIMITED ((SUN)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/5/1
Citi saw a positive surprise from the insurance business. Further expansion in underlying margin past management’s 12% guidance now looks likely in FY19, in the analysts’ view.
In contrast, the banking operations are doing it tougher, also because of less opportunity to collect non-interest income and increased regulatory compliance costs. This is now the weak link in the group, argue the analysts.
Alas, all the good news is being offset by what looks like a full valuation, in Citi’s opinion. Neutral rating now preferred, downgrade from Buy, while the price target rises to $16 from $15.35.
TELSTRA CORPORATION LIMITED ((TLS)) Downgrade to Underperform from Neutral by Macquarie and Downgrade to Neutral from Buy by UBS .B/H/S: 4/1/3
Telstra’s FY18 result was at the low end of consensus with unchanged guidance. The broker expects intensifying competition, particularly in the mobile market where earnings fell -11.6%, will outweigh positives going forward.
Macquarie raises EPS forecasts by 1.6% in FY19 but reduces FY20 and FY21 forecasts by -1.9% and -1.1% respectively.
The target price rises to $2.80 from $2.75 and given the recent run in the share price the broker downgrades to Underperform from Neutral.
FY18 results and FY19 guidance were both pre-announced. UBS downgrades to Neutral from Buy, given the recent re-rating of the stock. The broker still envisages some short-term earnings upside but finds it difficult to bridge revenue in FY18 to the mid point of FY19 guidance.
The broker envisages upside to the unchanged target of $3.00 from a more rational industry, 5G and the potential for TPG Telecom ((TPM)) to have a lesser impact than currently anticipated. Equally, the broker envisages downside to a $2.50 target if Telstra fails to execute on its plans and long-term EPS falls to around $0.14 per share.
TREASURY WINE ESTATES LIMITED ((TWE)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 2/3/2
FY18 earnings were in line with expectations. However, Morgan Stanley notes operating cash flow conversion the quality of earnings deteriorated badly in the second half.
A higher Penfolds allocation, annualisation of the French portfolio and new Italian launches should drive revenue and earnings acceleration for Asia in FY19.
Despite very strong growth prospects the broker believes better buying opportunities will emerge and downgrades to Equal-weight from Overweight. $20 target retained. Industry view: Cautious.
WHITEHAVEN COAL LIMITED ((WHC)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/5/0
FY18 results were in line with expectations. Production guidance has been downgraded, particularly Narrabri, the highest margin mine. Costs are expected to rise to $64/t.
The company provided a surprise special dividend, but with no franking credits and net debt back up to $270m, Macquarie is curious why a buyback was not used.
Nevertheless, the broker suggests higher prices can erase a lot of problems. Rating is downgraded to Neutral from Outperform. Target is reduced to $5.10 from $5.70.
WISETECH GLOBAL LIMITED ((WTC)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/3/1
Citi has made a valuation call on the stock, downgrading to Neutral from Buy. Target price has increased to $16.21 from $14.12.
|Broker Recommendation Breakup
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
Positive Change Covered by > 2 Brokers
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Positive Change Covered by > 2 Brokers
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