Weekly Reports | Sep 10 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 September 3 to Friday September 7, 2018
Total Upgrades: 5
Total Downgrades: 4
Net Ratings Breakdown: Buy 40.99%; Hold 43.34%; Sell 15.67%
As expected, overall activity among stockbroking analysts has nosedived post the August reporting season, providing total upgrades for ASX-listed stocks with an opportunity to -finally- outnumber downgrades. It had been a long while since.
By Friday, 7th August 2018, the difference was made by one single stock: Evolution Mining received two upgrades during the week, one to Buy. It made the difference in that total upgrades for the week accumulated to five with total downgrades accumulating to four. In the case of AGL Energy and Sigma Healthcare; those downgrades sank to Sell.
Only three stocks received positive revisions to valuations and price targets during the week with TPG Telecom enjoying the most explosive boost -up 19.98%- followed by Northern Star and an almost undetectable gain for Evolution Mining. This, however, leaves the balance in negative territory as there was noticeably more action on the other side of the ledger.
Graphite miner Syrah Resources' consensus target received the largest reduction last week, by -15%, followed by Orocobre, Unibail-Rodamco-Westfield, Virgin Australia and Sigma Healthcare.
Even though there was more action for positive revisions to earnings estimates, here the balance was even more in the negative. Whereas Graincorp, Northern Star and Perseus Mining all enjoyed double digit percentage increases, the numbers on the downside proved no less than eye-watering with reductions of -12%-44% for NextDC, Syrah Resources, Virgin Australia, Galaxy Resources and Megaport.
All in all, more and larger reductions to earnings estimates, even if this mostly involves mid- and small cap stocks outside the Top50, leaves the Australian share market with a little bit of a sour taste post a moderately positive August reporting season. This is not the reason why September has already revealed its seasonally tough character.
For this we can blame global, macro-economic dynamics combined with elevated valuations and a sudden pick-up in investor anxiety.
Upgrade
EVOLUTION MINING LIMITED ((EVN)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 3/5/0
The company appears set to commit to the underground development of Cowal. Along with plant extensions and upgrades this should deliver on the long-term goal of a sustainable 300,000 ounces per annum run rate, Macquarie expects.
Macquarie upgrades FY19 and FY20 earnings estimates by 8% and 3% respectively. The broker believes the company is well-positioned to execute on organic as well as acquisition opportunities.
Rating is upgraded to Outperform from Neutral. Target is raised to $3.30 from $3.20.
Credit Suisse believes the emerging high-grade underground opportunity supports the company's aspirations to increase Cowal's production to 300,000 ounces per year for 20 years.
The broker also believes Evolution Mining's disciplined business development continues to improve average asset quality. Credit Suisse upgrades to Neutral from Underperform. Target is $2.65.
FREEDOM FOODS GROUP LIMITED ((FNP)) Upgrade to Hold from Reduce by Morgans .B/H/S: 1/1/0
Freedom Foods posted a material beat on profit due to tax but underlying earnings slightly missed consensus, Morgans notes. New facilities are beginning perform better than expected, leading the broker to upgrade forecasts, while noting execution risk remains.
The company suffers from high capex requirements, poor cash flow generation and a low return on equity, Morgans notes, but has a great product portfolio, strong brands, and is leveraged to healthy eating trends, rising demand from Asia and the scaling of new facilities which should drive solid earnings.
Upgrade to Hold, target rises to $6.01 from $5.50.
OROCOBRE LIMITED ((ORE)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 7/0/1
Operating in Argentina always has its risks, Macquarie notes, hence the announcement of temporary export taxes (or tariffs, or royalties — the broker uses all three in its report), imposed in order to help the country's foundering economy and appease the IMF, should come as no shock.
The broker thus assumes a worst case scenario of the taxes being made permanent and not assuming any forex offset in revaluing Orocobre, and this still leads to an upgrade to Outperform from Neutral. Even is this case Macquarie sees value, particularly given talk around a buyback and of possible suitors sniffing around.
Target falls to $4.40 from $5.00.
SANDFIRE RESOURCES NL ((SFR)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 1/3/3
FY18 results were slightly below estimates because of higher exploration expenditure. Deutsche Bank now includes Black Butte in modelling but this is offset by an assumed closure cost at DeGrussa and removal of the equity value of Sandfire America.
The broker does not believe the current stock price provides value for exploration and extensions and upgrades to Buy from Hold on valuation. Target is $8.80.
Downgrade
AGL ENERGY LIMITED ((AGL)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 2/4/2
Credit Suisse has reviewed FY18 results and finds the realised wholesale price is higher than previously believed. The broker has modelled a more substantial decline in FY20 and beyond.
In the absence of earnings growth the focus is on cash flow and what level of capital return can be supported. In this regard AGL is currently in a strong position. Credit Suisse believes the company will commence a $500m buyback in FY19 which will mean gearing returns to around 25%.
The broker's rating is downgraded to Underperform from Neutral as apparent value is far less compelling now. Target is reduced to $17.70 from $20.60.
THE STAR ENTERTAINMENT GROUP LIMITED ((SGR)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 7/1/0
Credit Suisse believes the company has managed well the migration of its Sydney premium mass customers to an interim facility. The broker is confident that the company can at least hold Sydney premium mass revenue level in FY19.
The broker downgrades to Neutral from Outperform because of share price appreciation. Target is steady at $5.60. The next catalyst is considered to be the potential for Chou Tai Fook and Far East to increase their combined holding to 20% from 10%.
SIGMA HEALTHCARE LIMITED ((SIG)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/1/3
First half results were weaker than Credit Suisse expected. Management continues to expect underlying EBIT of $75m in FY19 before it falls to $40-50m in FY20 as a result of losing the Chemist Warehouse contract. FY19 guidance implies a strong second half skew of 54%.
Credit Suisse considers the short term outlook challenging. The company has appointed Accenture to execute restructuring initiatives but future business strategies remain unclear. The broker considers any restructuring would involve substantial costs and weigh on reported earnings.
Rating is downgraded to Underperform from Neutral. Target is reduced to $0.48 from $0.52.
SYRAH RESOURCES LIMITED ((SYR)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 3/2/0
The company's dilutive capital raising should be sufficient to fund commercial production, at which point Deutsche Bank expects guidance on a realised basket prices. The graphite market is opaque and the broker believes it is up to Syrah Resources to set clear expectations.
On this basis, the broker downgrades long-term realised price expectations to US$800/t from US$920/t, leading to a -20% fall in valuation. Rating is downgraded to Hold from Buy. Target is reduced to $2.70 from $4.20.
| Total Recommendations |
Recommendation Changes |
|
Broker Recommendation Breakup |
|
Broker Rating |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Recommendation |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Positive Change Covered by > 2 Brokers
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Negative Change Covered by > 2 Brokers
|
Target Price |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Positive Change Covered by > 2 Brokers
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Negative Change Covered by > 2 Brokers
|
Earning Forecast |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Positive Change Covered by > 2 Brokers
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Negative Change Covered by > 2 Brokers
|
Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
Click to view our Glossary of Financial Terms
CHARTS
For more info SHARE ANALYSIS: AGL - AGL ENERGY LIMITED
For more info SHARE ANALYSIS: EVN - EVOLUTION MINING LIMITED
For more info SHARE ANALYSIS: SFR - SANDFIRE RESOURCES LIMITED
For more info SHARE ANALYSIS: SGR - STAR ENTERTAINMENT GROUP LIMITED
For more info SHARE ANALYSIS: SIG - SIGMA HEALTHCARE LIMITED
For more info SHARE ANALYSIS: SYR - SYRAH RESOURCES LIMITED