Weekly Ratings, Targets, Forecast Changes

This story features ANSELL LIMITED, and other companies. For more info SHARE ANALYSIS: ANN

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 October 15 to Friday October 19, 2018
Total Upgrades: 21
Total Downgrades: 2
Net Ratings Breakdown: Buy 43.47%; Hold 41.53%; Sell 15.00%

The local share market keeps treading water, trying to stabilise while keeping a watchful eye on whatever happens on Wall Street, but at least stockbroking analysts are responding in the most positive manner: by issuing recommendation upgrades for weakening share prices.

For the week ending Friday, 19th October 2018, FNArena registered no less than 21 upgrades for individual ASX-listed stocks, versus two downgrades only. So which stocks still received downgrades?

Actually, there is only one. Jewellery retailer Michael Hill cannot shake off the habit of releasing disappointing market updates and this time yet another tough admission has been met with two downgrades. Both went to Sell, or an equivalent of Sell.

Seven out of the 21 upgrades only went as far as Neutral; this still leaves 14 fresh Buy ratings for stocks including CSL, Fairfax Media (2x), Super Retail, Sydney Airport, and Webjet.

ERM Power, equally recipient of a fresh Buy rating, sits on top of the week's table for positive revisions to price targets, thanks to offloading its troubled division in the USA. National Storage and St Barbara follow next, but overall percentage changes remain benign.

A similar observation applies to the negative side where Fairfax Media's consensus target suffered a -5% setback, followed by Northern Star Resources and James Hardie, but the numbers get quickly to a level hardly worth mentioning.

The week's changes to earnings estimates offers more fireworks with Perseus Mining (+72%) on top of the positive ranking, handsomely beating the likes of Northern Star, Steadfast Group, ERM Power, Oil Search, and Whitehaven Coal. The flip side has Galaxy Resources (-41%) on "top" (bottom?), followed by Domain Holdings, Evolution Mining, Fairfax Media, Fortescue Metals, and ARB Corp.

Apart from macro-economic events, investors have plenty to keep an eye out for in the week(s) ahead, from AGMs, to trading updates, to quarterly reports, to (soon) Australian banks releasing financial results.

Upgrade

ANSELL LIMITED ((ANN)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 2/6/0

Credit Suisse observes, since the FY18 result, the share price has fallen -15%, resulting in an upgrade to Neutral from Underperform. The broker now considers the risks balanced and the share price supported by the buyback program, a net cash position and potential for M&A.

The broker updates assumptions regarding FX and higher raw material prices, resulting in -3% downgrades to earnings estimates. Target is lowered to $23.50 from $24.00.

AURIZON HOLDINGS LIMITED ((AZJ)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/3/3

First quarter above-rail volumes were down -8%. Credit Suisse lowers coal volumes for FY19 by -3% and reduces coal earnings by -4%. The broker raises FY19 bulk earnings by 8%, believing the company could reach agreement with Linfox to sell the Queensland Intermodal business.

The Queensland Competition Authority has indicated it will consider a change to the averaging period for the risk-free rate and, if implemented, this could increase the company's operating earnings by around $20m a year. Credit Suisse upgrades to Outperform from Neutral on valuation and a potentially favourable announcement by the QCA.

The company's court case against the Queensland Competition Authority, alleging the former chairman was conflicted, starts on October 22. Credit Suisse reduces the target to $4.50 from $4.60.

CSL LIMITED ((CSL)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/5/0

Citi analysts have re-assessed their investment view and forward modeling now that the share price has corrected noticeably in line with rising bond yields.

While the share price target has been reset at $218 from $238 with the added comment this includes some $12 for CSL112, the recommendation has also been upgraded to Buy from Neutral.

Also, the analysts highlight at their revised target price, CSL shares will be trading on an FY20 PE of 31x; this compares with the three year average of 28x (still at a historic premium, thus).

ERM POWER LIMITED ((EPW)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/0/0

The company has signed an agreement to sell its US subsidiary Source Power & Gas to Direct Energy for US$27m, effectively simplifying the investment proposition for investors, say the analysts.

For company management, this deal now offers the opportunity to concentrate solely on Australian retailing with Ord Minnett adding the shares look cheap/attractive while offering a history of stable retail margins.

Target price lifts to $1.90 from $1.60. Recommendation has been upgraded to Accumulate from Hold. Estimates have been lifted.

FAIRFAX MEDIA LIMITED ((FXJ)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Buy from Neutral by UBS .B/H/S: 3/1/0

Further analysis of the proposed merger with Nine Entertainment suggests to Credit Suisse analysts the deal will be dilutive for Nine shareholders in the first two years and only EPS neutral in year three post the merger.

The analysts suggest management will seek additional synergies (read: cost cutting) to the tune of $30m to achieve EPS neutrality.

As the analysts believe the merger will go ahead, they have upgraded to Outperform from Neutral. Price target lifts by 5c to 90c.

Fairfax has provided a trading update which was largely in line with UBS estimates. Revenue is tracking around -5% lower year-on-year.

Meanwhile, a softer trading update from Domain ((DHG)) and a downgrade to guidance caught the broker by surprise. This resulted in a substantial drop in the Fairfax share price. UBS upgrades to Buy from Neutral. Target is reduced to $0.80 from $0.85.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/5/1

Over the past two years the company's margin in commercial lines has not improved to the extent Credit Suisse had expected, despite premium rate increases. The broker suspects a large part of the reason stems from the exit of the Swann business.

With some of the distortions to historical margins now explained, the broker is more comfortable about the guidance set by the company for FY19. Further capital management is also considered likely and Credit Suisse allows for a further $600m, 50:50 special dividend to buyback.

A pullback in the share price provides an opportunity at an attractive entry point and the broker upgrades to Outperform from Neutral. Target is steady at $7.90.

IRESS MARKET TECHNOLOGY LIMITED ((IRE)) Upgrade to Add from Hold by Morgans .B/H/S: 1/4/0

Morgans is upgrading its recommendation to Add from Hold following a sharp contraction in the share price, which has been caused by global uncertainty.

While expecting global markets to remain volatile and the share price to move accordingly, Morgans believes the stock is reasonable value for long-term investors. Target is $14.52.

JAMES HARDIE INDUSTRIES N.V. ((JHX)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 7/0/0

The stock has de-rated materially and is now at its lowest level relative to the ASX Industrials for the last 10 years, Morgan Stanley notes. The broker believes concerns over US housing and primary demand growth are valid but overplayed.

The slump in the stock represents an opportunity and the broker upgrades to Overweight from Equal-weight. While housing affordability may have deteriorated, home builders continue to report solid new orders.

The broker adjusts forecasts to allow for margin pressure as prices for pulp and freight remain elevated. Marginal downgrades to earnings estimates are made across the next three years. Industry view is Cautious. Target price is $23.

LINK ADMINISTRATION HOLDINGS LIMITED ((LNK)) Upgrade to Buy from Neutral by UBS .B/H/S: 5/2/0

Client losses and the effects of the Commonwealth budget have caused the stock to underperform over the past six months. However, UBS believes momentum is improving, as is gearing, and there is significant upside from capital redeployment.

The broker believes the market is ascribing no value to several positive factors, such as longer-term funds administration growth and options for capital management, which could drive an increase in value of more than 20%. UBS upgrades to Buy from Neutral. Target is raised to $8.90 from $8.00.

NATIONAL STORAGE REIT ((NSR)) Upgrade to Accumulate from Lighten by Ord Minnett .B/H/S: 2/1/1

Ord Minnett better understands how self storage is valued, where the transactions occur and the return on capital, after discussions with key stakeholders in the industry in Australia.

The broker reviews the company's financials and lifts free cash flow forecasts materially. Accordingly, the rating is upgraded to Accumulate from Lighten and the target raised to $1.85 from $1.55. Ord Minnett forecasts compound annual growth in earnings per share for the next three years of 5-6%.

ORORA LIMITED ((ORA)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 2/6/0

Deutsche Bank observes the share price has underperformed the market over the past three months, while the company has reiterated full-year guidance for underlying earnings growth, subject to global economic conditions.

The broker upgrades to Hold from Sell. Target is $3.20.

ST BARBARA LIMITED ((SBM)) Upgrade to Neutral from Sell by Citi .B/H/S: 3/2/0

Citi is encouraged by the results coming from deep drilling at Gwalia and awaits the outcome of work on the expansion and mass extraction. The broker believes the slurry-pumping strategy could be a game changing technology for deep gold mines, if it works. The study is due in the March quarter 2019.

Citi notes the shares have pulled back around -20% in the past three months, while the falling Australian dollar and commodity price outlook have lifted FY19 earnings expectations. The broker upgrades to Neutral from Sell. Target is raised to $4.30 from $3.70.

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

Sales volumes in the September quarter were ahead of UBS estimates. The company has lifted the lower end of its production and sales guidance for 2018 and reduced 2018 capital expenditure by -$50m. UBS observes the results are starting to demonstrate the positive impact of increased drilling in the Cooper Basin.

Overall, September quarter production was slightly below UBS estimates because of the timing of asset sales to Ophir Energy. UBS has since incorporated the acquisition of Quadrant. Rating is upgraded to Neutral from Sell. Target is raised to $7.55 from $5.70.

SUPER RETAIL GROUP LIMITED ((SUL)) Upgrade to Add from Hold by Morgans .B/H/S: 3/4/1

Morgans expects 10.9% growth in operating earnings in FY19, which requires around 5.7% growth from the base business. The broker expects the company to reduce its debt position materially and open the door for an increased pay-out ratio in future.

The company's ability to generate working capital efficiencies will continue to fund investment in stores and refurbishment as well as digital. With around 14% upside to the target, raised to $10.44 from $9.86, and a 5.7% dividend yield, Morgans upgrades to Add from Hold.

SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Upgrade to Add from Hold by Morgans .B/H/S: 4/2/2

Across FY18-22, Morgans upgrades the company's retail segment and decreases forecasts for parking earnings. Property earnings estimates are also increased. Overall, this provides a minor lift to operating earnings forecasts.

The Sydney Gateway road project, to reduce congestion around the airport, is considered to be a minor benefit for medium-term interest costs. Sydney Airport's compensation is $170m, with a commitment to invest the compensation in exploring other transport solutions for the airport.

As a result of the recent reduction in the share price Morgans upgrades to Add from Hold. Target is raised to $7.34 from $7.24, factoring in the Gateway deal with the NSW government.

TREASURY WINE ESTATES LIMITED ((TWE)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 2/4/1

Credit Suisse notes US retail sales data reflects a surprisingly resilient performance. Treasury Wines volumes were down -2% over the month ending October 6 but a significant improvement and the best performance since the company started selling direct to national accounts. The broker suspects the company's September promotion in the US has been quite profitable.

Credit Suisse upgrades to Neutral from Underperform in response to a drop in the share price. A respectable performance in North America will help achieve FY19 operating earnings guidance, the broker suggests. Target is steady at $16.45.

WEBJET LIMITED ((WEB)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 2/3/0

Ord Minnett has downgraded estimates for earnings per share to reflect lower growth assumptions for the B2B business as well as marginally lower volumes in the B2C division. FY19 and FY20 estimates are downgraded by -7% and -4% respectively.

The broker upgrades its recommendation to Buy from Hold and remains confident in the medium-term growth outlook, also believing the decline in the stock has created an opportunity. Target is reduced to $16.80 from $17.46.

WESFARMERS LIMITED ((WES)) Upgrade to Neutral from Sell by Citi .B/H/S: 0/6/1

Citi observes Coles delivered its strongest like-for-like sales growth in three years and the highest level of inflation in 10 years. Petrol volumes continue to decline by double digits but have held up in absolute terms over the past 12 months, the broker notes.

Citi makes small downgrades to estimates and upgrades Wesfarmers to Neutral from Sell following a de-rating of the stock. The broker reduces the target to $45.80 from $46.30.

WHITEHAVEN COAL LIMITED ((WHC)) Upgrade to Add from Hold by Morgans .B/H/S: 7/1/0

Whitehaven Coal's September production was surprisingly softer but the company is expected to manage the ramp up at Narrabri to meet FY19 guidance. Morgans is confident in the company's experience in managing production challenges as operations age, particularly at Narrabri.

Morgans believes the stock is a compelling exposure to the stronger thermal coal dynamics, supported by the potential for further capital management. Rating is upgraded to Add from Hold. Target is raised to $6.00 from $5.38.

WISETECH GLOBAL LIMITED ((WTC)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/3/0

Macquarie had placed an Underperform rating on WiseTech as it had run too far beyond valuation assumptions. Now -27% off its peak in this current rout, albeit still 76% up year to date, the broker upgrades to Neutral.

Macquarie's valuation still implies strong growth, increasingly driven by M&A. However given the stock is leveraged to offshore tech market movements (Read: Nasdaq), the broker warns more volatility may yet lie ahead.

Target rises to $18.70 from $17.50.

Downgrade

MICHAEL HILL INTERNATIONAL LIMITED ((MHJ)) Downgrade to Sell from Neutral by Citi and Downgrade to Reduce from Hold by Morgans .B/H/S: 2/0/2

Citi analysts had already expressed their concerns about what precisely was unfolding at the jewellery retailer and Michael Hill's trading update validated those concerns.

The broker has responded by cutting the price target to $0.65 from $0.95 and by downgrading the rating to Sell from Neutral.

Despite year-on-year comparables becoming easier, Citi analysts have no more confidence left this company's performance can improve materially in the short term.

The company's trading update has revealed a very weak first quarter and Morgans makes meaningful downgrades to sales and earnings forecasts. All regions experienced heavy same-store sales declines with Australia down -12.8%, New Zealand -7.6% and Canada -11%.

While the share price is likely to fall materially on the back of the update Morgans is conscious of not becoming too negative at what could be a low point.

Nevertheless, the fact all territories are so weak simultaneously remains of concern. Hence, the broker downgrades to Reduce from Hold. Target is lowered to $0.70 from $1.01.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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