Weekly Reports | Nov 05 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 October 29 to Friday November 2, 2018
Total Upgrades: 22
Total Downgrades: 6
Net Ratings Breakdown: Buy 43.98%; Hold 42.30%; Sell 13.72%
If there is one conclusion that can be drawn from the week past it is that stockbroking analysts overwhelmingly see opportunities emerging in a shocked and beaten down Australian share market. October has been brutal on multiple accounts, but at least analysts are responding by issuing far more recommendation upgrades than downgrades for individual ASX-listed stocks.
For the week ending Friday, 2nd November 2018, FNArena registered no less than 22 upgrades and only six downgrades, with multiple stocks receiving multiple upgrades. Medium cap mining conglomerate Independence Group received three upgrades during the week, of which two went to Neutral/Hold.
Equally worth pointing out is that upgrades are coming thick and fast for ongoing "growth" stories in the share market, countering the narrative that has been dominating the Australian share market for weeks that the future is now all about "value" stocks outperforming in the face of rising global bond yields.
Beach Energy, Boral, Carsales, nib Holdings, and REA Group all received multiple recommendation upgrades during the week.
The six downgrades went to one automotive dealer, two gold producers, one wealth manager, an owner of shopping centres and one troubled engineering firm currently under threat of falling 100% into Belgian ownership. Maybe the double representation of gold is a sign in itself?
Target prices, they didn't move much on the upside during the week, with Northern Star and ResMed enjoying increases of 3.4% and 2.85% rewspectively, but others not worth mentioning. A clear negative is, however, the observation there are far more and deeper cuts to take note of on the opposing side of the ledger.
Biggest casualty for the week is the consensus price target for AMP, which fell yet another -24%. Apart from this well-known, idiosynchratic train wreck, Blackmores' target fell by -19%, followed by Lovisa Holdings on -9.99%, Boral on -5.68% and Automotive Holdings on -5.24%.
There was more encouraging news from changes in estimated earnings with the positive side equally showing large numbers. Top for the week goes to Alacer Gold, whose forecasts enjoyed a boost of 67% during the week, handsomely beating AMP (yes, you read that correctly), Perseus Mining, National Australia Bank (yes, indeed), ANZ Bank (idem), and Beach Energy.
Independence Group's three upgrades were countered by a -18% reduction in EPS estimates, followed by Orocobre on -12.3%, Northern Star, Senex Energy, Mineral Resources, and Wagners Holding Co.
With AGM updates ongoing, and the out-of-season financial reporting season heating up locally, the week ahead should see plenty of changes yet again, amidst ongoing events on the macro-calendar.
BLACKMORES LIMITED ((BKL)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/2/2
Share price weakness has brought the stock closer to fair value and Credit Suisse upgrades to Neutral from Underperform. The broker reduces the target to $115 from $130, given China's consumer sector has de-rated.
Critical to the broker's valuation is the assumption that direct Chinese sales growth in FY19 decelerates to 15% through to FY23, from 20%.
Sales in the first quarter were ahead of expectations while operating earnings (EBITDA) growth of 11% was close to the projected growth rate.
BORAL LIMITED ((BLD)) Upgrade to Buy from Neutral by Citi and Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 5/2/0
Citi observes Boral shares have sharply underperformed the broader market, largely because of concerns over the US housing cycle and disruptions caused by wet weather.
The company remains bullish on demand conditions. Boral has also reiterated a preference to fund a possible acquisition of USG's 50% stake via asset sales and debt.
Citi believes the stock is oversold and upgrades to Buy from Neutral. Target is clipped to $7.00 from $7.50.
A laundry list of weather events contributed to a weak performance in the September quarter yet Credit Suisse believes, weather-related delays aside, the opportunities in the Australian business remain strong.
The order book is robust and price increases are coming through in concrete and aggregates. Nevertheless, despite unchanged guidance, the company's task is becoming more difficult because of a moderation of the US housing market.
Credit Suisse upgrades to Neutral from Underperform, although maintains the view that a discount to fair value is justified because of the moderating end market outlook. Target is reduced to $5.80 from $6.40.
BEACH ENERGY LIMITED ((BPT)) Upgrade to Buy from Hold by Ord Minnett and Upgrade to Neutral from Underperform by Macquarie .B/H/S: 2/1/1
September quarter production growth and higher commodity prices generated strong cash flow and helped reduce debt in the September quarter. Ord Minnett calculates the company is trading on an annualised free cash flow yield of 17%.
FY19 guidance is reaffirmed, signalling the business is trending towards the upper end of the guidance range for production and earnings. Rating is upgraded to Buy from Hold. Target is steady at $2.10.
The company reported stronger production and sales in the September quarter, offset by hedging losses and weaker pricing. Production is expected to come in at the upper end of FY19 guidance.
Macquarie upgrades to Neutral from Underperform and, at current levels, believes the stock is fair value, despite expecting a beat on production and earnings in FY19. Target is raised to $1.65 from $1.60.
CARSALES.COM LIMITED ((CAR)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Buy from Neutral by UBS .B/H/S: 6/1/0
The company has reported a slowing for Display and Stratton which has caused a softer financial performance in the first quarter.
The bias to the second half for earnings from the Display business signals to Macquarie that an improvement should be expected, although the basis for the assumption is not apparent. The second half bias for Stratton is based on operating improvements.
Macquarie, while aware of the near-term macro concerns, upgrades to Outperform from Neutral, envisaging broad-based earnings drivers including increased take up of premium/promote products. Target is $13.90.
UBS makes modest earnings downgrades after the AGM update, which suggests FY19 core revenue growth is expected to be more moderate.
UBS reduces domestic core earnings growth forecasts to 6% but, with the benefit of the SK Encar acquisition, still expects the company to deliver headline earnings growth of 14%.
Nevertheless, the broker considers the valuation now undemanding and upgrades to Buy from Neutral. Target is reduced to $13.50 from $14.00.
CSL LIMITED ((CSL)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/4/0
Ord Minnett believes Seqirus, the company's flu vaccine, will be able to price Flucelvax at a premium to egg-based vaccines. This opportunity has come after CSL gained regulatory approval for its new manufacturing process that should deliver a doubling of output in FY20.
The broker believes the vaccine business will deliver FY20 EBIT comfortably in excess of the US$200 guidance. Rating is upgraded to Accumulate from Hold and the target is raised to $215 from $201.
INDEPENDENCE GROUP NL ((IGO)) Upgrade to Buy from Neutral by Citi and Upgrade to Neutral from Underperform by Credit Suisse and Upgrade to Neutral from Underperform by Macquarie .B/H/S: 2/3/1
Citi acknowledges that downside risk is ongoing for nickel and copper in the face of US-China trade tensions but this is partly offset by gold's re-emerging sensitivity to geopolitical risk. Nova production was soft in the Sep Q, leading to a target price cut to $4.70 from $5.00, but the broker believes there is clear upside potential from Nova exploration.
Citi considers a -13% sell-off for Independence is overdone, and upgrades to Buy from Neutral.
September quarter production was in line with expectations. Credit Suisse notes there were no changes to FY19 budgets while a stronger second half for Nova should deliver lower unit costs.
Management has indicated its dividend policy is up for a review with a possible switch to a free cash flow pay-out from the first half of FY19.
The broker upgrades to Neutral from Underperform because of weakness in the share price. Target is steady at $3.95.
Macquarie incorporates an underground development of Boston Shaker into its forecasts for Tropicana. Adjustments to grade profile means cuts of -1% and -10% to FY19 and FY20 production estimates.
The move underground will extend the life of the Tropicana project and improve the potential for exploration success at depth.
Rating is upgraded to Neutral from Underperform. Target is raised to $4.30 from $4.20.
IRESS MARKET TECHNOLOGY LIMITED ((IRE)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 2/3/0
The share price has fallen -15% in October and Ord Minnett now believes the valuation is compelling enough to warrant an upgrade to Buy from Hold. The broker now considers IRESS one of the cheapest stocks in the sector.
First half results were ahead of expectations and the commentary at the time suggested growth in the UK would accelerate in the second half. Target is reduced to $11.73 from $12.36.
LOVISA HOLDINGS LIMITED ((LOV)) Upgrade to Add from Hold by Morgans .B/H/S: 3/0/1
The trading update revealed a softer start to FY19 with like-for-like sales down -0.9%. Morgans suggests the volatility and weakness is likely to persist over the balance of the year but believes the rolling out of stores has potential as a positive driver of the business.
The broker believes 2019 will be the year the company takes a more assertive stance on the pilot market footprint. Rating is upgraded to Add from Hold.
The broker remains unconcerned about the short-term sales blip and emphasises the global growth potential and growing cash position. Target is reduced to $8.06 from $10.93.
MONADELPHOUS GROUP LIMITED ((MND)) Upgrade to Neutral from Sell by Citi .B/H/S: 1/3/1
Citi continues to envisage downside risk to FY19 earnings but upgrades to Neutral from Sell because of the improving outlook for core markets. Target is raised to $13.95 from $12.70.
The broker expects investors will look through the decline in FY19, anticipating earnings growth in FY20 and beyond. The maintenance division is expected to benefit from increased demand as LNG projects ramp up production.
The broker also believes Monadelphous will be able to capitalise on an expected increase in iron ore construction work in Western Australia, yet envisages risk to FY19 given any potential iron ore contract will contribute materially only in FY20, and competition remains in tense.
NANOSONICS LIMITED ((NAN)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0
Because of market volatility and the resultant fall in the share price, which is down – 20% from its peak, Morgans upgrades to Add from Hold.
The broker expects new products to be launched over the next 18 months which will drive substantial growth in profit. Target is unchanged at $3.32.
NIB HOLDINGS LIMITED ((NHF)) Upgrade to Add from Hold by Morgans and Upgrade to Neutral from Sell by UBS .B/H/S: 2/5/1
The company has upgraded FY19 profit guidance by 5.5% because of a benign claims environment. Morgans suggests previous guidance was always conservative and upgrades forecasts by 4-7% over FY19-20.
The recommendation is moved to Add from Hold. The broker believes the recent sell off in the shares has been overdone, particularly in light of the upgrade. Target is reduced to $6.49 from $6.77.
The company now believes net margins can be sustained at FY18 levels in FY19 despite lower premium rate increases.
Benefits are likely to be short lived, however, in the broker's view, as wider margins will add to mounting political pressure for lower premium rate increases.
Rating is upgraded to Neutral from Sell, as the broker envisages limited downside. Target is reduced to $5.95 from $6.10.
PERPETUAL LIMITED ((PPT)) Upgrade to Neutral from Sell by UBS .B/H/S: 0/7/0
The shares are down -31% in the year to date and UBS believes the downside is now limited, upgrading to Neutral from Sell.
The Corporate Trust and Perpetual Private divisions are on track and represent 58% of operating earnings versus 38% five years ago, as the company has diversified away from its stagnant Perpetual Investment earnings.
While net outflows will continue to affect the latter, the broker expects earnings elsewhere to grow by around 5% per annum.
As a result, UBS believes the stock offers fair value and the cash on the balance sheet provides strategic options. Target is reduced to $33.50 from $41.50.
REA GROUP LIMITED ((REA)) Upgrade to Accumulate from Lighten by Ord Minnett and Upgrade to Neutral from Sell by UBS .B/H/S: 4/3/0
Ord Minnett notes the share price has fallen -23% since peaking in August following the weak update from Domain ((DHG)). This formed the basis for a Lighten rating, exacerbated by global de-rating of technology stocks.
Ord Minnett now believes the correction has run its course and there is greater-than-expected growth in depth penetration, amid a soft property market.
While lowering first quarter estimates because of a steeper decline in listings, the broker envisages potential upside to its numbers. Rating is upgraded to Accumulate. Target is steady at $79.
UBS reduces earnings estimates because of slower Premiere growth, particularly in NSW, as well as a view that house prices will decline around -10% from peak to trough.
FY19 and FY20 estimates for earnings per share are reduced by -2% and -4% respectively. Still, despite the reductions to expectations the broker believes REA Group is more resilient as the number one player, despite the soft housing environment.
Rating is upgraded to Neutral from Sell. Target is reduced to $75 from $80.
RESMED INC ((RMD)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/3/1
First quarter results were strong, with operating earnings up 28% and 13% above Credit Suisse estimates.
The broker believes growth in both the US and the rest of the world for flow generators stems from the company's connected care strategy and the data capabilities on its AirView and Brightree platforms.
Credit Suisse upgrades to Outperform from Neutral. Target is raised to $15.10 from $14.30.
WISETECH GLOBAL LIMITED ((WTC)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 2/2/0
The share price has fallen -27% in October, reflecting a broader sell-off in technology stocks. This is the opportunity Ord Minnett was waiting for.
Earnings have recently been upgraded and, while the stock still trades at a substantial premium to software peers, it is now modestly below the broker's valuation.
The broker believes the volatility presents an opportunity to take a stronger view on the growth story and the rating is upgraded to Buy from Hold. Target is raised to $17.87 from $17.00.
AUTOMOTIVE HOLDINGS GROUP LIMITED ((AHG)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 1/4/2
Morgan Stanley has lowered forecast earnings for AP Eagers ((APE)) by -5-10% and for Automotive Holdings by -14-17% due to lower commissions, lower organic growth expectations based on falling vehicle sales, and sentiment around wealth effects. The broker sees house prices declining -10-15% from their peak, and thus vehicle sales -6%.
Morgan Stanley prefers AP Eagers to Auto Holdings and notes previous periods of falling house prices and vehicle sales have led to a de-rating for Auto Holdings, which the market is underestimating. The balance sheet is more constrained this time around. Downgrade to Underweight from Equal-weight, target falls to $1.55 from $2.50. Industry view: In line.
EVOLUTION MINING LIMITED ((EVN)) Downgrade to Hold from Add by Morgans .B/H/S: 3/5/0
Morgans observes gold production in the September quarter, if annualised, would be at the top of the projected range for the year. At the flagship Cowal mine work continued on the tails leach project with some success with high-grade exploration reported.
Meanwhile, treatment of stockpiles will continue at Mt Rawdon with a focus on the stage 4 pit cutback. The board has also approved the underground mine development at Mt Carlton.
Rating is downgraded to Hold from Add, given the rise in the share price. Morgans envisages the primary risk to valuation comes from the gold price, with the copper price less significant. Target is raised to $3.28 from $3.17.
OCEANAGOLD CORPORATION ((OGC)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 4/2/0
Credit Suisse expects production is on track to deliver on full year guidance, supported by a surprise contribution in the September quarter from the previously-unknown high-grade breccia ore.
This, in all likelihood, was added to the Didipio production schedule to offset the weaker-than-expected result from Haile.
The broker retains a positive outlook but downgrades to Neutral from Outperform on valuation. Target is raised to $4.00 from $3.80.
PENDAL GROUP LIMITED ((PDL)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 2/3/1
Weak equity markets are expected to affect growth in funds under management and could potentially affect industry flows to equities. Credit Suisse notes Pendal Group is overweight equities.
The broker downgrades to Underperform from Neutral because of these near-term headwinds. Hambro performance fees are likely to be lower for longer, the broker suspects.
Earnings forecast for FY19-20 are lowered by -12-14%. Target is reduced to $7.10 from $9.00.
SHOPPING CENTRES AUSTRALASIA PROPERTY GROUP ((SCP)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/3/2
The stock has re-rated, Ord Minnett believes, because of its superior operating results compared with other retail portfolios, as well as relatively predictable earnings growth.
Pricing on the assets acquired from Vicinity Centres ((VCX)) was also favourable. The broker continues to believe the portfolio is well-positioned with an attractive return on capital and relatively low risk.
As the stock is trading in line with the target, steady at $2.70, the rating is downgraded to Hold from Accumulate.
WATPAC LIMITED ((WTP)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0
Watpac has received an off-market takeover bid from BESIX, which currently has a 28.1% stake. The board has unanimously recommended the offer and it has been deemed fair and reasonable by an independent expert.
Morgans had suggested previously that an earnings-led recovery in the share price would take time and, therefore, believes shareholders should accept the offer. A superior offer, while possible, is considered unlikely.
The broker downgrades to Hold from Add. The target is raised to $0.92 a share, in line with the offer price, from $0.86.
Broker Recommendation Breakup
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
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