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.