Weekly Reports | Nov 12 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 November 5 to Friday November 9, 2018
Total Upgrades: 26
Total Downgrades: 5
Net Ratings Breakdown: Buy 44.84%; Hold 41.89%; Sell 13.27%
An interesting dynamic is unfolding inside the Australian share market post October slaughter fest. While price targets and earnings estimates are, on a net basis, falling, stockbroking analysts nevertheless see sufficient value to issue a tsunami of recommendation upgrades, only offset by a small number of downgrades; the latter mostly because corporate market updates do not meet market expectations.
For the week ending Friday, 9 November 2018, FNArena registered no less than 26 recommendation upgrades for individual ASX-listed stocks versus only four stocks receiving downgrades, of which Domino's Pizza received two. McMillan Shakespearre too is among the small selection of stocks receiving a downgrade but in this case the negative move is being compensated with two upgrades to Buy on the other end of the ledger.
The 26 upgrades represent a true potpourri of Australia's corporate variety; from the ASX, to CommBank and Corporate Travel (2x), to CSL, Lovisa, Mineral Resources, QBE Insurance, and Treasury Wine Estates (2x).
Meanwhile, four of the five downgrades only went to Neutral, with Orica and REA Group the receivers that haven't been named yet.
Offsetting the clear bias towards "value is opening up" is the observation that trends for valuations & price targets, and for underlying earnings estimates has clearly turned to the negative.
Among positive revisions to price targets, only Xero, Macquarie Group and QBE Insurance are worth mentioning. Instead, there is plenty to look out for among the negative adjustments, with CSR receiving the largest hit (-22.8%), followed by Corporate Travel, Unibal-Rodamco-Westfield, McMillan Shakespeare and Blackmores.
It's pretty much a similar picture that emerges from the tables showing revisions to earnings estimates. Certainly, Alacer Gold, National Australia Bank, Unibail-Rodamco-Westfield, a2 Milk and Macquarie Group are all enjoying positive adjustments, but their wins couldn't possibly outweigh the many heavy downward adjustments that are befalling companies including Xero, Syrah Resources, Suncorp, Wagners Holdings, CSR, and many more.
As AGM season and the release of out-of-season financial earnings reports continue this week, it will be interesting to watch whether this new dynamic is turning into the new trend for the Australian share market.
ASX LIMITED ((ASX)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 0/3/5
ASX has made a strong start to FY19 from a cash market perspective, Deutsche Bank observes, with the value traded up 17% for the first four months of the year on a 17% increase in volume traded.
The recent market correction, nevertheless, is expected to drag on capital raisings for the next six months.
The pullback in the share price now means the stock is in line with fair value and the broker upgrades to Hold from Sell. $58.50 target maintained.
COMMONWEALTH BANK OF AUSTRALIA ((CBA)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/5/1
Following the first quarter trading update Credit Suisse upgrades FY19-21 earnings estimates by 3%. Compositionally, the broker notes a robust update, with falling operating expenses and a strong capital position.
It seems to the broker that many of the regulatory and compliance headwinds have been, or are being, dealt with. Therefore, a focus on cost reductions is expected and capital management also enters the scene.
Credit Suisse upgrades to Outperform from Neutral and raises the target to $78 from $75.
COCHLEAR LIMITED ((COH)) Upgrade to Buy from Neutral by Citi .B/H/S: 1/4/2
A US court has awarded damages of US$268m against Cochlear in a patent infringement case. As the patent in the litigation has expired the judgment will not disrupt the company's business in the US.
Cochlear will appeal the judgment, a process that is expected to take up to two years. To stay the execution of the outcome pending appeal Cochlear will need to lodge a US$335m insurance bond with the court.
As a consequence of the recent fall in the share price Citi has upgraded to Buy from Neutral and reduced the target price to $202 from $220.
CSL LIMITED ((CSL)) Upgrade to Buy from Neutral by UBS .B/H/S: 5/3/0
UBS has had a look at third quarter results from CSL competitors and also adjusted for forex in lowering its earnings forecasts by -6% across the forecast period, resulting in a target price cut to $220 from $232.
However despite competitive pressures, the broker believes CSL can still deliver compound earnings growth of 11% over three years. UBS looks forward to the company's investor day on December 5 and on valuation has upgraded to Buy from Neutral.
CSR LIMITED ((CSR)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 2/4/0
First half net profit was below expectations, largely because of a worse result from property, which is now heavily skewed to the second half. Deutsche Bank believes the company's varied end markets help offset a decline in residential volumes and building product margins.
The broker recognises some earnings risk in aluminium but believes the alumina/aluminium link is likely to return to its historical ratio by the time CSR has a new contract in January 2020.
Rating is upgraded to Buy from Hold as the stock is trading at a significant discount to peers.
CORPORATE TRAVEL MANAGEMENT LIMITED ((CTD)) Upgrade to Add from Hold by Morgans and Upgrade to Buy from Hold by Ord Minnett .B/H/S: 3/2/0
Having reviewed the VGI reports and the increased disclosure from Corporate Travel, Morgans has more confidence in the company's business model, growth strategy and financials.
The broker continues to believe the reports contained a number of inaccuracies and are unfounded. The broker retains forecasts and expects strong earnings growth.
Morgans believes the stock has been severely oversold, which provides the opportunity to buy a company with solid long-term growth potential.
Rating is upgraded to Add from Hold. Target is raised to $26.72 from $23.30.
Ord Minnett suggests investors take the opportunity to build a position in the stock, after weakness stemming from the issues raised in the recent report on the company's business signalled some sloppy attention to detail regarding patents and the status of offices.
Organic growth, acquisitions and investment in technology are driving margins higher, and the broker believes the key to understanding this business is the importance of the scale and leverage this creates.
Ord Minnett upgrades to Buy from Hold. Target is steady at $30.30.
GALAXY RESOURCES LIMITED ((GXY)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/1/0
After a significant correction in the share price Morgan Stanley upgrades Galaxy Resources to Overweight from Equal-weight.
While maintaining a negative house view on lithium prices, the broker envisages a valuation gap has emerged which may close as near term catalysts approach, such as the sale process at Sal de Vida and resource drilling results at Mount Cattlin.
Moreover, after receiving cash from POSCO the broker expects a cash balance of around US$270m, roughly 1/3 of the market capitalisation. Target is raised to $2.90 from $2.85. Industry View: In-Line.
INDEPENDENCE GROUP NL ((IGO)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 2/4/0
After recent commodity price weakness Morgan Stanley envisages upside for the near term for both nickel and gold prices. Hence, valuation support has emerged for Independence Group, leading to an upgrade to Equal-weight from Underweight.
Drilling currently underway at Nova could provide a near-term catalyst for the stock, the broker adds. Moreover, management has flagged a move to dividends based on free cash flow in the near future, which could improve yield significantly.
Industry view is: In-Line. Target is raised to $4.40 from $4.15.
INCITEC PIVOT LIMITED ((IPL)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/3/0
Ahead of the FY18 result on November 13, Credit Suisse upgrades to Outperform from Neutral. The broker suspects the market is playing catch up on fertiliser prices and the tightening supply for explosives in eastern Australia.
Assumptions for fertiliser prices drive upgrades to the broker's earnings estimate and the target is increased to $4.33 from $4.02.
As the company is intent on maintaining its dominance of the Bowen Basin the next major capital project is likely to be an expansion of the ammonia capacity at Moranbah to support additional ammonium nitrate production, Credit Suisse suggests.
LOVISA HOLDINGS LIMITED ((LOV)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 3/1/0
The stock has traded down -40% from its peak and, while headwinds continue, Morgan Stanley believes it is far more reasonably priced now. The broker envisages increased traction from the global roll-out of stores and e-commerce offering.
Further softening is envisaged ahead of Christmas as tough comparables are cycled.
The risk/reward is now more balanced and the broker upgrades to Equal-weight from Underweight. Target is reduced to $8.40 from $9.50. Industry view is In-Line.
MINERAL RESOURCES LIMITED ((MIN)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/1/0
Ord Minnett notes the global lithium sector has shown signs of life following a price increase for battery and industrial grade in China's spot market.
Despite the continued focus on spot prices, which the broker deems irrelevant, all other electric vehicle link data remain positive.
Ord Minnett upgrades to Accumulate from Hold, given share price weakness and a view that the risk/reward ratio is now skewed to the upside. Target is steady at $18.
MCMILLAN SHAKESPEARE LIMITED ((MMS)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/2/0
The company has announced an intention to merge with EclipX ((ECX)). Macquarie calculates the bid, of $0.46 cash and 0.1414 McMillan Shakespeare shares, represents a 17% premium to the last close for EclipX.
Macquarie calculates more than 30% accretion post synergies. The broker upgrades to Outperform from Neutral and suspects the market is either not rating the combined business, does not trust EclipX earnings or does not believe the synergies. Target is raised to $17.41 from $16.54.
The company has agreed a merger with EclipX ((ECX)), offering 0.1414 shares plus $0.46 cash per each EclipX share. Credit Suisse upgrades to Outperform from Neutral, regarding the stock is attractively valued even prior to the proposed merger.
The broker believes the strategic rationale is sound and the majority of the synergy benefits are achievable. Target is reduced to $17.65 from $18.55 because of a lower market multiple.
See also MMS downgrade.
MACQUARIE GROUP LIMITED ((MQG)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/3/0
Net profit in the first half was ahead of Ord Minnett forecasts. The upgrade to guidance has come more quickly than usual, which the broker suggests reflects confidence in the outlook, as it does not yet include the Quadrant Energy sale.
Strength appears set to continue for the near term and the broker raises FY19-21 profit forecasts by 7-9%. Rating is upgraded to Accumulate from Hold and the target elevated to $132 from $117.
ORICA LIMITED ((ORI)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/5/1
Credit Suisse is confused as to whether the FY18 result is merely about optics from a business that has been under pressure. The broker cites several reasons to be cautious because of the recent history and operating issues at Burrup.
The upside case is created by a tightening of supply/demand in the Australia Pacific region. While not 100% convinced, Credit Suisse still suspects profits will be carried higher over the medium term and upgrades to Outperform from Neutral. Target is raised to $19.08 from $17.60.
See also ORI downgrade.
OIL SEARCH LIMITED ((OSH)) Upgrade to Neutral from Sell by Citi .B/H/S: 2/4/0
Citi now considers the ASX energy sector fairly priced but ASX names are not being priced at a premium to global peers. Under price assumptions of US$70/bbl for oil and US$9/mmbtu for LNG in the long term the stock would be trading at a -21% discount to the broker's valuation, before considering the dividend yield.
The broker upgrades to Neutral from Sell. Target is raised to $7.42 from $7.07.
QBE INSURANCE GROUP LIMITED ((QBE)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 6/2/0
While the company has operated in a difficult market over the past five years, Credit Suisse notes premium rates have turned positive in early 2018 and premium rate increases have been maintained.
The broker reassesses the growth opportunity and has a more optimistic view. The company is expected to update the market in early December on potential cost reductions.
Credit Suisse upgrades to Outperform from Neutral and raises the target to a $13 from $11.
REA GROUP LIMITED ((REA)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/3/0
Macquarie observes a very strong first quarter result, with the drivers being the take-up of depth products as well as new revenue from commercial and developer segments.
The broker finds it hard to fault the trajectory of the business, despite the macro trends. A strong FY19 is expected and Macquarie upgrades to Outperform from Neutral. Target is unchanged at $90.
See also REA downgrade.
SMARTGROUP CORPORATION LTD ((SIQ)) Upgrade to Add from Hold by Morgans .B/H/S: 6/0/0
Smartgroup's share price has fallen some -20% since its peak post result in August, Morgans notes. While new car sales have indeed been weak in the Sep Q, the broker expects novated demand has remained resilient, as suggested by peer McMillan Shakespeare ((MMS)).
Consistent demand, combined with a focus on operational efficiencies and further acquisition potential, leads Morgans to consider the stock is now trading at a reasonable valuation. Target falls to $11.65 from $12.62 but rating upgraded to Add from Hold on the gap to share price.
TREASURY WINE ESTATES LIMITED ((TWE)) Upgrade to Overweight from Equal-weight by Morgan Stanley and Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/2/1
Morgan Stanley believes the sell-off since the FY18 results provides an attractive entry point to a unique growth story. Concerns regarding growth in China are overplayed and the broker suggests Treasury Wine's earnings drivers are under appreciated.
The broker's view across multiple stocks/countries indicates there is no slowdown in China and a healthy 18% compound earnings growth is still envisaged for FY19-21.
Rating is upgraded to Overweight from Equal-weight. $20 target retained. Industry view: Cautious.
Macquarie reviews the investment thesis for Treasury Wine following the recent de-rating of the stock. The broker is increasingly convinced about margin improvement in the US, which remains a significant growth opportunity.
The broker also expects the company to remain on the acquisition trail, principally focused on the US. Successful execution of US distribution changes presents margin upside of around 2-2.5%, in Macquarie's opinion.
Rating is upgraded to Outperform from Neutral. Target is raised to $18.22 from $17.15.
WORLEYPARSONS LIMITED ((WOR)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/0
Since the company announced an intention to buy the ECR business from Jacob's Engineering the stock has traded well below the entitlement issue price. Still, Dar Group's intention to take up all its entitlement is a sign of confidence in the deal, Credit Suisse suggests.
Despite the amount of entitlement stock to be absorbed, which may suppress the share price, Credit Suisse moves to Outperform from Neutral on the medium-term outlook. Target is steady at $17.60.
WOODSIDE PETROLEUM LIMITED ((WPL)) Upgrade to Neutral from Sell by Citi .B/H/S: 3/3/1
Citi now considers the ASX energy sector fairly priced but ASX names are not being priced at a premium to global peers. Under price assumptions of US$70/bbl for oil and US$9/mmbtu for LNG in the long term the stock would be trading at a -14% discount to the broker's valuation, before considering the dividend yield.
Meanwhile, the changes announced by the Commonwealth government to the petroleum resource rent tax have resulted in a -5% reduction to the broker's valuation of Woodside.
Rating is upgraded to Neutral from Sell. Target is reduced to $32.91 from $34.64.
WESTERN AREAS NL ((WSA)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 5/2/0
As the project metrics at Odysseus have improved and there is upside for the nickel price, Morgan Stanley upgrades to Equal-weight from Underweight.
Nevertheless, limited mine life at the Forrestania assets and risks related to construction and commissioning of Odysseus provide higher pre-production expenditure estimates of $299m.
Industry view is In-Line. Target is reduced to $2.50 from $2.55.
XERO LIMITED ((XRO)) Upgrade to Buy from Lighten by Ord Minnett .B/H/S: 2/4/1
Ord Minnett observes the business has underperformed global peers over the past month, falling to what is now deemed an attractive entry price. First half results are due on November 8 and the broker believes the focus will be on subscriber growth and acquisitions.
Ord Minnett envisages 17% upside to its valuation and upgrades the rating to Buy from Lighten. Target is increased to $48 from $42.
DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Downgrade to Neutral from Buy by UBS and Downgrade to Reduce from Hold by Morgans .B/H/S: 2/1/4
At its AGM, Domino's reiterated FY19 earnings guidance and planned store openings, albeit the latter comes with a greater skew to the second half. UBS has trimmed its first half earnings forecast slightly.
The broker is a fan of the company but having outperformed the ASX200 Industrials by 24% year to date, valuation is now fair and the broker thus pulls back to Neutral from Buy. Target unchanged at $57.
The trading update has revealed a further slowing in same-store sales momentum, particularly in Australasia and Europe. FY19 underlying operating earnings guidance of $227-247m was reiterated, although Morgans suggests the upper end is stretched following this latest update.
While the launch of new menus should assist sales growth, the broker awaits greater clarity on the top-line momentum. Rating is downgraded to Reduce from Hold, based on fundamentals. Target is reduced to $50.01 from $51.28.
MCMILLAN SHAKESPEARE LIMITED ((MMS)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 3/2/0
The transaction with EclipX ((ECX)) has caused Ord Minnett to pause, downgrading to Hold from Buy, as further assessment is made of the combined entity. The combined entity becomes much more of a fleet management play with less salary packaging/novated leasing as a percentage.
The broker is uncertain regarding the ongoing contribution from the Right2Drive business, as McMillan Shakespeare management were unwilling to commit to this on the conference call. Target is reduced to $16.00 from $20.50.
See also MMS upgrade.
ORICA LIMITED ((ORI)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 1/5/1
FY18 results were ahead of Morgan Stanley's estimates. Australia Pacific and Latin America stood out. EMEA disappointed. The broker considers the guidance vague albeit consistent with forecasts.
Permanent repairs are expected to make the Burrup ammonium nitrate plant fully available for use in the first half of FY20. These issues of reliability cloud the medium-term outlook for the broker.
Rating is downgraded to Equal-weight from Overweight. Target is reduced to $17.90 from $18.90. Industry view is Cautious.
See also ORI upgrade.
REA GROUP LIMITED ((REA)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 4/3/0
First quarter results were stronger than expected, benefiting from continued growth in depth products and softer-than-expected declines in new listings. There was strong growth in the developer and commercial segments.
Ord Minnett increases developer revenue growth estimates to 10% for FY19 and continues to expect 10% growth in commercial revenues.
As the stock is trading in line with the $79 target the broker downgrades the rating to Hold from Accumulate.
See also REA upgrade.
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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