Weekly Reports | Dec 17 2018
By Greg Peel, Acting 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 December 10 to Friday December 14, 2018
Total Upgrades: 11
Total Downgrades: 11
Net Ratings Breakdown: Buy 46.81%; Hold 39.89%; Sell 13.30%
At face value the number of broker upgrades to downgrades last week again looks evenly split. However, of the 11 upgrades, 7 went to Buy and of the 11 downgrades, only 3 went to Sell. Of the 11 downgrades, IOOF Holdings copped no less than four following news of APRA's accusations, but all went from Buy to Hold (or equivalent).
This as the market continues to correct, the bias remains to the upside in terms of analyst recommendations. Five of the upgrades are attributed to "valuation", meaning the share price has fallen too far as far as analysts are concerned.
Target price increases were nevertheless benign last week, which again plays into the "valuation" theme. Inghams Group ((ING)) topped the list with 4.5% followed by Fortescue Metals on 3.7%. The downside was a little different, with HT&E ((HT1) seeing a net -17.1% cut and Adelaide Brighton -15.7%. However we can dismiss the HT&E number given it relates only to the sale of Adshel and subsequent capital return, leaving a smaller company. But Adelaide Brighton's cut comes following a weak trading update.
In terms of forecast earnings changes, WiseTech Global tops the upside with 8% while HT&E's -12% downgrade is a case of see above.
ADELAIDE BRIGHTON LIMITED ((ABC)) Upgrade to Neutral from Sell by Citi and Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/3/2
Citi observes the shares have fallen -38% from highs in early July. The housing cycle may have peaked but the broker believes the company's exposure to infrastructure and non-residential markets will provide a meaningful offset.
While the company has downgraded net profit guidance by -6%, the broker believes the factors are temporary. The broker cannot rule out speculation regarding the logic of a merger between Adelaide Brighton and privately-owned Barro, which is owned by the company's largest shareholder, the Barro family.
Citi upgrades to Neutral from Sell, believing the stock has retreated to fair value. Target is reduced to $4.70 from $5.50.
The company has cited volume weakness in its downgrade to 2018 guidance. Credit Suisse models a partial recovery, excluding WA where the outlook is more uncertain.
The broker expects volumes to grow in 2019, amid strong price outcomes and upgrades to Outperform from Neutral. Target is reduced to $5.30 from $6.56.
The broker notes WA is establishing as a major processor of lithium hydroxide, ex China. Lime is a key input in the production of this substance, which is used in batteries.
The broker calculates that initial projects will require more than 50,000t of lime, approximately 5% of total WA use, and this could well prove to be a substantial new long-term market for the company.
BEACH ENERGY LIMITED ((BPT)) Upgrade to Neutral from Sell by Citi .B/H/S: 2/2/0
Citi downgrades oil price forecasts and now expects Brent oil at U $60/bbl for 2018 and US$55/bbl for 2019. The broker maintains a neutral view on the sector but concedes there may be deep value emerging in some names.
Following the recent decline in the share price the broker now considers Beach Energy fair value and upgrades to Neutral from Sell. Target is reduced to $1.62 from $1.70.
DULUXGROUP LIMITED ((DLX)) Upgrade to Add from Hold by Morgans .B/H/S: 1/3/2
The share price has pull backed -16% over the past year, Morgans notes. This comes despite the company continuing to deliver solid earnings growth. The broker believes a good buying opportunity has emerged for a high-quality, defensive business with strong brands.
Despite a slowdown in residential building activity, Morgans expects renovation activity to remain resilient, and many of the products that Dulux sells are about maintenance.
Rating is upgraded to Add from Hold. Target is steady at $7.67.
FORTESCUE METALS GROUP LTD ((FMG)) Upgrade to Overweight from Underweight by Morgan Stanley .B/H/S: 6/1/1
Morgan Stanley's commodities strategists have lifted long-term iron ore price estimates by 12% to US$63/t. This is the main driver of the upgrade to the stock.
The broker expects Chinese steel mill margins to improve in 2019, largely driven by the winter reductions gathering pace in late December and early January. If this does not occur, there is further upside risk to forecasts, the broker adds.
Morgan Stanley upgrades to Overweight from Underweight and raises the target to $5.05 from $3.30. Industry view is upgraded to Attractive from In-Line.
INGHAMS GROUP LIMITED ((ING)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 0/5/1
To reflect a stronger pricing environment and further cost cutting potential, Morgan Stanley upgrades estimates for earnings per share by 1-6% across FY19-21. The supply contract for Woolworths ((WOW)) remains the largest risk, in the broker's opinion.
Near-term profitability is expected to be supported by ownership changes at NZ competitor, Tegel, leading to a more rational market and margin expansion from FY20, as well as further automation of production processes.
Rating is upgraded to Equal-weight from Underweight. Target is raised to $4.40 from $3.40. Industry view: Cautious.
NEW HOPE CORPORATION LIMITED ((NHC)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/1/0
Credit Suisse upgrades to Outperform from Neutral on the back of share price weakness, despite the stock being a top performer over 2018. Target is reduced to $4.00 from $4.10.
ORIGIN ENERGY LIMITED ((ORG)) Upgrade to Add from Hold by Morgans .B/H/S: 6/1/0
Origin Energy has resumed paying dividends with $0.20 a share for FY19 and a formal dividend policy to be announced by early FY20. The company's performance since offloading Lattice Energy has improved, in Morgan's view.
Origin Energy is exposed to oil price fluctuations through its 37.5% interest in the APLNG JV. Morgans assumes the spot oil price will rise, with long-term Brent averaging US$70/bbl.
Additionally, the company has limited downside exposure in FY19 if the price falls below US$60/bbl for a sustained period, as it has purchased put contracts.
Morgans upgrades to Add from Hold. Target is reduced to $8.09 from $9.31.