Weekly Reports | Feb 04 2019
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: Wednesday January 30 to Sunday February 3, 2019
Total Upgrades: 10
Total Downgrades: 18
Net Ratings Breakdown: Buy 46.39%; Hold 40.43%; Sell 13.19%
The week ending Friday, 1st February 2019 saw the eight stockbrokerages monitored daily by FNArena issue ten upgrades for individual ASX-listed stocks. None involved multiple moves for a single stock, and only three upgrades stopped at Neutral/Hold, indicating there might still be selective opportunity for investors post the unusually strong January rally.
Upgrades include companies having issued a profit warning (such as Air New Zealand), mining stocks (including Galaxy Resources and Iluka Resources), banks and other financials (NAB and Challenger), and sold down industrials whose core resilience might not be fully appreciated by jumpy investors.
The latter category includes the likes of DuluxGroup and GUD Holdings; both are included in my selection of All-Weather Performers in the Australian share market (For paying subscribers: see the dedicated section on the website).
Those same stockbrokers also issued 18 downgrades and here market division about intrinsic value and outlook for mining stocks is on full display with all of Fortescue Metals, Newcrest Mining and OceanaGold receiving two downgrades during the week, of which one for each went to Sell.
Others receiving fresh Sell ratings (nine out of 18) include ResMed, Westpac, Adelaide Brighton and Air New Zealand. Mining stocks are amply represented, which is probably no surprise given the sector's strong rally in January.
Consensus target prices rising remains a phenomenon witnessed few and far between. For the week, only Bellamy's Australia, Fortescue Metals, OceanaGold, Iluka Resources and Newcrest Mining are worth mentioning with increases ranging between 4.46%-3.26%. On the negative side, a lot more action can be witnessed with GUD Holdings' consensus target diving -9.74% after a disappointing interim results release, followed by SG Fleet (-9.11%) after an equally disappointing market update, followed by AMP (-9%), EclipX Group, ResMed, Smartgroup, and others.
With analysts updating their models and forecasts ahead of the February reporting season, some big moves dominate the table for positive revisions to earnings estimates. On top of the table sits Brickworks (+47.8%), followed by NextDC (+42.3%), Unibail-Rodamco-Westfield (+33.3%), Newcrest Mining, OZ Minerals, TPG Telecom, and others.
Not surprisingly, given the rapid deterioration in economic signals and data since late last year, reductions in earnings estimates remain of a decisively larger magnitude. Pilbara Minerals sits atop the weekly table for negative revisions with a hit of -55%, followed by Independence Group, Senex Energy, Galaxy Resources, and AMP; all suffering reductions of -26.5% and higher.
Then follows a queue of industrial and financial stocks each suffering single digit reductions in forecasts; Air New Zealand, Incitec Pivot, Challenger, Syrah Resources, and ResMed.
The local reporting season will be generating lots to focus on this week for investors with all of CommBank, Janus Henderson, James Hardie, AGL Energy, News Corp and REA Group on the calendar, as well as a quarterly update from National Australia Bank.
Let the games begin!
AIR NEW ZEALAND LIMITED ((AIZ)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/2/2
Air NZ issued a serious profit warning yesterday with CS analysts explaining the circa -16% downgrade to guidance (at the mid-point of the revised range) is entirely caused by disappointing revenue on slower growth in domestic New Zealand leisure travel on top of softening inbound tourism.
Falling jet fuel prices have been nothing but the proverbial band-aid, it turns out. The analysts see potential for further negative news/developments. Earnings estimates have been reduced. Price target drops to NZ$2.75 from NZ$2.85.
However, given the share price has already been caned, the recommendation has been upgraded to Neutral from Underperform.
See also AIZ downgrade.
CHALLENGER LIMITED ((CGF)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 1/6/0
The stock has underperformed and Morgan Stanley upgrades to Equal-weight from Underweight. Nevertheless, the broker acknowledges risks continue to overhang the stock, particularly market volatility and the bottom of the interest-rate cycle.
There are also headwinds to margins as the company seeks to reduce its exposure to unrated fixed income & property.
Target is reduced to $7.85 from $10.50. Industry view: In-line.
DULUXGROUP LIMITED ((DLX)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/2/2
Macquarie has used a general sector update on Australian building materials companies to sneak in an upgrade for DuluxGroup; to Outperform from Neutral. The analysts state, with apparent conviction, that Australia is almost certainly going to see a contraction in building activity, especially in the high-rise multi-residential sector.
On the other hand, the analysts remain of the view that many a share price linked to the theme has, simply put, fallen too fast, too deeply. Sector order of preference: Reliance Worldwide ((RWC)), then James Hardie ((JHX)), then DuluxGroup, then Boral ((BLD)).
Specifically for DuluxGroup, the broker explains the key investment attraction lies in the company's resilience combined with consistent growth through the cycle.
G.U.D. HOLDINGS LIMITED ((GUD)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/2/0
GUD's first half result missed expectations largely on slowing sales growth in Auto, which UBS puts down to an issue at AA Gaskets that appears transitional. The good news is the company's Narva Electrical & Lighting range has been built up ahead of a catalogue launch and group cash flow is typically weighted to the second half, the broker notes.
GUD's brands remain strong and on the strength of a -22% share price fall over the past six months, UBS upgrades to Buy. Target falls to $12.30 from $13.85.
GALAXY RESOURCES LIMITED ((GXY)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/1/0
December quarter production was softer than Credit Suisse expected and guidance for 2019 pricing is notably weaker. Nevertheless, the broker finds reasons to be constructive about the stock and believes it offers value.
The share price is offering an attractive entry point and the rating is upgraded to Outperform from Neutral. Target is steady at $3.15.
See also GXY downgrade.
ILUKA RESOURCES LIMITED ((ILU)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 6/0/0
Strong December quarter cash earnings have driven an upgrade to Macquarie's 2018 estimates. The company has secured price increases of 8-11% for rutile and synthetic rutile in the first half of 2019.
Demand for zircon has softened but the company believes zircon is moving towards a structural deficit, while any price rises present upside risk to the broker's forecasts.
Macquarie upgrades to Outperform from Neutral. Target is raised to $9.10 from $7.80.