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.
MCMILLAN SHAKESPEARE LIMITED ((MMS)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/1/0
The company's exposure to the public sector as well as minimal exposure to upfront commissions increases Morgan Stanley's earnings conviction.
The broker observes several catalysts, noting EclipX ((ECX)) shareholders will vote on the merger in the current quarter, after which the focus will shift back to fundamentals.
Morgan Stanley upgrades to Overweight from Equal-weight. Target is raised to $17.25 from $16.45. In-Line sector view.
NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 4/3/1
Morgan Stanley takes a negative stance on all major banks given the challenging operating and regulatory environment.
The broker now upgrades National Australia Bank to Equal-weight from Underweight because low earnings growth and a reduction in the dividend are partially reflected in current trading multiples.
The bank also has less exposure than its peers to the pressure on household cash flows.
Target is reduced to $25.60 from $26.50. Industry view: In-line.
NETWEALTH GROUP LIMITED ((NWL)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 1/3/1
Ord Minnett notes the company has had a disappointing update followed by an over-reaction to MLC re-pricing its platform offering.
This has opened up an attractive entry point for the stock, as the broker considers the business positioned to grow funds under administration while adviser independence is expedited following the Royal Commission.
December quarter flows were softer than anticipated but Ord Minnett reserves judgement as to the source of the slowdown until the March and June updates. Rating is upgraded to Buy from Hold and the target is reduced to $7.85 from $8.60.
REDBUBBLE LIMITED ((RBL)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0
Revenue growth, operating profit and cash generation were ahead of forecasts in the first half.
Morgans notes the company has adjusted swiftly to the change in the Google algorithm and clawed back the lost profit margin through pricing strategies and better deals with suppliers.
As the risks associated with the algorithm change are now quantifiable, Morgans upgrades to Add from Hold. Target is raised to $1.27 from $1.19.
ADELAIDE BRIGHTON LIMITED ((ABC)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 1/4/2
Deutsche Bank has a mixed outlook for Australian building materials, remaining positive on Australian infrastructure while considering the residential market has clearly peaked.
The broker believes the largest volume declines will continue to be in multi-residential. Rating is downgraded to Sell from Hold.
AIR NEW ZEALAND LIMITED ((AIZ)) Downgrade to Underperform from Outperform by Macquarie .B/H/S: 0/2/2
A sudden drop in demand has continued into forward bookings and the airline has lowered pre-tax guidance for FY19 to NZ$340-400m.
While operating statistics and load factors held up in December the main change was weak yield from both the short and long haul, Macquarie observes.
The broker believes the market will question whether this is a structural issue, and this will remain unclear until the first half result.
Macquarie downgrades to Underperform from Outperform. Target is reduced to NZ$2.55 from NZ$3.65.
See also AIZ upgrade.
AMP LIMITED ((AMP)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 2/6/0
Lower wealth earnings in the second half, amid volatile markets and regulatory uncertainty, have caused Morgan Stanley to downgrade to Equal-weight from Overweight.
The broker also cites a lack of clarity on the future strategy from the new CEO. The main concern is how AMP sustains a commercially viable model, while managing compliance risk and the likely elevated role of trustee boards.
Target is reduced to $2.50 from $3.40. Industry view is In-Line.
CREDIT CORP GROUP LIMITED ((CCP)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/1/0
First half underlying net profit was broadly in line with Ord Minnett's forecasts. The broker believes the risk/reward equation is now more balanced, particularly with an uncertain macro economic backdrop in Australia.
Rating is downgraded to Hold from Accumulate, although the target is raised to $23 from $22 because of changes to earnings forecasts.
The broker still believes double-digit earnings growth in FY20 is readily achievable.
ECLIPX GROUP LIMITED ((ECX)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 1/4/0
Morgan Stanley observes EclipX has dislocated from trading, in line with the proposed offer price from McMillan Shakespeare ((MMS)).
In light of the share price movement, the broker strips back valuation to reflect only the core leasing business where there is a track record of profitability and returns.
Target is reduced to $2.32 from $3.00. The broker downgrades to Equal-weight from Overweight. Industry view is In-Line.
FORTESCUE METALS GROUP LTD ((FMG)) Downgrade to Sell from Buy by UBS and Downgrade to Hold from Add by Morgans .B/H/S: 3/3/2
Shipments in the December quarter were in line with UBS forecasts, at 42.5mt. However, costs were 5% higher than expected. The broker forecasts interim underlying earnings of US$543m, down -20%.
Stronger shipments are expected in the second half. UBS points to a lift in the share price of around 18% since the announcement of the Vale tailings dam failure in Brazil and associated supply disruption to the iron ore market.
This brings gains for the year to date to around 35%. UBS believes the current iron ore price is not sustainable and reduces the rating to Sell from Buy on valuation grounds. Target is raised to $5.00 from $4.70.
Following recent strength in the iron ore price and resulting rise in the Fortescue Metals share price, Morgans downgrades to Hold from Add. Target is reduced to $5.45 from $5.68.
The stock does not appear expensive but spot prices are already at around US$80/t and a discount on low-grade has already narrowed, so the near-term risks appear skewed to the downside, in the broker's view.
GALAXY RESOURCES LIMITED ((GXY)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 4/1/0
December quarter concentrate sales were in line with expectations. Incorporating the quarterly production result and lower spodumene prices for the second half of 2019, drives material reductions to Macquarie's earnings estimates.
The broker believes, with the advent of new, larger and lower-cost projects, Mount Cattlin is likely to become the marginal Australian producer and margin should continue to be eroded.
Meanwhile, the timeline for Sal de Vida development draws out. Macquarie downgrades to Neutral from Outperform and reduces the target to $2.20 from $2.70.
See also GXY upgrade.
INDEPENDENCE GROUP NL ((IGO)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 2/3/1
Weak first half earnings surprised Macquarie, while December quarter production was better than expected.
Higher non-cash charges resulted in operating earnings (EBITDA) for the December quarter missing forecasts by -27% and resulted in only a marginal profit for the year.
The company has changed its capital allocation and now expects to return 15-25% of free cash flow to shareholders in dividends and buybacks. Macquarie expects the change will double cash returns to shareholders from the previous minimum 30% pay-out of earnings.
Macquarie downgrades to Underperform from Neutral. Target is steady at $3.80.
NEWCREST MINING LIMITED ((NCM)) Downgrade to Underperform from Neutral by Credit Suisse and Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/5/2
Credit Suisse analysts seem pleased with the contents of the December quarter production report, labeling Newcrest's performance as "strong", while also noting management left FY guidance unchanged.
While the target price has been left unchanged at $20.30, the recommendation has been downgraded to Underperform from Neutral, on valuation. Earnings estimates have been lifted, also incorporating commodity and FX updates.
Ord Minnett observes a re-emergence of corporate-level M&A in the global gold sector has raised the question regarding the intentions of Newcrest. While cash margins and asset life are solid, Cadia and Lihir account for 90% of operating earnings (EBITDA).
The broker would not be surprised if Newcrest increased its exposure to any or all of tier-1 assets such as Golpu, Fruita del Norte or SolGold.
The broker also envisages potential for asset-level transactions, as recent mergers among global majors are likely to lead to divestments.
The company has maintained FY19 production guidance at 2.35-2.6m ozs. Rating is downgraded to Hold from Accumulate, given recent gains in the share price. Target is unchanged a $25.
OCEANAGOLD CORPORATION ((OGC)) Downgrade to Neutral from Buy by UBS and Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/2/1
UBS believes the risks to Waihi and Macraes in terms of mine life have been addressed. These assets contribute around half of current production.
The broker notes permit approvals and the gold price have driven the share price 20% higher since December and it is now above valuation.
Rating is downgraded to Neutral from Buy as a result. Target is raised to $4.85 from $4.50.
Despite the weakness at Haile the company achieved upgraded production guidance in the December quarter. 2019/20 earnings estimates are reduced on the implications of the grade depletion over 2018, ahead of further guidance and details in the February results.
Credit Suisse downgrades to Underperform from Neutral as a result. Target is steady at $4.00.
RESMED INC ((RMD)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 3/3/1
December quarter operating income was almost -4% below Ord Minnett's forecasts because of weaker-than-expected sales growth. This was offset by a better-than-expected gross margin.
The broker remains comfortable with the company's leading position in sleep therapy but expects sales growth to be subdued over much of 2019 as past strength is cycled.
Rating is downgraded to Lighten from Hold as the broker now expects earnings to contract for the next few quarters. Target is lowered to $13.40 from $15.50.
SANDFIRE RESOURCES NL ((SFR)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 1/4/2
Copper production was down -6% in the December quarter versus September, although cost guidance has improved for FY19.
While operating cash flow is solid Deutsche Bank believes finding another Monty-sized deposit is critical to sustaining DeGrussa's life beyond 2023.
Rating is downgraded to Hold from Buy on valuation. Target is $7.25.
SG FLEET GROUP LIMITED ((SGF)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 2/0/1
The stock has sold off substantially since its AGM update and, considering the current trading environment shows new vehicle sales in decline, Morgan Stanley suggests it is one of the stocks most at risk within its leasing coverage.
Morgan Stanley lowers earnings estimates by -8% for FY19 and -9% for FY20.
Rating is downgraded to Underweight from Equal-weight. Target is reduced to $2.60 from $3.65. Industry view is In-Line.
SMARTGROUP CORPORATION LTD ((SIQ)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 5/1/0
Morgan Stanley believes the company's major exposure in healthcare and public benevolent customers should lead to a more defensive earnings profile, which is less exposed to consumer confidence and wealth affects.
However, the broker estimates between 70-75% of earnings are generated from commissions and this is a near-term earnings risk.
Rating is downgraded to Equal-weight from Overweight. Target is reduced to $10.25 from $14.00. Sector view is In-Line.
WESTPAC BANKING CORPORATION ((WBC)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 3/3/2
Morgan Stanley takes a negative stance on all major banks given the challenging operating and regulatory environment. The broker downgrades Westpac to Underweight from Equal-weight, citing lower returns and rising risks in retail banking.
Westpac also has relatively more exposure to the end of the mortgage bull market. There is also limited margin for error on loan losses and a limited capital buffer amid a growing risk of a cut to the dividend.
The broker reduces the target to $24.30 from $26.00. Industry view: In Line.
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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