Weekly Reports | Feb 18 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: Monday February 11 to Friday February 15, 2019
Total Upgrades: 10
Total Downgrades: 36
Net Ratings Breakdown: Buy 44.60%; Hold 41.17%; Sell 14.23%
Macro and global sentiment continue to support equities, but the local reporting season keeps injecting lots of volatility into the Australian share market as the calendar morphs into the final two weeks of what will yet become a deluge in corporate report releases.
Stockbroking analysts continue to issue more downgrades than upgrades in ratings for individual, ASX-listed entities. The week ending Friday, 15th February 2019 was certainly no exception.
For the eight stockbrokers monitored daily, FNArena counted 36 downgrades for the week, only offset by ten upgrades.
Among those ten, only six moved up to a Buy, including results reporters Aurizon Holdings (2x), Bapcor, Breville, Goodman Group, and Treasury Wine Estates.
There is a lot more to observe in terms of individual stocks and changes in ratings on the flipside of the week's ledger; AMP received two more downgrades, Bendigo and Adelaide Bank accumulated three downgrades, Breville Group combined the one upgrade with two downgrades, Cleanaway Waste Management also received three downgrades, as did Magellan Financial Group, while beaten down Pact Group's sixth profit warning since 2017 was good for yet another two downgrades. Treasury Wine Estates received two downgrades post financial report.
Downgrades reflected a mix of poor results and solid results prompting over-excited share price responses.
All in all, 13 of the 36 downgrades (50%) moved to Sell, including all three downgrades for Bendalaide Bank as well as both downgrades for Pact Group, with Class, Challenger, Newcrest Mining, Stockland and Virgin Australia among those to receive fresh Sell ratings.
In terms of all eight stockbrokers combined, Sell ratings still only represent a little more than 14% of all ratings, while total Buy ratings (44.60%) continue to outnumber total Neutral/Hold ratings (41.17%). Traditionally, when Buy ratings are this far ahead of Neutral/Holds it signals a rather rough time for the share market.
This time around, the signal (if there is one) is more difficult to read as five months of relentless selling in late 2018 have been swiftly followed up by two months of swift recovery. Many a shorter-term focused expert is now calling for a "cooling off" period, at the least, but it remains to be seen whether equity markets are paying attention.
One observation stands, however, and that is this reporting season already is proving incredibly tough to read in terms of share price movements post results releases. More about this in this week's Weekly Insights.
This week's table for positive amendments to valuations and price targets reads like an assembly of companies whose corporate results surprised to the upside, with IDP Education wearing the week's crown (up 35%), followed by Goodman Group (up 15.4%) and Magellan Financial Group (up 15%), followed by Cleanaway Waste Management, Telstra, Tassal Group, and Northern Star.
Challenger tops the week's table for negative adjustments to consensus price target, followed by Unibail-Rodamco-Westfield, Virgin Australia, Bendalaide Bank, Pact Group, and Bapcor.
The table for positive revisions to earnings estimates equally reveals large adjustments, with AGL Energy on top for the week, followed by GBST Holdings, Beach Energy, Goodman Group, South32, and others.
On the flipside, we find Virgin Australia, Aveo Group, Coronado Global Resources, Superloop, Carsales, and others.
Local reporting season genuinely moves into a (much) higher gear this week. If the first two weeks are anything to go by, investors should expect more fireworks, and other types of explosions.
AURIZON HOLDINGS LIMITED ((AZJ)) Upgrade to Equal-weight from Underweight by Morgan Stanley and Upgrade to Neutral from Sell by Citi .B/H/S: 1/6/1
As regulatory uncertainty recedes Morgan Stanley suspects the focus will now shift to the company's legal and capital structure. The broker envisages a modest upside risk from re-basing earnings.
The company appears to have accepted the UT5 final decision and the broker expects FY19 consensus earnings estimates will be downgraded and, instead, FY20 and FY21 will be upgraded.
Morgan Stanley upgrades to Equal-weight from Underweight and raises the target to $4.50 from $4.35. Industry view: Cautious.
First half results revealed a decline in earnings from continuing operations of -16%. Citi forecasts underlying EBIT for the non-network business towards the mid point of management's guidance range of $390-430m.
Citi revises FY19 estimates to reflect the fact Aurizon has chosen to account for the implementation of the UT5 decision in FY19, rather than extend the regulatory uncertainty further. The broker expects an 18% lift in underlying EBIT in FY20.
As a result of the clearer outlook for the network earnings, the broker lifts its rating to Neutral from Sell and raises the target to $4.40 from $3.80.
See also AZJ downgrade.
BAPCOR LIMITED ((BAP)) Upgrade to Add from Hold by Morgans .B/H/S: 4/0/0
Bapcorp's first-half result met the broker. A slowing in trading momentum in the second quarter was cushioned by divisional margin expansion.
Management has revised down guidance to the low end of previous guidance and the broker believes the stock can meet that comfortably, noting fundamentals are firm and expects trading challenges will be temporary.
Broker upgrades to Add from Hold but reduces the target price to $6.54 from $6.90.
BREVILLE GROUP LIMITED ((BRG)) Upgrade to Neutral from Sell by UBS .B/H/S: 1/2/1
First half results were ahead of expectations. UBS notes slower growth in North America was far from weak, still delivering 7.1%, and fears around Australian trading were not realised.
While cash flow was soft, the broker notes working capital is being built up in the UK, the US and Europe.
UBS upgrades to Neutral from Sell, believing there are years of growth ahead in Europe. Target is raised to $14.30 from $11.20.
See also BRG downgrade.
CHARTER HALL LONG WALE REIT ((CLW)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 0/2/1
First half results were ahead of estimates.The company has extended its lease to Inghams for the portfolio of chicken processing facilities to 25 years from 16 years.
Ord Minnett estimates the asset's capitalisation rate should firm to 6.5% from 7.25% on acquisition. This adds $0.07 to the net tangible assets per security and increases the weighted average lease expiry.
As a result, Ord Minnett raises the rating to Hold from Lighten and the target to $4.25 from $4.10.
GOODMAN GROUP ((GMG)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/2/1
First half results were in line with expectations while guidance has beaten Credit Suisse forecasts. The level of demand for industrial assets remains strong, supported by revaluations, investment and development activity.
The company will reduce its pay-out ratio to the low 50% range in order to sustain higher development work-in-progress in the near term.
The broker expects market conditions to remain positive and upgrades to Outperform from Neutral. Target is raised to $13.22 from $10.84.
LENDLEASE GROUP ((LLC)) Upgrade to Buy from Neutral by UBS .B/H/S: 5/0/0
UBS upgrades Lend Lease to Buy from Neutral, believing the stock to be undervalued given risks have fallen on troublesome projects. It also notes the company is not reliant on Australian residential markets given its global profile and institutional capital partners for all asset classes.
UBS expects an announcement regarding the engineering business when the interim results are published on Friday.
Target price rises to $15.70 from $15.20.
NORTHERN STAR RESOURCES LTD ((NST)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/2/3
Ord Minnett believes the market concern around grades is not a major issue and Kalgoorlie operations should reach FY19 guidance. Moreover, medium-term production opportunities could push Kalgoorlie towards 400,000 ounces of gold per annum.
The broker also notes the recent update on Pogo, with December quarter mining rates up 22%, suggests the upside potential is greater than initially assumed.
The broker upgrades to Accumulate from Hold and raises the target to $10.00 from $8.50.
TREASURY WINE ESTATES LIMITED ((TWE)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/3/1
The company missed the broker's expectations and cash flow in the first half, although there was a 25% increase in receivables outstanding, much of which was paid down in January.
The broker finds some signs of falling prices in the Penfolds luxury range, and there is a risk that the market may struggle to absorb the double-digit uplift in supply.
However, the continued expansion of the range in China should allow for very strong growth.
Credit Suisse upgrades to Outperform from Neutral and raises the target to $19.85 from $16.45. The company expects to grow operating earnings by 15-20% in FY20.
See also TWE downgrade.
VOCUS GROUP LIMITED ((VOC)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 1/5/2
Morgan Stanley has become bullish on the potential for market share gains in the Australian enterprise segment of Vocus. The broker considers Vocus a turnaround story, upgrading to Overweight from Equal-weight.
While the broker acknowledges the enterprise segment is smaller, it is less competitive and offers sustainable higher margins than the consumer segment.
Target is raised to $4.00 from $2.90. Industry view is In-Line.
AMCOR LIMITED ((AMC)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 5/2/0
First half results demonstrate to Credit Suisse that operations are on track. The broker maintains FY20 and FY21 estimates unchanged.
FY19 estimates for earnings per share are reduced by -3% because of the delay in the closure of the Bemis transaction, relative to earlier expectations.
The recent rally in the share price has closed out excessive near-term returns, in the broker's view, although fundamentals appears solid.
Credit Suisse downgrades to Neutral from Outperform and raises the target to $14.90 from $14.80.
AMP LIMITED ((AMP)) Downgrade to Neutral from Buy by Citi and Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/7/0
In response to AMP's result and guidance Citi has cut forecast earnings by -3% in FY19 and -13% in FY20, cut its target to $2.50 from $2.80, and downgraded to Neutral (High Risk).
AMP does appear to offer some longer term value, the broker suggests, but an internal focus and rebasing of underlying earnings expectations mean investors will likely require significant patience before returns emerge. And the risk of regulatory action remains.