Weekly Reports | Feb 25 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 18 to Friday February 22, 2019
Total Upgrades: 17
Total Downgrades: 38
Net Ratings Breakdown: Buy 43.28%; Hold 42.29%; Sell 14.43%
Week three of the domestic February corporate reporting season saw the deluge in recommendation downgrades continue. For the week ending Friday, 22nd February 2019, FNArena counted no less than 38 downgrades for individual ASX-listed entitties, against 17only upgrades.
Total Neutral/Hold ratings held by the eight stockbrokers monitored daily is rapidly closing in on total Buy ratings; 42.29% versus 43.28%, which can serve as an indication of where most downgrades lead to. The fact share market indices have remained inside a strong upward channel provides an easy explanation as to why.
Only two brokers out of the eight are carrying more Buy ratings than Neutral/Holds; retail stockbrokerages Morgans and Ord Minnett.
Three companies received multiple upgrades during the week, with each of Pact Group, APA Group and AP Eagers receiving two upgrades post market updates. AP Eagers was the only one receiving two upgrades to Buy.
On the flipside, each of Cochlear, GWA Group, Iluka Resources, nib Holdings, Regis Resources, Sandfire Resources, Sonic Healthcare, Stockland, a2 Milk, and Wesfarmers seeing two downgrades post financial results.
There was equally a lot of fireworks on display for consensus changes to valuations and price targets, with a2 Milk grabbing the week's honours enjoying an increase of 20%, followed by Goodman Group, Magellan Financial, and Cleanaway Waste Management.
The flipside equally displays large numbers with Pact Group's consensus target suffering most (-14%), followed by Smartgroup Corp, Bank of Queensland, Domino's Pizza, and Cochlear. Noteworthy: the top of the week's increases shows larger increases than the top of the week's negative ranking.
As is normal practice during reporting season, positive adjustments to earnings estimates are nothing short of enormous, and last week commodities producers (more miners than oil & gas) commanded pole position. The negative side shows more diversity, and equally ginormous adjustments, with plenty of corporate disappointers featuring prominently.
The largest downward adjustment goes to Pact Group (-135%), followed by Unibail-Rodamco-Westfield, Mineral Resources, Automotive Holdings, and OceanaGold.
Reporting season continues this week but at a gradually slowing pace from last week's tsunami of corporate releases. The epicentre of domestic reports is well and truly behind us. Ex-dividends start populating the calendar from here onwards.
ALTIUM LIMITED ((ALU)) Upgrade to Hold from Sell by Ord Minnett .B/H/S: 1/2/0
First half results were very strong, supported by perpetual license sales, particularly Altium Designer in China. Ord Minnett found operating leverage clearly evident.
The broker notes management's confident outlook regarding the FY20 revenue target of $200m. The broker materially upgrades cash flow forecasts and lifts the rating to Hold from Sell. Target is raised to $26.51 from $17.70.
APA GROUP ((APA)) Upgrade to Neutral from Underperform by Credit Suisse and Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 1/7/0
First half earnings were ahead of Credit Suisse forecasts. The broker asserts arbitration rules are proving ineffective, and the upcoming elections and the outcome of the review in August signal the risk has not entirely diminished.
Growth projects are largely on track. The broker believes there is upside to consensus FY20 forecasts. Rating is upgraded to Neutral from Underperform, to reflect the upside. Target is raised to $8.75 from $7.65.
Deutsche Bank believes the interim report was "solid". It was clearly better-than-expected by the broker beforehand. As management continues to deliver solid, consistent and predictable distributions, the recommendation is upgraded to Buy from Hold. Target $9.90.
AP EAGERS LIMITED ((APE)) Upgrade to Add from Hold by Morgans and Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/2/0
AP Eagers 2018 result met the broker, defying industry weakness thanks to years of cost control, risk-based pricing and business restructuring.
The company improved volumes, market penetration and margin retention and the company remains confident on these fronts. Broker notes the stock is well-positioned for acquisitions, although this would pose downside risk to the share price and dividend.
Target price inches up to $8.03 from $8. Broker upgrades to Add from Hold.
The 2018 result was in line with the guidance provided in mid January. Ord Minnett observes the economics of dealerships have changed and will continue to evolve.
The company reported margin expansion in the second half in both operating divisions, providing a level of comfort in what is expected to be a weak new vehicle sales environment.
That said, the company is ideally positioned to participate in industry consolidation. Rating is upgraded to Accumulate from Hold and the target raised to $7.50 from $7.00.
BABY BUNTING GROUP LIMITED ((BBN)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/0/0
Macquarie found the first half results solid and in line with expectations. The likelihood of an upgrade has been reduced although the broker believes the upper end of guidance is achievable.
FY19 EBITDA guidance of $25-27m is reiterated. Macquarie upgrades to Outperform from Neutral and considers the recent weakness a buying opportunity. Target is raised to $2.65 from $2.25.
BLACKMORES LIMITED ((BKL)) Upgrade to Hold from Reduce by Morgans .B/H/S: 0/4/2
Blackmore's first-half result fell shy of the broker, thanks to a weak performance from China and a deterioration in second-quarter and third-quarter sales.
Management guided to a weaker second half and Morgans slashes forecasts -12.9%, -13.4% and -14% across FY19/FY20/FY21.
Target price falls to $86 from $107. Morgans upgrades to Hold from Reduce given the sharp retreat in the share price and notes the stock is still trading at a premium multiple to international peers despite its lower growth outlook.
See also BKL downgrade.
Data#3 Limited ((DTL)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0
Data#3's first-half result outpaced the broker by 4%, the dividend doubling off a low figure in the previous corresponding period.
Product outpaced Services and the company outstripped peers thanks to its diversified customer base.
On the downside, the gross profit margin fell below 13% for the first time in a decade due to weakness in Services. The Federal election could also create a drag in the second half.
EPS forecasts rise 3% in FY19 and 11% in FY20. Target price rises to $1.85 from $1.67 and rating upgraded to Add from Hold.
HEALIUS LIMITED ((HLS)) Upgrade to Add from Hold by Morgans .B/H/S: 2/3/1
Healius returned a soft first-half result thanks to external conditions and one-offs but management guided to a strong second-half recovery.
The broker spies several green shoots in the result and increases earnings forecasts for FY19-FY21 in anticipation of productivity intiatives and an improving earnings trajectory (pending market trends).
The stock is upgraded to Add from Hold. Target price rises to $3.15 from $2.90.
LINK ADMINISTRATION HOLDINGS LIMITED ((LNK)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 7/0/1
First half net profit was weaker than Ord Minnett expected. The broker believes there could be positive surprises in the near term as PEXA gains traction and becomes a meaningful contributor.
Moreover, pending legislation is likely to lead to super funds spending more on implementing regulatory changes.
The broker upgrades to Accumulate from Hold and raises the target to $8.00 from $7.70.
See also LNK downgrade.
MOELIS AUSTRALIA LIMITED ((MOE)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 1/0/0
2018 operating earnings (EBITDA) were ahead of Ord Minnett estimates. Asset management underpins the strong performance, with total segment revenue up 95%.
The broker believes corporate advisory is largely a distraction to the base business. The broker upgrades to Buy from Accumulate and reduces the target to $6.63 from $6.67.