Weekly Reports | Mar 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: Monday February 25 to Friday March 1, 2019
Total Upgrades: 7
Total Downgrades: 25
Net Ratings Breakdown: Buy 42.26%; Hold 43.06%; Sell 14.68%
The final week of the February reporting season saw one deviation from the prior months: total Hold/Neutral ratings for ASX-listed entities is now the largest group for the eight stockbrokerages monitored daily by FNArena.
This, of course, is the direct result of stockbroking analysts issuing decisively more downgrades than upgrades in their ratings for such stocks, with the index up double digit percentage since late December, of which some 6% (incl dividends) were added in February.
For the week ending Friday 1st March 2019, FNArena counted 25 downgrades versus seven upgrades, taking the total tallies to respectively 43.06% Hold/Neutral ratings and 42.26% Buy ratings, with the remaining 14.68% on Sell. Only two of the seven upgrades did not move to Buy.
Only five of the 25 downgrades moved to Sell, and for some it was one of a number of downgrades received. Plenty of stocks received multiple downgrades during the week, ranging from Appen, Atlas Arteria, and OZ Minerals, to Ramsay Health Care. In all cases share prices went up and financial results have been released.
Among the fresh Sell ratings we find NextDC, Costa Group, OZ Minerals, Seek, and Spark Infrastructure.
Target prices have struggled to post net positive gains throughout the season and last week only saw a few stocks post gains that are worth mentioning: Michael Hill enjoyed the week's largest gain (7.57%), beating G8 Education, OZ Minerals, Automotive Holdings and Costa Group.
The negative side of the week's ledger is populated by half a dozen stocks whose consensus target suffered by 2% or more, with FlexiGroup receiving the biggest blow (-4.7%), followed by Caltex Australia, Seek, Spark Infrastructure, and Stockland.
As is usual practice during reporting season, many amendments to consensus earnings forecasts, be it negative or positive, are nothing short of ginormous. NextDC, Atlas Arteria, Unibail-Rodamco-Westfield and Rio Tinto grabbed the honours on the positive side, whereas the heaviest reductions fell down upon Perseus Mining, Galaxy Resources, Automotive Holdings, and Spark Infrastructure.
This week will see the February flood of broker research come to a sudden and immediate stand still. Investors will continue to focus on macro events, while stocks going ex-dividend will continue to populate the calendar.
AUSTRALIAN FINANCE GROUP LTD ((AFG)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/0/0
First half net profit was in line with Macquarie's estimates. The broker considers the valuation is now attractive as political/regulatory risk appears to have eased.
Forecasts reflect probable broker remuneration changes as well as negative mortgage settlement activity extending through FY20.
Macquarie assumes mortgage settlement activity remains negative until FY21, which drives downgrades to estimates of earnings per share of -26.3% in FY20.
Rating is upgraded to Outperform from Neutral and the target is raised to $1.48 from $1.17.
AUTOMOTIVE HOLDINGS GROUP LIMITED ((AHG)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/6/1
First half results were weaker than Macquarie expected. While the broker envisages downside risk to guidance concerns over the balance sheet have diminished as costs are being controlled.
FY19 net profit guidance is revised lower, to $52-56m. The company expects a second half recovery but the earnings skew is inconsistent with history, in the broker's view.
Macquarie upgrades to Neutral from Underperform, given the improved balance sheet. Target is raised to $1.95 from $1.50.
FLEXIGROUP LIMITED ((FXL)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 4/2/0
Cash net profit fell sharply in the first half, largely because of an impairment in the vendor finance book. Certegy was a highlight while cards continue to be a drag, Deutsche Bank observes.
Still, despite profit declines, the company appears to be entrenched in consumer finance and should generate more cash than listed finance peers that are valued on significantly higher multiples, in the broker's view.
Given strong valuation support and the upside risk from new initiatives the broker upgrades to Buy from Hold. Target is $1.80.
MICHAEL HILL INTERNATIONAL LIMITED ((MHJ)) Upgrade to Add from Hold by Morgans .B/H/S: 3/1/0
First half results were ahead of forecasts. Morgans senses a change in momentum after a prolonged period of the company missing expectations, and makes material upgrades to forecasts for FY20 and FY21.
The broker believes the cost-cutting program will underpin two years of solid growth and upgrades to Add from Hold. Target is raised to $0.78 from $0.62.
MYER HOLDINGS LIMITED ((MYR)) Upgrade to Neutral from Sell by UBS .B/H/S: 0/2/3
Myer has underperformed the index by -18% over the past three months, UBS notes, due to market concern over weak Christmas trading. Yet retail company reports this season suggest that while tough, Christmas was not as bad as feared. Moreover, Myer is making good progress on handing back floor space and landlords are becoming more prepared to accept rental reductions.
And most importantly, Myer has not provided a trading update (Read: profit warning). UBS thus upgrades to Neutral. Target unchanged at 38c.
TREASURY WINE ESTATES LIMITED ((TWE)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 5/2/1
Ord Minnett reviews its valuation of Treasury Wine Estates, noting since the first half result the share price has fallen -11.7%. Yet significant earnings (EBITS) growth is forecast.
Now, cash conversion and the concerns over the agricultural cycle are better reflected in the share price.
As the risk/reward equation is more attractive the broker upgrades to Accumulate from Hold. Target is steady $17.50.
WISETECH GLOBAL LIMITED ((WTC)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/2/0
Citi's upgrade to Buy from Neutral following a -24% fall in the share price over the past seven days. In addition, the analysts believe the latest acquisition (of Containerchain) "appears to be highly strategic" for the company.
Forecast FY19 revenue growth of $114m (51%) is split 23% organic and 28% acquisitive, the analysts explain, Target price lifts to $21.31 from $21.09.
ATLAS ARTERIA ((ALX)) Downgrade to Hold from Add by Morgans and Downgrade to Neutral from Buy by UBS and Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/4/0
Morgans found no major surprises in the results as toll revenue had already been published. The broker was hoping for news about the removal of the Eiffarie debt amortisation, as this accounts for 8-9c per security of its FY20-21 distribution forecast.
Of most concern to Morgans is a potential change of legislated tax rate reductions in France. The broker downgrades to Hold from Add, given recent strength in the share price. Target is reduced to $6.64 from $6.74.
2018 results revealed a doubling of cash flow that more than covered the distribution. UBS expects 2019 will be a year of transition as there are a number of traffic disruptions and temporarily elevated corporate costs.
Guidance is for a 25% rise in the 2019 distribution to $0.30 per security, which reflects an expected 10% increase in cash flow from APRR.
UBS downgrades to Neutral from Buy, given a period of strong outperformance and insufficient upside to valuation. Target is reduced to $6.90 from $7.10.
Credit Suisse lowers 2020 distribution growth forecasts to 10% from 23%, estimating there is a significant risk that Dulles Greenway may not pass the one-year debt test in December 2019. This would prevent distributions until 2021.
Credit Suisse downgrades to Neutral from Outperform, having removed the option value for a favourable long-term toll regulation deal for Dulles Greenway. Target is lowered to $7.15 from $7.50.
AUSTRALIA & NEW ZEALAND BANKING GROUP ((ANZ)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 4/4/0
ANZ's focus on expense management in a tough revenue environment and its leading capital position provide support, but Macquarie sees downside risk to forecasts given challenging revenue conditions, ongoing market share losses and RBNZ capital requirement uncertainty. The broker's forecasts have been trimmed.
Recent relative outperformance has taken ANZ back to its five-year PE average and its dividend yield down to a sector-low 5.8%. Macquarie downgrades to Neutral from Outperform, retaining a $28 target.
APPEN LIMITED ((APX)) Downgrade to Neutral from Buy by UBS and Downgrade to Neutral from Buy by Citi .B/H/S: 0/2/0
Appen delivered an exceptionally strong result in UBS's view, 10% above forecast. FY19-21 guidance has been upgraded by 10-20% and thereafter in excess of 20%. The broker believes FY19 guidance looks conservative on current momentum, noting the company's leading market position will allow it to leverage accelerating global investment in AI.
That said, the broker has raised its target to $24 from $16 but downgrades to Neutral from Buy, noting the stock has gained 90% in a quarter compared to a 30% increase in sector multiple.
Appen's 2018 financial performance seems to have beaten expectations, but Citi, in firm reference to the 75% share price rally year-to-date, downgrades to Neutral from Buy. The analysts have added 18%-20% to forecasts.
The combination Appen-Leapforce has potential to become the ultimate "winner" in the global race for analytics, state the analysts. Target price lifts to $23.29 from $17.31. Citi analysts add the suggestion that management's guidance for 2019 might yet prove conservative.
DPS estimates have been lowered.
COSTA GROUP HOLDINGS LIMITED ((CGC)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 3/1/0
2018 net profit was ahead of Ord Minnett's forecasts. The company may have a strong market position and good growth opportunities but the broker finds guidance for 30% growth in 2019, off a depressed year, below expectations.
Forecasts for 2019 and 2020 are reduced by -5% and -2%, respectively. The broker believes the exposure to the uncertainties of agricultural supply/demand is not reflected in the premium valuation and downgrades to Lighten from Hold. Target is reduced to $4.69 from $4.74.
CHARTER HALL GROUP ((CHC)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/2/0
First half results were in line with Ord Minnett's forecasts. Ord Minnett estimates funds management operating margins rose by 770 basis points over the past 12 months, to 57%.
The potential for increasing economies of scale is relatively strong, the broker suggests. The share price has risen 18% over the past four weeks in anticipation of stronger earnings and now appears fair value. Rating is downgraded to Hold from Accumulate.
To reflect higher forecast medium-term earnings because of a reduced need for external capital, as well as a higher operating margins, the target is raised to $9.00 from $8.75.
CROMWELL PROPERTY GROUP ((CMW)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/2/1
First half operating profit was below Ord Minnett's forecasts because of lower rental income and higher corporate costs. The company has maintained earnings guidance for FY19 of not less than 8c per share.
Over time, Ord Minnett expects capital to be realised in the company's office portfolio ias assets are re-positioned and re-deployed into aged care or into Europe via co-investment.
This is an opportunistic strategy that the company believes is justified by higher returns, although it carries increased complexity that the broker believes will not appeal to some investors.
Rating is downgraded to Hold from Accumulate. Target rises to $1.13 from $1.10.
CALTEX AUSTRALIA LIMITED ((CTX)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 4/2/1
Deutsche Bank observes convenience store targets are looking tougher to attain. The broker expects the current low fuel price will support retail fuel margins and refining margins will eventually revert.
However, the departure of the general manager of convenience makes the broker less confident about the uplift target from the transformation. The broker believes Viva Energy ((VEA)) is a better way to play the thematic as it has market share opportunity.
Rating is downgraded to Hold from Buy. Target is reduced to $27.50 from $28.00.
G8 EDUCATION LIMITED ((GEM)) Downgrade to Hold from Add by Morgans .B/H/S: 4/2/0
2018 results were in line with guidance. Morgans observes occupancy in the year to date is up around 2% but excess supply continues to make for a challenging market.
The company has reiterated a medium-term occupancy target of 81%. Morgans downgrades to Hold from Add as the total shareholder returns are under 10%. Target is raised to $3.16 from $3.04.
HUON AQUACULTURE GROUP LIMITED ((HUO)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/2/0
First half operating earnings (EBITDA) were below Ord Minnett's forecasts. FY19 volume guidance of 20,000t is unchanged. Guidance requires flat production costs for the second half, which the broker suspects could be challenging.
Ord Minnett reduces FY19 and FY20 earnings forecasts by -24% and -14% respectively. The broker believes the company is well invested, but there are risks to forecasts from higher production costs in the near term and lower wholesale prices in the longer term.
Rating is downgraded to Hold from Buy. Target is lowered to $4.40 from $5.41.
KELLY PARTNERS GROUP HOLDINGS LIMITED ((KPG)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0
First half net profit was weaker than expected. The Sydney CBD business underperformed. The company has provided net profit guidance for FY19 of $4m.
Morgans downgrades to Hold from Add, suspecting management has contained the underperforming business but will need to deliver on guidance and organic growth into FY20 to restore confidence. Target is reduced to $1.08 from $1.65.
NEXTDC LIMITED ((NXT)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 4/2/1
Deutsche Bank observes the business is increasingly exposed to a concentration of buyers, lower returns on invested capital and an unpredictable sales cycle.
Sales velocity appears to have decreased because of the more complex nature of hyper-scale contracts. The company is also incurring significant expenditure to achieve its growth ambitions and this is leading to elevated debt and interest levels in the short term.
The broker downgrades to Sell from Hold. Target is $5.50.
OZ MINERALS LIMITED ((OZL)) Downgrade to Hold from Buy by Deutsche Bank and Downgrade to Underperform from Neutral by Credit Suisse and Downgrade to Hold from Add by Morgans .B/H/S: 3/4/1
2018 results beat Deutsche Bank estimates, driven by lower depreciation & amortisation. The broker had expected more detail on the progress at Carrapateena, given its importance in the portfolio.
In updating 2019 assumptions and its views on copper, the broker observes the stock has outperformed peers and the copper price, downgrading to Hold from Buy. Target is $11.
2018 net profit was less than Credit Suisse expected. The broker observes forensic analysis is required to unravel the company's circuitous accounting. This diverts attention from cash and the outlook and Credit Suisse wonders how the board understands the accounts as presented.
The broker notes Brazil is not yet materialising and the concentrate treatment plant project has been shelved. Credit Suisse downgrades to Underperform from Neutral. Target is $9.
2018 results were in line with expectations. Morgans observes the company continues to prudently manage its growth options. The focus is on re-affirming the construction schedule and budget for Carrapateena.
Upside to the broker's valuation has been reduced following a strong run up in the share price and the rating is downgraded to Hold from Add.
Upon the full de-risking of Carrapateena the stock offers upside to valuation, the broker assesses. The target is raised to $11.40 from $10.75.
RAMSAY HEALTH CARE LIMITED ((RHC)) Downgrade to Hold from Buy by Deutsche Bank and Downgrade to Neutral from Buy by Citi .B/H/S: 1/6/1
First half results pleased Deutsche Bank, demonstrating the Australian business can achieve decent revenue growth and margin expansion, while European profitability is improving.
The broker expects the the company to benefit from increased tariffs in France and the UK, amid synergies from the Capio acquisition. The broker downgrades to Hold from Buy on valuation. Target is $64.90.
Ramsay delivered a solid result, in line with Citi's forecast. Revenue growth in Australia suggests Ramsay continues to take market share and by continuing to invest in hospital capex, the company is attracting more doctors and driving market share gains, the broker notes.
France surprised to the upside and weakness in the UK reduced in the Dec Q. Capio integration is now the focus, Citi believes, but could take time. On recent share price strength the broker pulls back to Neutral from Buy. Target rises to $65.00 from $61.25.
SPEEDCAST INTERNATIONAL LIMITED ((SDA)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/4/0
2018 results were in line with downgraded expectations. Credit Suisse expects the company will need to deliver some organic growth in 2019 in order to obtain a re-rating.
The broker, which changes analyst coverage with this report, is also concerned about elevated gearing and downgrades to Neutral from Outperform.
The broker is pleased the company has acknowledged investor reservation and committed to de-leveraging. Target is reduced to $3.70 from $5.50.
SEEK LIMITED ((SEK)) Downgrade to Sell from Neutral by UBS .B/H/S: 2/3/2
First half results were in line with expectations and UBS envisages inherent risk to the second half if Australasian job volumes and the macro environment in China worsen.
The broker cuts underlying estimates for earnings per share by -10% and downgrades to Sell from Neutral, reducing the target to $17.00 from $18.50.
STOCKLAND ((SGP)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/3/2
First half funds from operations were well below Ord Minnett's forecasts, driven by weaker residential earnings and retail operating income.
The broker downgrades forecasts by -3.5% in FY19 and -6% in FY20, based on lower assumed residential and retail earnings.
Because of uncertainty and risks with additional asset sales and re-positioning of the portfolio, the broker downgrades to Hold from Accumulate. Target is reduced to $3.80 from $4.30.
SPARK INFRASTRUCTURE GROUP ((SKI)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 0/5/2
Morgan Stanley believes compressed regulatory returns and tax uncertainty have reduced the stock's relative appeal and downgrades to Underweight from Equal-weight.
The 2018 performance was in line with the broker's estimates but the risks are considered skewed to the downside going forward.
Target is reduced to $2.28 from $2.43. Industry view is Cautious.
SUPERLOOP LIMITED ((SLC)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 1/1/0
Deutsche Bank is concerned the continued lack of sales momentum on Superloop's HK and Australian networks is concerning. Management's plans to focus on the core network and broadband businesses is a step in the right direction, find the analysts, but also a step back, nevertheless.
Deutsche Bank has downgraded to Hold from Buy. The analysts suggest it will take time for this company to demonstrate traction on the new strategy. New price target of $1.28 compares with $2.80 in August last year.
UNIBAIL-RODAMCO-WESTFIELD ((URW)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/3/1
Ord Minnett has reassessed the prospects for the company. The focus on prime shopping centres in wealthy catchments is likely to mean the business is a long-term winner but the broker envisages few near-term catalysts in a tough retailing environment.
Ord Minnett downgrades to Hold from Accumulate and lowers the target to $12.60 from $13.00. The broker notes 2019 earnings growth guidance was lowered for several reasons.
The company is aiming to sell EUR4bn in property and the broker is unsure how much was incorporated in guidance.
Broker Recommendation Breakup
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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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