Weekly Ratings, Targets, Forecast Changes

This story features CHALLENGER LIMITED, and other companies. For more info SHARE ANALYSIS: CGF

By Rudi Filapek-Vandyck, Editor FNArena

Guide:

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.

Summary

Period: Monday March 25 to Friday March 29, 2019
Total Upgrades: 7
Total Downgrades: 9
Net Ratings Breakdown: Buy 42.32%; Hold 42.72%; Sell 14.96%

Total downgrades for individual ASX-listed entities continue to outnumber upgrades among the eight stockbrokerages monitored daily by FNArena, even as the share market struggles to advance close to its 2018 peak.

For the week ending Friday, 29th March 2019, FNArena counted seven upgrades being outnumbered by nine downgrades. Not helping the numbers, gold miner St Barbara received three upgrades during the week, so in terms of individual stocks receiving upgrades and downgrades, the gap is more pronounced than it appears.

In particular when we consider Sandfire Resources received two upgrades during the week. On the opposite end of the ledger, no such double downgrades are present.

Most of the activity revolves around mining and energy companies with each of Independence Group, Mount Gibson, Oil Search, Origin Energy and Woodside Petroleum receiving a downgrade.

Positive changes to valuations and price targets, on the other hand, remained largely an industrial affair, with each of Superloop, Collins Foods, Challenger and Austal worth mentioning. The negative side contains more hefty reductions, led by St Barbara, then Pilbara Minerals, Sigma Healthcare, and Premier Investments.

Earnings estimates are experiencing large amendments each way. Companies enjoying large boosts to forecasts include Superloop, Galaxy Resources, Western Areas, Suncorp and Challenger. Oversized reductions have fallen upon Pilbara Minerals, Sigma Healthcare, EclipX Group, and, in more moderate fashion, St Barbara and Westpac.

Upgrade

CHALLENGER LIMITED ((CGF)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 1/6/0

The relationship between Challenger and its Japanese partner is deepening and Deutsche Bank notes MS Primary will now provide to Challenger an annual amount of reinsurance, across both Australian and US dollar annuities, of at least JPY50bn (circa $640m) per year for a minimum of five years.

The revised arrangement remains subject to review in the event of any material adverse change for either of the parties and comes also with an increased equity stake in Challenger. Target price jumps to $8 from $7. Rating has been upgraded to Hold from Sell.

COLLINS FOODS LIMITED ((CKF)) Upgrade to Add from Hold by Morgans .B/H/S: 3/0/0

The KFC brand continues to perform well domestically, which implies a better performance from the company's Australian operations, Morgans suggests. Yum! Brands and Restaurant Brands have recently reported positive quarterly sales for their KFC operations.

The broker expects Europe will remain challenging for the company in the short term but a return to sustainable positive same-store sales growth could provide the medium-term catalyst for a more aggressive roll out.

The broker upgrades estimates for earnings per share by 0.5-2% for FY19-21, primarily reflecting higher KFC Australia assumptions. The broker believes there is meaningful value to be realised in Collins Foods and upgrades to Add from Hold. Target is raised to $7.78 from $6.90.

ST BARBARA LIMITED ((SBM)) Upgrade to Neutral from Underperform by Credit Suisse and Upgrade to Buy from Hold by Deutsche Bank and Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/3/0

The feasibility study at Gwalia has abandoned the underground ore pumping technology concept. The geometry could not meet the pumping rate that the pre-feasibility study had assumed. Long-term plans revert to the trucking option but this has also been downgraded.

Production guidance is also downgraded by around -20%. The stock was already trading at a premium to valuation, which Credit Suisse observes was elevated by prior guidance for higher production at lower costs.

The maturity of Gwalia is seen battling the limitations of technology. The broker considers that positive news on the Simberi sulphide expansion may offset the value lost by the downgrade to Gwalia.

Rating is upgraded to Neutral from Underperform. Target is reduced to $3.30 from $3.90.

Deutsche Bank has upgraded to Buy from Hold. Now that the company has announced it will stick to trucking to move ore at Gwalia after alternative options have proved too expensive, Deutsche Bank has remodelled the outlook for the goldminer.

Admittedly, this has resulted in -20% less in Net Present Value (NPV) but the analysts retain a positive view on Gwalia overall. They also believe St Barbara can pay out 20c per annum to shareholders in a sustainable manner.

Price target drops to $3.80 from $4.80 prior.

The feasibility study for the Gwalia mass extraction project has assessed the viability of pumping as technically feasible but, with a doubling of the original cost assumptions amid more difficult geometry in the orebody, this has now been abandoned in favour of trucking.

Ord Minnett considers the recent sell-off a buying opportunity, believing the company is in solid shape. Rating is upgraded to Accumulate from Hold. Target is reduced to $3.80 from $4.60.

SANDFIRE RESOURCES NL ((SFR)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Neutral from Sell by UBS .B/H/S: 2/4/2

Macquarie upgrades to Outperform from Neutral after recent share price weakness. The company is exposed to strong near-term copper prices.

The broker envisages potential acquisition or the formal go-ahead for the Black Butte development project as key catalysts for the stock. Target is steady at $7.80.

Upgrades to commodity price estimates have driven a 5% upgrade to the valuation of Sandfire Resources. UBS observes the valuation is very sensitive to near-term commodity assumptions because of the 3-4 years of remaining mine life at DeGrussa.

Management is trying to extend life through regional exploration. While the stock now trades in line with UBS's valuation, the broker suggests there is risk of M&A. Rating is upgraded to Neutral from Sell and the target raised to $7.00 from $6.70.

Downgrade

GOLD ROAD RESOURCES LIMITED ((GOR)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/0

Macquarie downgrades to Neutral from Outperform after recent share price strength as first gold from Gruyere is imminent.

The target is raised to $1.10 from $0.90, given the more leveraged longer-term outlook.

INDEPENDENCE GROUP NL ((IGO)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/4/1

UBS observes the shares have gained around 30% since the start of the year, underpinned by higher nickel prices and a solid operating performance in the December quarter.

While downgrading to Neutral from Buy the stock remains the broker's preferred nickel exposure, trading on a 15-20% free cash flow yield for FY20-21.

The broker suggests exploration success could be very accretive but for now the stock is fair value. Target is raised to $5.00 from $4.90.

MOUNT GIBSON IRON LIMITED ((MGX)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/2/0

Macquarie downgrades to Neutral from Outperform because of a lack of valuation upside and a rise of over 70% in the share price over the past three months.

The target is raised to $0.90 from $0.78 to reflect both a softer Australian dollar and an increase in the value of the resources currently outside of the mine plan.

NEW HOPE CORPORATION LIMITED ((NHC)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/3/0

Following the company's first half results, where it highlighted a higher proportion of low-grade coal in the sales mix, Macquarie envisages a challenge to earnings.

The broker also incorporates updated commodity prices and FX forecasts.

Macquarie reduces its earnings outlook for the business and downgrades to Neutral from Outperform. Target is reduced to $3 from $4.

ORIGIN ENERGY LIMITED ((ORG)) Downgrade to Neutral from Buy by Citi .B/H/S: 4/4/0

Following changes to retail electricity pricing and the associated impact on energy market earnings, Citi downgrades to Neutral from Buy. The broker believes the stock valuation correctly reflects a US$55/bbl long-term oil price.

Lower revenues are expected to be offset by the -$100m reduction in costs from FY18-21, as churn rates increase and costs to acquire customers become cheaper.

The broker needs more clarity on margin compression and the quantifiable impact on profitability for FY19 and beyond. Target is reduced to $7.42 from $8.62.

ORICA LIMITED ((ORI)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 2/4/1

Ord Minnett has reviewed the production and earnings outlook for the company, noting production delays at Burrup are expected to continue. Utilisation rates at the Yarwun plant remain critical to meeting increased ammonium nitrate requirements from BHP Group ((BHP)), as anti-dumping provisions create a tight market.

Ord Minnett suspects costs may increase, as a result, in order to meet contracted customer demands. The broker reduces earnings forecast for FY19 by -6.4% and by -5.7% for FY20. Rating is downgraded to Lighten from Hold and the target reduced to $16.20 from $17.15.

OIL SEARCH LIMITED ((OSH)) Downgrade to Sell from Neutral by Citi .B/H/S: 4/3/1

The company may be demonstrating a focus on maximising value from current assets but Citi downgrades to Sell from Neutral because of weaker macro conditions in LNG.

The broker believes the next 12 months will still provide potential for positive catalysts, such as the gas agreement in early April and exercising the Alaskan option. Target is reduced to $7.64 from $7.91.

The broker now includes a benefit from late-life gas that provides production backfill for PNG LNG and Papua LNG.

WESFARMERS LIMITED ((WES)) Downgrade to Hold from Add by Morgans .B/H/S: 1/3/3

Morgans can see the attraction of a business whose products are exposed to electric vehicles, wind turbines and other renewable applications, but also sees Malaysian political risk as a major factor. While the bid is only indicative at this stage, the licence for Lynas Corp's ((LYC)) Malaysian plant is up for renewal in September.

The issue for the plant has always been one of radioactive waste, which leads the broker to question why Wesfamers would exit coal on ethical grounds and then decide to get into rare earths. While more detail is required, Morgans pulls back to Hold for now on increased risk and drops its target to $34.54 from $36.50.

WOODSIDE PETROLEUM LIMITED ((WPL)) Downgrade to Sell from Neutral by Citi .B/H/S: 3/4/1

Citi believes Woodside Petroleum is in a difficult position in a crowded LNG market. Something has to give, and investors may be disappointed.

Any farming down of Scarborough and Pluto T2 is likely to be sold at a risk-adjusted price and the broker suspects consensus still values the project at current equity interest levels. Citi does not expect Scarborough to reach its FID target of 2020. The company appears adamant it will not farm down at a discount to fair value, implying investors could take on the full brunt of the marketing risk.

If Browse were to move forward in a timely manner then new equity is likely required and/or the pay-out ratio reduced, in the broker's view. Citi downgrades to Sell from Neutral and reduces the target to $31.12 from $34.30.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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