Weekly Reports | May 13 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 May 6 to Friday May 10, 2019
Total Upgrades: 9
Total Downgrades: 20
Net Ratings Breakdown: Buy 40.72%; Hold 43.67%; Sell 15.61%
The Australian share market continues to suffer from falling earnings forecasts and out-of-season corporate results releases from banks, agricultural producers and chemical companies, thus far, have simply continued to contribute to the negative underlying trend.
With macro matters and US equities supporting risk assets at elevated levels, it should not surprise stockbroking analysts are issuing more than twice as many downgrades in recommendations for individual ASX-listed stocks than they are issuing fresh upgrades. No surprise also most downgrades are hitting companies reporting out-of-season corporate results, a profit warning, or both.
For the week ending Friday, 10th May 2019, FNArena registered nine downgrades and twenty upgrades for ASX-listed stocks by the eight stockbrokers monitored daily. Reductions in earnings estimates far outweigh increases. Overall changes in valuations and price targets remain rather tepid to the upside, but this equally applies to downside adjustments.
Operational updates will continue to flow in during the week ahead, including by CommBank ((CBA)) on Monday morning, DuluxGroup ((DLX)), and Xero ((XERO)).
ADELAIDE BRIGHTON LIMITED ((ABC)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 0/5/2
Deutsche Bank analysts have responded to the company's pre-AGM profit warning by upgrading their rating to Hold from Sell, while reducing the price target to $3.60 from $4 in line with reduced forecasts.
While disappointing, the analysts now believe this is in the share price.
See also ABC downgrade.
ALUMINA LIMITED ((AWC)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/3/0
UBS forecasts a US11.9c per share dividend in 2019. This is well down on 2018, which was driven by a very high, yet unsustainable, pricing environment.
The broker envisages a longer-term dividend of US11-12c per share based on a US$350/t alumina price that will support the share price, assuming free cash flow is returned to shareholders.
UBS considers the outlook now more balanced and moves to a Neutral rating from Sell. There is potential downside risk in the alumina price should Alunorte reach full capacity in the current quarter. Target is steady at $2.20.
ERM POWER LIMITED ((EPW)) Upgrade to Add from Hold by Morgans .B/H/S: 3/0/0
Morgans believes the stock is back into buying territory, and upgrades to Add from Hold. The broker forecasts an 11% total shareholder return on a 12-month horizon.
Upside potential exists if gross margins for Business Energy Australia are in the mid-upper range of guidance, or if the energy services division can increase its earnings faster than forecast.
The broker assumes the Neerabup power station will be refinanced in the first half of FY20. Target is reduced to $1.86 from $1.90.
EVOLUTION MINING LIMITED ((EVN)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/4/3
Ord Minnett reviews its valuation, noting the share price has fallen more than -20% from its January highs and has underperformed the ASX gold sector.
Outside of supportive mark-to-market valuations, the broker notes Evolution Mining is reaching a net cash position and should deliver improvements to operations at Cowal in the next 12 months.
Ord Minnett does not believe the share price correlates with fundamentals and upgrades to Accumulate from Hold. Target is steady at $3.50.
GRAINCORP LIMITED ((GNC)) Upgrade to Hold from Reduce by Morgans .B/H/S: 3/1/0
First half results were poor and materially below Morgans' forecasts. Seasonal conditions are below average on the east coast of Australia leading into the 2019/20 winter cropping season which will affect FY20 earnings.
The business is also currently affected by unfavourable trading positions which have reduced operating earnings (EBITDA) by -$40m. The company has not provided FY19 earnings guidance.
While the de-merger may unlock value in the malt business, Morgans believes that, in the absence of a derivative instrument, the new GrainCorp will trade at a material discount.
Rating is upgraded to Hold from Reduce, after share price weakness, and the target is reduced to $7.57 from $7.90.
See also GNC downgrade.
ORICA LIMITED ((ORI)) Upgrade to Neutral from Sell by Citi .B/H/S: 0/7/0
First half results have cleared any doubts about the company's operating leverage, Citi acknowledges. Strong growth was driven by higher volumes, improved product mix and better manufacturing. Market conditions are improving and price/cost headwinds fading.
However, the broker notes further delays with Burrup. Burrup remains a swing factor, with a negative impact on cash flow forecast by the company in FY19 of -$40-45m. Burrup's operating earnings (EBITDA) are forecast to be $45m in FY21.
Citi upgrades to Neutral from Sell and raises the target to $20 from $16.
See also ORI downgrade.
PLATINUM ASSET MANAGEMENT LIMITED ((PTM)) Upgrade to Hold from Sell by Ord Minnett .B/H/S: 0/3/1
The stock has underperformed the Small Ordinaries index by -19% despite its international fund rising 13% and Ord Minnett upgrades to Hold from Sell on valuation.
The broker raises the target to $4.77 from $4.72.
RESMED INC ((RMD)) Upgrade to Buy from Neutral by UBS .B/H/S: 5/2/1
UBS upgrades estimates for earnings per share by 5% and increases the rating to Buy from Neutral. Results in the March quarter were well ahead of expectations. Mask growth stood out and new products and re-supply performed well.
The broker believes the success of Brightree and opportunities from recently-released analytics means market saturation will not occur in the short to medium term. Target is raised to US$119 from US$109.
TPG TELECOM LIMITED ((TPM)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/1/3
The ACCC opposes the merger between TPG Telecom and Vodafone Australia ((HTA)). The regulator cited an already very concentrated mobile and fixed broadband industry as well as its belief there is a real chance the company will roll out a mobile network if the proposed merger does not proceed.
Ord Minnett agrees with the two companies' legal analysis and believes the case has a better chance of being approved in court. Rating is upgraded to Accumulate from Hold and the target raised to $6.90 from $6.50.
ADELAIDE BRIGHTON LIMITED ((ABC)) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Sell from Neutral by Citi .B/H/S: 0/5/2
The company has provided maiden 2019 guidance, indicating net profit will be down -10-15%. Adelaide Brighton cited a weak residential environment, import competition and competitive pressure in Queensland.
The dividend yield provides some store of value, in the broker's view. Rating is downgraded to Neutral from Outperform and the target lowered to $3.90 from $5.00.
The company has warned of a -10-15% drop in 2019 earnings. Softening demand for residential construction materials, increased competition from cement imports and increasing competition in Queensland were cited.
Citi notes the acceleration in the downturn in the residential market, particularly in NSW and Victoria, appears to have caught the company by surprise. The downgrade to expectations comes just 2.5 months after the 2019 outlook described a stable demand environment.
Citi downgrades to Sell from Neutral and reduces the target to $3.50 from $4.50.
See also ABC upgrade.
COCA-COLA AMATIL LIMITED ((CCL)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/5/3
Macquarie downgrades to Underperform from Neutral following the recent re-rating of the share price above its target, which is steady at $8.15. The broker believes Australian beverages remain susceptible to a number of headwinds such as competition and sugar issues, and more investment in price is likely.
The broker expects more money will need to be spent to meet growth targets and forecasts $10-20m per annum expenditure over the next three years. Indonesian volumes have improved but Macquarie notes this can be attributed to the cycling of undemanding comparables.
CSR LIMITED ((CSR)) Downgrade to Underperform from Neutral by Credit Suisse and Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 0/4/3
FY19 net profit was in line with guidance. Credit Suisse believes the downturn in building activity is only just beginning and volume declines are likely to accelerated during the year. History points to significant operating leverage for the company.
The broker also believes it will be challenging to maintain earnings for aluminium, given the second half step up in coal, alumina and other costs. The broker downgrades to Underperform from Neutral, maintaining a target of $2.90.
FY19 net profit was broadly in line with Deutsche Bank's expectations. No quantitative guidance was provided for FY20, as is usually the case.
Management has indicated that building products volumes in April are consistent, although there are mixed economic signals which make it difficult to predict activity in FY20.
Deutsche Bank believes risk is to the downside for building product margins. Aluminium earnings are expected to remain depressed until at least FY21. The broker downgrades to Hold from Buy and reduces the target to $3.60 from $3.80.
GRAINCORP LIMITED ((GNC)) Downgrade to Reduce from Hold by Morgans .B/H/S: 3/1/0
Long Term Asset Partners has withdrawn its $10.42 bid for Graincorp following due diligence that left LTAP disappointed. Morgans finds it concerning that initial operating assumptions were not met.
Graincorp's de-merger proposal may provide some share price support, but with at least two more tough years ahead for grains, Morgans moves to Reduce from Hold ahead of the company's result release on Thursday. Target falls to $7.90 from $9.30.
See also GNC upgrade.
HUB24 LIMITED ((HUB)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/1/2
Citi continues to believe HUB24 will be a beneficiary of the structural shift towards specialist providers and triple its market share in the next five years. However, because of a 25% increase in the share price since the first half result, the broker downgrades to Sell from Neutral.
Target is lowered to $13.35 from $13.60. The broker does not believe the current share price reflects the downside risk to revenue margins from competition and operating earnings (EBITDA) margin from the ongoing need to invest in the platform to support growth.
HARVEY NORMAN HOLDINGS LIMITED ((HVN)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/4/2
Macquarie acknowledges Harvey Norman is executing well in its global business, shielding it from weaker domestic outcomes. Property is also resilient. Given the rally in the share price and a sharp slowing in shopping centre sales, the broker suspects the risks are building.
Rating is downgraded to Neutral from Outperform. Target is $4.20. The company is successfully pivoting the business to enjoy a greater proportion of earnings from offshore. Still, Macquarie believes the underlying business may start to struggle.
JB HI-FI LIMITED ((JBH)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/4/2
Macquarie suspects the buy case for the stock will likely become harder. The business is considered a well-run retailer capitalising on gaming, smart home and a shorter PC replacement cycle, in order to offset structural & cyclical headwinds.
Nevertheless, the stock has rallied, and the bulk of catalysts have now played out, so the broker downgrades to Neutral from Outperform. Target is reduced to $25.83 from $28.80.
JANUS HENDERSON GROUP PLC. ((JHG)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/3/1
Janus Henderson's March Q result fell short of the broker, with net outflows continuing to disappoint and fee margins also lower. Macquarie had seen value in the stock for some time and a re-rating had been underway, but with no sign of flow momentum improving the broker now pulls back to Neutral.
The stock is trading at a -25% discount to the five-year average PE and some -42% discount to listed fund managers but Macquarie sees limited scope for outperformance from here. Target falls to $36.00 from $39.50.
MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/7/0
Ord Minnett notes strong absolute returns have benefited global fund managers. Magellan Financial has rallied, returning 87% in 2019, following a 16% absolute return in its global fund, strong retail and institutional net flows.
The stock has now run past fundamental value and Ord Minnett downgrades to Hold from Buy. Target is raised to $40.33 from $34.34.
MACQUARIE GROUP LIMITED ((MQG)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/4/0
FY19 net profit was slightly ahead of Ord Minnett's forecast. The result was more heavily reliant on lower-quality items than the broker expected, with gains on sale and performance fees contributing 30% of net operating income in the second half.
Hence, the broker is not surprised the FY20 outlook commentary was disappointing. Based on Ord Minnett's estimates, valuation is only fair for a stock trading on a forecast 15x FY20 PE multiple and with lower quality earnings mix than in recent years.
Rating is downgraded to Hold from Accumulate and the target lowered to $130 from $133.
MYER HOLDINGS LIMITED ((MYR)) Downgrade to Sell from Neutral by UBS .B/H/S: 0/2/3
UBS notes the stock price has lifted around 58% in the year to date as the new CEO executes well and delivers on early commitments. The broker's analysis of lease expiry suggests a significant opportunity, resulting in 10-33% upgrades to earnings per share.
Still, the market remains, in the broker's opinion, overly optimistic on the size of potential upgrades and the pace at which the new strategy can be executed. Hence, the broker downgrades to Sell from Neutral. Target is raised to $0.59 from $0.47.
NICK SCALI LIMITED ((NCK)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/1/1
Downward pressure from declining house prices are intensifying with plenty of profit downgrades being issued by small cap companies being impacted. Analysts at Citi don't think Nick Scali will remain immune either.
The analysts have reduced estimates by -4%-5%. Target price falls to $5.35 from $5.60. Downgrade to Sell from Neutral.
NETWEALTH GROUP LIMITED ((NWL)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 1/3/1
While there is limited valuation headroom, Ord Minnett believes the federal election brings a potentially significant catalyst for the platform sector. Labor's proposed ban on franked credit refunds will affect the self managed super (SMSF) sector, where around 30% of assets are in pension phase and therefore benefiting from refunds. Pooled superannuation vehicles managing tax as a single entity can use pension member franking credits to offset accumulation member taxes. Many platform superannuation funds have a structural tax advantage over SMSFs.
While other superannuation funds will also be able to leverage this benefit, the broker observes only platforms come with many of the investment management freedoms afforded an SMSF. Ord Minnett observes the leading specialist platforms are winning more than their fair share of industry churn while incumbent businesses are losing flows to industry funds.
The broker estimates the company could double its superannuation assets with pension transitions and still be able to offer pension members refunds of their credits. Should this occur there could be 30-40% upside for the Netwealth target. Rating is downgraded to Accumulate from Buy and the target raised to $9.57 from $8.14.
ORICA LIMITED ((ORI)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/7/0
Credit Suisse found several positives in the company's first half results. The broker was pleased with the recovery in the Latin American performance, while noting the take-up of electronic and wireless blasting solutions appears to be accelerating and, potentially, validating the technology.
There is also prospective upside from product rationalisation initiatives and management appears more confident in the price environment. The broker also welcomes the absence of any "worse" news on Burrup.
Credit Suisse considers the stock is fair value and downgrades to Neutral from Outperform. Target is raised to $19.24 from $19.08.
See also ORI upgrade.
PUSHPAY HOLDINGS LIMITED ((PPH)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 2/0/0
FY19 revenue was in line with expectations. The deceleration in the back book suggests to Ord Minnett that either the company is finding it harder to increase online penetration or revenue churn is having an impact.
As such, with growth becoming increasingly reliant on signing new customers, amid significant leadership changes, the risks are now considered outweighing the rewards.
Rating is downgraded to Lighten from Hold. Target is reduced to $3.27 from $3.47.
QANTAS AIRWAYS LIMITED ((QAN)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/4/1
Qantas increased revenues in the March Q, reflecting the timing of Easter. Macquarie sees revenue per available seat-kilometre growth easing into FY20 given lower corporate travel, the impact from the election and a weaker domestic consumer.
The broker's forecast is below consensus and Macquarie sees RASK risk skewed to the downside. Downgrade to Neutral. Target falls to $5.75 from $6.25.
QBE INSURANCE GROUP LIMITED ((QBE)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 7/0/1
Recent share price recovery has been followed up with a downgrade to Sell from Hold at Deutsche Bank with an $11.80 price target. Direct reason is the expectation of a more prolonged housing downturn in Australia, which should lead to a spike in lenders' insurance claims.
QBE's LMI business is the second largest in Australia, the broker explains. It generated $100m of insurance profit in FY18, representing approximately 17% of Australian insurance profit or 8% of group earnings.
TABCORP HOLDINGS LIMITED ((TAH)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 4/2/0
Credit Suisse is reducing the rating to Neutral from Outperform and considers FY20 likely to be a 'no growth' year. Higher depreciation has reduced FY20-21 forecasts for earnings per share by around -3%. Lower wagering revenue projections have also shaved -1-2% off estimates.
The broker points out Tabcorp had the opportunity to update investors at the investor forum on April 30 and, not only did it not disclose revenue, cautioned against intense competition. Target is steady at $5.05.
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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