Weekly Reports | May 20 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 13 to Friday May 17, 2019
Total Upgrades: 7
Total Downgrades: 22
Net Ratings Breakdown: Buy 40.31%; Hold 43.58%; Sell 16.11%
The dichotomy between a share market that wants to move higher and Australian companies that are unable to provide better profit results continues to show up in FNArena's daily monitoring of eight leading stockbrokerages.
For the week ending Friday, 17th May 2019, FNArena registered but seven upgrades in recommendations for ASX-listed stocks against 22 downgrades against a background of more disappointments than upward surprises from the local out-of-season results season, and a slew of profit warnings from predominantly small and mid-cap companies.
Only one of the eight stockbrokers still carries more Buy-rated stocks than either Hold/Neutral or Sell and one wonders whether this can be partially explained by the fact Ord Minnett has five ratings for stocks of which two -Buy and Accumulate- are being treated as a 'Buy' in FNArena's data assessment.
In what can only be a positive signal, all seven upgrades moved to Buy. On the negative side of the week, all of Mayne Pharma, St Barbara, Sydney Airport and Xero received multiple downgrades.
Few companies are enjoying positive revisions to earnings expectations and CYBG, Xero and Flight Centre all stood out during the week. Plenty of negative adjustments form the offset with the week delivering large reductions to forecasts for Mayne Pharma, Adelaide Brighton, Reliance Worldwide and St Barbara.
With exception of gold miner St Barbara, which announced an acquisition not liked by everyone, these reductions all followed a profit warning by the companies involved.
The market's fundamental dillemma continues this week as a (no doubt) positively received federal election result battles with ongoing out-of-season profit reports, AGM updates and, no doubt, further profit warnings.
May investors live through interesting times.
DEXUS PROPERTY GROUP ((DXS)) Upgrade to Buy from Neutral by Citi .B/H/S: 1/3/1
Citi upgrades to Buy from Neutral and raises the target to $14.10 from $12.02. This reflects recent transaction activity and increased longer-term office re-leasing spreads because of a longer office cycle.
The broker believes a re-rating is likely to continue in a low interest rate environment, given the solid growth profile and high degree of distribution sustainability.
EVOLUTION MINING LIMITED ((EVN)) Upgrade to Add from Hold by Morgans .B/H/S: 2/3/3
Morgans upgrades to Add from Hold, given recent share price weakness, with macro events implying further global economic uncertainty and, hence, an increased probability the gold price will appreciate.
The broker notes the company's costs and production guidance have been met for the past seven years and costs are among the lowest in the industry. Target is reduced to $3.55 from $3.85.
A consistent history, along with well-run operations and conservative assumptions provides long-term investors with a lower risk/value proposition, in the broker's view.
FORTESCUE METALS GROUP LTD ((FMG)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/2
Credit Suisse lifts iron ore price forecasts by 21% for 2019 and 33% for 2020. The broker expects the price to peak at US$110/t in the September quarter when China's port inventory is expected to be at its tightest.
This drives an increase to Fortescue Metals' price target to $8.20 from $6.40, and the rating is upgraded to Outperform from Neutral.
The company has also declared a $0.60 dividend, payable June 14, which is outside the standard February/August dividend announcements that typically come with results.
Credit Suisse considers the dividend is pulling forward all or part of the dividend that otherwise would have been announced in August. The payment makes sense to the broker, in light of any potential changes to the franking credit regime that may, or may not, occur after the federal election.
FLEXIGROUP LIMITED ((FXL)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 5/1/0
The highlight of FlexiGroup's update on the progress of its "humm" retail rollout, Macquarie suggests, is that there was no downgrade to FY guidance. This led to a positive market reaction.
From here it will all be about the "humm journey", which is still in its early stages and will result in a multi-year strategic reset. With the rollout supported by existing market stabilisation, Macquarie believes the stock can trade strongly ahead of execution and financial benefit. Upgrade to Outperform, target rises to $2.04 from $1.34.
INTEGRAL DIAGNOSTICS LIMITED ((IDX)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 2/1/0
Ord Minnett believes investors have woken up to the prevailing tailwinds and adjusts models to account for indexation. Revenue growth has been supported by long-term average growth in benefits of 6% and this is now supplemented by indexation of almost 80% of medical benefit services from FY21.
The broker considers the sector appealing for the long-term. The broker also revises its view of the potential contribution from the soon-to-be-opened Prostate Centre of Excellence clinic.
Rating is upgraded to Buy from Accumulate and the target raised to $3.30 from $2.99.
NEW HOPE CORPORATION LIMITED ((NHC)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/2/0
Credit Suisse has become more bearish on thermal coal because of increased competition from displaced European coal, which it believes is undermining the Newcastle price. A mild winter in Europe has meant coal inventory has built up and an LNG glut is driving down gas prices.
The broker lowers Newcastle F.O.B. thermal coal forecasts by -8% in 2019 to US$87/t and by -6% to US$80/t for 2020. Nevertheless, the broker upgrades to Outperform from Neutral because of recent underperformance in the share price. Target is reduced to $3.50 from $4.00.
SCENTRE GROUP ((SCG)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/2/3
The stock has underperformed the A-REIT index by -7% since its February result, Credit Suisse observes. Underperformance has been driven by a deterioration in retail trading conditions as well as concerns around the balance sheet and ability to fund future developments.
The broker is of the view that these factors are now reflected in the share price and the stock is again offering material value. Rating is upgraded to Outperform from Neutral. Target is steady at $4.20.
AGL ENERGY LIMITED ((AGL)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/3/4
Citi revamps its model, largely because of updates to consumer market electricity and gas discounts and revenue rates. The broker also marks to market the wholesale electricity prices to reflect the continued rally.
Citi suspects FY20 core net profit will more likely be down than flat. The company has called out specific headwinds for FY20, such as lower electricity prices, higher input fuel costs for thermal generation and the regulated default offers in retail electricity.
Citi considers FY19 is the peak in earnings for AGL and the share price does not reflect this. Rating is downgraded to Sell from Neutral. Target is reduced to $20.87 from $22.48.
ANSELL LIMITED ((ANN)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 3/5/0
Deutsche Bank envisages risks to earnings from slowing global economic growth. Execution risks also exist with the rationalisation and expansion of manufacturing facilities.
The stock has re-rated and now offers 7% compound growth in earnings per share between FY19-22. The broker downgrades to Hold from Buy. Target is $27.19.
AUSNET SERVICES ((AST)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/6/1
Post FY19 results release, Citi analysts have added 14% to their target price, but they also downgraded to Sell from Neutral with the share price up 19% year-to-date. Also, the increase in target reflects a short term view on interest rates and bond yields, explain the analysts.
Further out, Citi's valuation has actually declined by -6%, thanks to weaker cash flow forecasts. Revised forecasts are -8% below market consensus, on the analysts' assessment. The FY19 report itself proved pretty much in-line on just about every metric.
AusNet's FY20 dividend guidance proved better-than-expected. Citi continues to forecast 3% growth in dividends per annum. Price target moves to $1.71 from $1.50.
COMMONWEALTH BANK OF AUSTRALIA ((CBA)) Downgrade to Hold from Add by Morgans .B/H/S: 1/4/3
The March quarter trading update was softer than Morgans expected, largely because of the re-basing of non-interest income. Non–interest income was down -10% versus the first half.
Morgans reduces cash estimates for earnings per share for FY19 and FY20 by -9.1% and -6.2% respectively. Rating is downgraded to Hold from Add because of a lower target and share price strength over the past month. Target is reduced to $74 from $76.
COCHLEAR LIMITED ((COH)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/3/4
The share price has rebounded significantly since the company announced the launch of the new MRI compatible implant, Citi observes. The broker downgrades to Neutral from Buy on valuation. Target is steady at $198.
The company's investor briefing has focused on growing the adult market in developed countries where the penetration rate is only 3% and the children's market in developing countries where the penetration rate is around 10%.
CYBG PLC ((CYB)) Downgrade to Hold from Add by Morgans .B/H/S: 2/1/0
The company is scheduled to release first half results on May 15, which will reflect the acquisition of Virgin Money. Morgans continues to expect net interest margins will be affected by intense competition in the mortgage and customer deposit segments.
Amid Brexit-related uncertainty and the commencement of legal action on fixed rate tailored business loans, along with downgrades to underlying earnings forecasts, Morgans reduces the target to $3.64 from $4.39 and downgrades to Hold from Add.
GWA GROUP LIMITED ((GWA)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 0/4/1
Deutsche Bank expects falling home sales and listings data to affect earnings from FY20. While alterations and additions are more stable than new construction, this is closely linked to new home listings and sales.
The broker does not expect the decline to reverse in the near term and envisages similar, although not as negative, risks in New Zealand. Rating is downgraded to Sell from Hold. Target is $2.85.
MAYNE PHARMA GROUP LIMITED ((MYX)) Downgrade to Neutral from Buy by Citi and Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/3/1
Citi had expected a more stable generic pricing environment would eventually lead to a recovery in trading but this is not the case for the start of the second half.
As a result of incorporating heightened deflationary pressures, the broker reduces FY19-21 estimates for earnings per share by -63% and -55% respectively.
Rating is downgraded to Neutral/High Risk from Buy and the target lowered to $0.60 from $0.95. The company will review the carrying value of its generic business and development assets at the full year results in August.
The company has announced a significant deterioration in the performance of its generic products since the first half results because of increased competition and -US$4m in one-off adverse items. The high-margin specialty brands revenue is also weaker than expected.
Revenue declined -15% in January to April and gross profit was down -20%. The company is currently reviewing the carrying value of generic assets which could result in an impairment.
Credit Suisse downgrades to Neutral from Outperform and reduces the target to $0.64 from $1.00. The broker envisages merit in the strategy to pivot towards the more stable earnings profile in specialty brands, but the outlook for FY20 remains unclear.
OIL SEARCH LIMITED ((OSH)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 2/5/1
Deutsche Bank downgrades to Hold from Buy, believing the positive catalysts are factored into the stock and there are growing risks around geopolitics, Alaska and strain on the balance sheet.
Target is reduced to $8.00 from $9.50.
RELIANCE WORLDWIDE CORPORATION LIMITED ((RWC)) Downgrade to Hold from Add by Morgans .B/H/S: 3/2/0
The company's trading update disappointed Morgans, as FY19 underlying operating earnings (EBITDA) guidance was reduced by -7% to $260-270m. The main concern for the broker is that there are issues across all regions and the near-term outlook is uncertain.
US customers are reducing inventory, particularly in the retail channel, and there is a sharper-than-expected decline in Australian residential construction activity. Certain product lines have been exited in the UK and there is slower growth in Spain. The main positive is that John Guest integration remains on schedule.
The company will seek to mitigate the impact of US tariffs, which could negatively affect FY20 earnings, through customer price increases and/or negotiated supplier price reductions. US tariffs on imports from China are not expected to have a material impact on FY19 earnings.
Morgans downgrades to Hold from Add and reduces the target to $3.94 from $5.56.
ST BARBARA LIMITED ((SBM)) Downgrade to Underperform from Neutral by Credit Suisse and Downgrade to Underperform from Neutral by Macquarie .B/H/S: 2/1/2
St Barbara will acquire Canadian gold producer, Atlantic Gold. Credit Suisse observes exploration success is needed to create value, assessing the CAD802m price is a 28% premium to the valuation.
The company has been assessing potential acquisitions over the past two years and Atlantic Gold is the first to meet criteria. While it withstands due diligence it falls short on value considerations, the broker suggests.
Nevertheless, the assets look good, adding long life and low-cost gold production. Credit Suisse downgrades to Underperform from Neutral and reduces the target to $2.72 from $3.30.
St Barbara will acquire Canadian-listed Atlantic Gold, with the Moose River gold mine the primary asset. Given the 39% premium St Barbara paid, plus some C$300m in capital required to lift production at Moose River, Macquarie downgrades to Underperform.
Target falls to $2.70 from $3.40.
SIMS METAL MANAGEMENT LIMITED ((SGM)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 3/3/1
Scrap prices in key markets have declined in the face of soft demand, Morgan Stanley observes. The stock is unlikely to outperform while this continues. Hence, the broker downgrades to Equal-weight from Overweight and lowers the target to $10.50 from $12.50.
Global scrap prices have declined from first quarter 2019 highs in all key markets. The broker continues to believe in the long-term opportunities for Sims Metal. Industry view is Cautious.
SENEX ENERGY LIMITED ((SXY)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/4/0
Credit Suisse believes Senex Energy is well positioned to benefit from higher domestic gas prices, as Project Atlas ramps up over the next two years. Yet, while the company has been touted as a takeover target, no bid has emerged.
This is of concern to the broker, signalling there may be technical "skeletons" at the flagship Western Surat Gas Project in particular. Rating is downgraded to Neutral from Outperform and the target is reduced to $0.36 from $0.50.
The broker asserts the upside is offset by risks to production/cost metrics and sustainability, particularly at WSGP.
SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Downgrade to Sell from Neutral by UBS and Downgrade to Hold from Add by Morgans .B/H/S: 2/2/4
UBS observes international traffic momentum was weak in the March quarter, even after taking into account the timing of Easter. Airline schedules now suggest capacity declines for the remainder of 2019.
The broker observes lower bond yields have also widened the gap between price and fundamentals. Ongoing traffic disappointment in 2019 has potential to drive underperformance and UBS downgrades to Sell from Neutral. Target is $7.
The share price has surged 20% since mid January. Morgans points out government bond rates falling to historical lows and the market appetite for yield were probably the key drivers. Weakness in short-term traffic growth appears to have been disregarded by the market.
The broker downgrades to Hold from Add as the share price has compressed the total return potential. Morgans notes significant valuation upside exists if the market starts to factor in a lower-for-longer interest rate scenario. Target rises to $7.61 from $7.55.
UNIBAIL-RODAMCO-WESTFIELD ((URW)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/2/2
Citi analysts, who are covering this stock from Europe, have downgraded to Sell from Neutral as further analysis has made them worried about asset values longer term. With online sales poised to take more market share in years ahead, the analysts believe values for shopping centres can potentially deflate by as much as -50%.
In addition, it has become clear to the analysts that retailers are using rent decline to maintain their margins in an attempt to please their shareholders. This smells like trouble, doesn't it? The analysts note the share price rallied recently, despite EPS forecasts actually declining. Target price falls to EUR125 from EUR142.
WESFARMERS LIMITED ((WES)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/4/2
Macquarie believes a further move into EVs, were Wesfarmers to take over Kidman Resources ((KDR)), makes sense. While oversupply will likely lead to lower lithium prices over the next 12 months, over five years lithium, cobalt and nickel should all be winners on battery demand. Kidman's 50% owned Mt Holland project is substantial, but not without risk.
Meanwhile, the broker believes the market is being too cautious over Bunnings, yet total shareholder return upside is becoming limited and risks are moving to the downside. Downgrade to Neutral from Outperform. Target unchanged at $37.13.
WOOLWORTHS LIMITED ((WOW)) Downgrade to Neutral from Buy by UBS .B/H/S: 0/6/2
UBS notes the Australian grocery market has become more rational while inflation has returned. While believing an improved inflation outlook provides near-medium term upside risk to forecasts, this appears to the broker to be priced in.
UBS downgrades Woolworths to Neutral from Buy and now prefers Metcash ((MTS)) in the grocery sector. Target is raised to $32.90 from $30.80.
XERO LIMITED ((XRO)) Downgrade to Sell from Neutral by UBS and Downgrade to Lighten from Buy by Ord Minnett .B/H/S: 1/2/2
The company has achieved positive free cash flow in FY19, which UBS suggests is representative of the end of a loss-making start-up period as Xero becomes a self-funding business.
While comfortable with the growth prospects and supportive of the strategy, the broker believes the valuation has overshot the level at which there is a fair risk/reward trade-off for investors.
Particularly in the context of a 10% re-rating on an essentially in-line result. Rating is, therefore, downgraded to Sell from Neutral. Target is raised to $50 from $47.
The company reported a FY19 normalised net loss of -NZ$27.1m, weaker than Ord Minnett expected. Excluding the UK, the broker suspects investors may have shifted their focus to the US where growth was less than 10% half on half. This is typically more than 20%.
Ord Minnett downgrades to Lighten from Buy and increases the target to $53 from $49. The broker remains concerned that the stronger-than-expected growth in the UK could be a one-time benefit.
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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