Weekly Ratings, Targets, Forecast Changes

This story features A2 MILK COMPANY LIMITED, and other companies. For more info SHARE ANALYSIS: A2M

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 July 8 to Friday July 12, 2019
Total Upgrades: 9
Total Downgrades: 17
Net Ratings Breakdown: Buy 39.23%; Hold 44.45%; Sell 16.31%

The good news: stockbroking analysts continue to upgrade recommendations for individual ASX-listed stocks. The flip side: they also continue to issue more downgrades than upgrades.

For the week ending Friday, 12th July 2019, FNArena counted nine upgrades against 17 downgrades. Among the stocks receiving upgrades we find a few retailers, a2 Milk and small cap miners. Among the downgrades we find numerous gold miners, Commbank (twice) and more miners.

Investors should note: both downgrades for CommBank shares moved to Sell. Evolution Mining equally received two downgrades during the week, alongside a number of other small cap gold miners.

Magellan Financial stands a-top of the week's table for positive amendments to price targets, followed by Northern Star, Goodman Group and NextDC. On the negative side, Pact Group stands out, as do South32, Orocobre, Virgin Australia and Village Roadshow. Here the good news is the average increase is larger than the reductions on display.

The reverse picture opens up in the two tables for revisions to earnings estimates. The positive side has Fortescue Metals in pole position, followed by Healius, Orocobre, Insurance Australia Group, and OceanaGold. Reductions tend to be larger with the week's biggest cuts reserved for Galaxy Resources, followed by Nearmap, Michael Hill International, OZ Minerals and Alumina ltd.

With only two weeks left before August, analysts are starting to update and review their modeling and assumptions ahead of corporate earnings reports, soon to be unleashed upon Australian investors. In the shorter term, quarterly production reports from miners and energy producers will require attention.

Upgrade

THE A2 MILK COMPANY LIMITED ((A2M)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/3/1

UBS believes a2 Milk is in a unique position, with a differentiated premium brand that is well regarded yet under-penetrated in the largest and most profitable infant milk formula market globally.

The main risk is further regulation and greater disruption from changes in Chinese e-commerce laws. Still, A2 Milk is considered well positioned to mitigate the risks.

The broker upgrades to Buy from Neutral. Target is raised to NZ$17.50 from NZ$14.00.

EBOS GROUP LIMITED ((EBO)) Upgrade to Add from Hold by Morgans .B/H/S: 1/2/0

Ebos recently raised NZ$175m to reduce gearing ahead of further acquisitions and organic growth, and Morgans notes the company has delivered 12% compound annual earnings growth over the past four years, with 10% forecast for the next two, partly driven by the new CWG supply agreement.

Upgrades to FY20-21 earnings forecasts lead to a target increase to $24.07 from $20.43. This takes forecast total shareholder return to over 10%, which on Morgans' scale prompts an upgrade to Add from Hold.

FLIGHT CENTRE LIMITED ((FLT)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/3/0

Citi believes the retail outlook is improving for the first time in four years on the back of tax cuts, rate cuts, lower cost of living and a stabilising housing market. The broker still anticipates some weak earnings reports from the sector ahead of such improvement, and believes downside risk provides buying opportunities.

Flight Centre upgraded to Buy on an improving domestic backdrop, and strong growth in corporate and international leisure. Target rises to $49.20 from $42.30.

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

Macquarie upgrades to Outperform from Neutral. The company recently poured its first gold at Gruyere and, despite some delays to commissioning, the broker has moved the target to the blended mix used for producers.

Target is raised to $1.40 from $1.05.

HARVEY NORMAN HOLDINGS LIMITED ((HVN)) Upgrade to Neutral from Sell by Citi .B/H/S: 0/5/1

Citi believes the retail outlook is improving for the first time in four years on the back of tax cuts, rate cuts, lower cost of living and a stabilising housing market. The broker still anticipates some weak earnings reports from the sector ahead of such improvement, and believes downside risk provides buying opportunities.

Harvey Norman upgraded to Neutral from Sell. Target rises to $4.00 from $3.20.

JB HI-FI LIMITED ((JBH)) Upgrade to Neutral from Sell by Citi .B/H/S: 1/5/1

Citi believes the retail outlook is improving for the first time in four years on the back of tax cuts, rate cuts, lower cost of living and a stabilising housing market. The broker still anticipates some weak earnings reports from the sector ahead of such improvement, and believes downside risk provides buying opportunities.

JH Hi-Fi upgraded to Neutral from Sell. Target rises to $27.80 from $21.10.

PREMIER INVESTMENTS LIMITED ((PMV)) Upgrade to Neutral from Sell by Citi .B/H/S: 3/2/0

Citi believes the retail outlook is improving for the first time in four years on the back of tax cuts, rate cuts, lower cost of living and a stabilising housing market. The broker still anticipates some weak earnings reports from the sector ahead of such improvement, and believes downside risk provides buying opportunities.

Premier Investments upgraded to Neutral from Sell.  To be more positive the broker needs to see evidence of success for the Smiggles wholesale rollout strategy. Target rises to $16.40 from $15.50.

ST BARBARA LIMITED ((SBM)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/3/0

Macquarie maintains its forecasts for gold prices although moderates its AUD/USD expectations, with the net result a modest upgrade for gold forecasts, to $1667/oz, in Australian dollar terms for the next five years.

The broker upgrades St Barbara to Neutral from Underperform and raises the target to $3.10 from $2.50. The broker assumes a cautious view on the larger Australian gold producers.

SANDFIRE RESOURCES NL ((SFR)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 2/5/0

Credit Suisse concludes the acquisition of MOD Resources ((MOD)) is accretive and raises the target to $6.75 from $6.40. Sandfire Resources has agreed to a 45% premium, in cash and scrip for the company, which owns the undeveloped T3 copper project in Botswana.

The broker expects the company to deliver at the top end of production guidance in the June quarter. Rating is upgraded to Neutral from Underperform.

See also SFR downgrade.

Downgrade

ADELAIDE BRIGHTON LIMITED ((ABC)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/2/2

Given continued weakness in residential approvals data in April and May, Ord Minnett believes the second half result will underperform estimates. Net profit in 2019 is now expected to fall -17%.

Trading multiples remain elevated and the broker downgrades to Lighten from Hold. The target is lowered to $3.90 from $4.00.

ALUMINA LIMITED ((AWC)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 2/3/1

Macquarie downgrades the outlook for alumina prices, which has a significant impact on its earnings outlook for Alumina Ltd. The broker now envisages downside risk to consensus expectations for both the dividend and earnings.

Rating is downgraded to Underperform from Neutral, although an 8% dividend yield should provide some downside protection. Target is $2.00.

COMMONWEALTH BANK OF AUSTRALIA ((CBA)) Downgrade to Sell from Neutral by Citi and Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/4/3

Commonwealth Bank is challenged, Citi believes, as it offsets the headwinds from lower portfolio returns. Its leading market position in mortgages and deposits, however, provides a platform for actively re-pricing.

As the leader in retail banking, Commonwealth Bank is well-placed to reap the benefits from the easing of front book competition, in the broker's view.

Nevertheless, the stock has run hard and is fully priced. Rating is downgraded to Sell from Neutral. Target is raised to $73.25 from $70.50.

Credit Suisse now incorporates a lower net interest margin to account for the lower cash rate. The broker downgrades to Neutral from Outperform because of the recent strong performance in the bank's share price.

Earnings forecasts are reduced but lower long-term bond yields are now assumed in the three-year model for the target, and the target has increased to $79 from $76 as a result.

DACIAN GOLD LIMITED ((DCN)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/2/0

The company has provided FY20 guidance and a new life of mine plan for Mount Morgans, with 170,000 ounces signalled for the next five years.

The updated plan assumes mill throughput of 2.9mtpa and recovery of 94.3%. These metrics are 16% and 4% higher than respective nameplate capacity and feasibility study outcomes.

Incorporating the updated outlook, Macquarie makes material downgrades in the near term and upgrades in the long term. The broker lowers the target to $0.70 from $0.80 and downgrades to Neutral from Outperform.

EVOLUTION MINING LIMITED ((EVN)) Downgrade to Hold from Add by Morgans and Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/4/3

Evolution Mining has pre-released quarterly production numbers and updated guidance. FY19 production met guidance but exceeded Morgan's forecast, while costs came in above guidance. Cost guidance has increased for both FY20 and FY21, as capex guidance. A lower Aussie partially offsets the impact.

Target falls to $3.44 from $3.55. Evolution remains the Morgans' preference in the space, and the broker believes a gold allocation is required in any portfolio in uncertain geopolitical times. Recent share price strength nevertheless triggers a downgrade to Hold.

Macquarie maintains its forecasts for gold prices although moderates its AUD/USD expectations, with the net result a modest upgrade for gold forecasts, to $1667/oz, in Australian dollar terms for the next five years.

The broker downgrades Evolution Mining to Neutral from Outperform, assuming a cautious view on the larger Australian gold producers. Target is raised to $4.30 from $3.90.

GALAXY RESOURCES LIMITED ((GXY)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 4/1/1

The cost of production for spodumene producers remains important over the short to medium term, given pressure on margins created from the softer pricing environment. Macquarie now expects 6% lithium spodumene prices to fall to US$550/t towards the end of 2019.

The broker downgrades Galaxy Resources to Underperform from Neutral. Target is $1.20.

MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Downgrade to Sell from Neutral by UBS .B/H/S: 0/5/2

The business continues to enjoy considerably stronger net flows relative to peers but UBS suspects this growth driver is moderating. With the shares up 135% in 2019 to date, the broker notes the FY20 dividend yield outlook is compressed to 3.5%, notwithstanding the increased pay-out policy.

Valuation metrics appear increasingly stretched and UBS downgrades to Sell from Neutral. Target rises to $42.00 from $35.50.

MEDIBANK PRIVATE LIMITED ((MPL)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/3/4

Macquarie assesses Medibank Private needs to continue outperforming industry claim trends to maintain its lofty margins. The broker believes gross margins and investment returns will be very strong in the second half.

However, the stock appears overpriced at current levels and the rating is downgraded to Underperform from Neutral. Target is raised to $3.05 from $2.85.

NORTHERN STAR RESOURCES LTD ((NST)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/3/3

Macquarie maintains its forecasts for gold prices although moderates its AUD/USD expectations, with the net result a modest upgrade for gold forecasts, to $1667/oz, in Australian dollar terms for the next five years.

The broker assumes a cautious view on the larger Australian gold producers and downgrades Northern Star to Neutral from Outperform. Target is raised to $11.60 from $10.30.

REGIS RESOURCES LIMITED ((RRL)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/3/3

Macquarie maintains its forecasts for gold prices although moderates its AUD/USD expectations, with the net result a modest upgrade for gold forecasts, to $1667/oz, in Australian dollar terms for the next five years.

The broker downgrades Regis Resources to Neutral from Outperform and raises the target to $5.70 from $5.60. The broker envisages the upcoming production/earnings and FY20 guidance cycle a potentially risky period.

SOUTH32 LIMITED ((S32)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 4/2/1

Macquarie cuts alumina and base metal price forecasts which have a negative impact on the earnings outlook for South32. The broker downgrades to Underperform from Neutral.

The weaker price outlook translates to -12% and -30% reductions to FY20 and FY21 forecasts, respectively. Target is reduced to $2.70 from $3.20.

SARACEN MINERAL HOLDINGS LIMITED ((SAR)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/1

Macquarie maintains its forecasts for gold prices although moderates its AUD/USD expectations, with the net result a modest upgrade for gold forecasts, to $1667/oz, in Australian dollar terms for the next five years.

The broker downgrades Saracen Mineral to Neutral from Outperform and raises the target to $3.80 from $3.30. The broker envisages the upcoming production/earnings and FY20 guidance cycle a potentially risky period.

SANDFIRE RESOURCES NL ((SFR)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/5/0

Macquarie has reduced base metal price forecasts, which has driven material downgrades to the more leveraged base metal stocks. As a result the broker downgrades Sandfire Resources to Neutral from Outperform.

The stock has consistently outperformed the copper price over the past 18 months. Target is reduced to $7.10 from $8.00.

See also SFR upgrade.

SIMS METAL MANAGEMENT LIMITED ((SGM)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 3/2/1

Operating conditions remain challenged and Ord Minnett expects no reprieve in the near term.

Barring any material macro changes, such as a truce in the US/China trade dispute, China relaxing non-ferrous scrap restrictions or a strengthening Turkish economy, the broker suggests the stock may struggle to outperform.

Despite strength in iron ore, ferrous scrap pricing remains weak. Ord Minnett downgrades to Hold from Buy and reduces the target to $11.00 from $13.20.

WOODSIDE PETROLEUM LIMITED ((WPL)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 2/3/1

Marginal returns from development projects, Scarborough and Browse, are hampering the company's ability to convince its JV partners to proceed and Ord Minnett ascertains this is likely to be causing delays to the investment decision schedule.

The risk is that one or both of the projects will be shelved indefinitely which means the trains at the Karratha gas plant will need to be shut down.

The stock is now trading above the broker's target, leading to a downgrade to Lighten from Hold. Target is reduced to $33.85 from $34.60.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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