Weekly Ratings, Targets, Forecast Changes

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By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of seven major Australian and international stock brokers: Citi, Credit Suisse, 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 29 to Friday August 2, 2019
Total Upgrades: 10
Total Downgrades: 26
Net Ratings Breakdown: Buy 37.72%; Hold 44.24%; Sell 18.04%

As the dichotomy between corporate earnings under pressure and share market indices near an all-time high persists, it should be no wonder stockbroking analysts continue issuing decisively more downgrades than upgrades for individual ASX-listed stocks. It should be noted that, while the RBA is widely criticised for lowering the cash rate further in 2019, a record number of Australian companies is issuing profit warnings; a trend that continued up until last Friday.

For the week ending Friday, 2 August 2019, FNArena registered ten upgrades versus 26 downgrades.

Equally noteworthy is the observation that seven out of the ten upgrades only moved to Neutral from Sell, leaving only three fresh Buy ratings. Karoon Gas, ResMed and Xero are the week's lucky three. Further emphasising the bifurcated nature of the 2019 bull market rally is the added observation that both ResMed and Xero are high PE multiple, quality growth stocks. Need I say more?

An important third observation completes the week's trifecta: the table for stocks receiving downgrades throughout the week is populated with companies releasing financial results and/or profit warnings ahead of the release. Adelaide Brighton (profit warning) received three downgrades against one upgrade, AGL Energy received two downgrades (both to Sell), GUD Holdings (FY19 release) received three downgrades, and nib Holdings was downgraded twice.

Fifteen out of the 26 downgrades moved to Sell, which includes household names such as Woolworths, Wesfarmers, Medibank Private and Insurance Australia Group (IAG).

Target prices continue to move higher for a select number of stocks with ResMed grabbing the week's lead, followed by Bingo Industries, Virtus Health, Xero and nib Holdings. On the flipside, a small number of large reductions dominate the table with both GUD Holdings and Adelaide Brighton harshly punished for their disappointment, as is Northern Star.

Increases to earnings estimates remain rather mild in comparison, though battle-hardened, bruised and dented Pact Group saw a gigantic increase during the week. Out of the rest of the table, only Steadfast Group and Bingo Industries are worth mentioning.

As expected, there's a lot more happening inside the table for negative revisions to earnings estimates. Adelaide Brighton tops the ranking, followed by Xero, Northern Star, Nufarm, Pilbara Minerals, and OceanaGold. They all suffered double-digit percentage declines. Further down the table we also find Rio Tinto (half-yearly update), Origin Energy and GUD Holdings.

The August reporting season is only just getting started. Meanwhile, international markets are being dominated by macro and geopolitical matters. August 2019 might well turn into a surprising, multi-leveled experience for local investors.

Upgrade

ADELAIDE BRIGHTON LIMITED ((ABC)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 0/2/4

Following the company's second downgrade to 2019 net profit estimates, Ord Minnett now believes guidance is achievable. Management has signalled a -32-37% decline in net profits over the year.

The broker upgrades to Hold from Lighten, although reduces the target to $3.50 from $3.90. Despite the sharp reaction in the share price following the announcement, Ord Minnett does not believe the stock is cheap.

See also ABC downgrade.

CIMIC GROUP LIMITED ((CIM)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/2/1

First half net profit was below expectations. Mining division strength stood out, delivering 26% growth in pre-tax profit. Operating cash flow was well below expectations. The company has indicated it is moving to alliance-style, rather than fixed-price, contracts which have a more even cash flow profile.

Macquarie upgrades to Neutral from Underperform, given the extent of the fall in the share price and support from the share buyback. The broker reduces the target to $40.00 from $43.80.

A return to positive construction growth is required to support a more favourable fundamental view, the broker asserts.

KAROON GAS AUSTRALIA LIMITED ((KAR)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/1/0

The company will acquire the Bauna oilfield for US$665m, becoming the fourth largest liquids producer on the ASX. Macquarie suggests a US$100-120m capital raising may be required to fund the acquisition shortfall and strengthen the balance sheet.

The broker assesses the company's three-year wait to obtain the field appears to have paid off. Seller Petrobras is undergoing an extensive divestment program to reduce debt.

Macquarie believes the field is more suited to a company such as Karoon Gas, which has the ability to focus on lifting production volumes. Rating is upgraded to Outperform from Neutral. Target rises to $3.00 from $1.15.

MYER HOLDINGS LIMITED ((MYR)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 1/2/1

Credit Suisse retains bearish forecasts for discretionary retailers but upgrades Myer to Neutral from Underperform. Target is 44c.

REDBUBBLE LIMITED ((RBL)) Upgrade to Hold from Reduce by Morgans .B/H/S: 0/1/0

Morgans was surprised by the strength in the fourth quarter, particularly in margins, noting the company is looking at a secondary listing of shares in the US.

Forecasts are upgraded to reflect the lower marketing and overhead costs seen in the fourth quarter. Morgans upgrades to Hold from Reduce and raises the target to $1.51 from $0.67.

Risks are expected to diminish greatly if the company can prove cash flow self-sufficiency in FY20.

RESMED INC ((RMD)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/2/1

UBS upgrades to Buy from Neutral. Following the results, which were slightly ahead of expectations, the broker updates assumptions which underpin upgrades of 5-8% over the forecast period.

Mask growth stood out in the Americas, up 16%, and US re-supply growth is also showing no signs of slowing. Target is raised to US$140 from US$122.

SPARK INFRASTRUCTURE GROUP ((SKI)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/4/2

Credit Suisse is upgrading to Neutral from Underperform as the stock is trading in line with valuation. Relative underperformance is rendering Spark Infrastructure undervalued based on historical correlation of valuation multiples. Target is raised to $2.30 from $2.10.

Still, the broker cautions that forecast cash flows put significant doubt on the company's ability to grow dividends and an extension of a discounted dividend reinvestment plan may be required beyond what is needed to fund the Bomen equity.

SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/3/2

Following a material decline in bond yields UBS is reducing its cost of equity assumptions, which drives an upgrade to valuation. The stock's long-dated concession, and longer-term cash flow, means it has strong leverage to lower bond yields.

UBS upgrades to Neutral from Sell. The broker expects weakening bond yields to be the primary driver of share price performance. Target is raised to $8.50 from $7.00.

WESTPAC BANKING CORPORATION ((WBC)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 2/4/1

Morgan Stanley assesses major bank PE multiples have re-rated since the federal election but have underperformed the broader Australian market since the first cut to official rates in June.

The combination of subdued loan growth prospects, downward pressure on margins from lower interest rates and a reinvestment burden is likely to mean the banks remain in a downgrade cycle, in the broker's view.

Westpac has become the broker's preferred major bank and the rating is upgraded to Equal-weight from Underweight because of relative valuation support and more scope to mitigate the impact of lower rates. Target is raised to $26.60 from $26.00. Industry view: In Line.

XERO LIMITED ((XRO)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/1/2

Macquarie has decided to upgrade Xero to Outperform from Neutral while bumping up its price target by 21% to $76.50. The analysts believe Xero is well positioned to establish itself as a global platform of choice for SMEs, underpinned by its core subscription SaaS product.

The underlying thesis is that strong unit economics will drive operating leverage for the company. The analysts argue Xero is still only at the precipice of its long term growth story. They see the US market as equally ripe for cloud disruption.

Downgrade

ADELAIDE BRIGHTON LIMITED ((ABC)) Downgrade to Neutral from Outperform by Macquarie and Downgrade to Underperform from Neutral by Credit Suisse and Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 0/2/4

Macquarie had already set its forecasts below Adelaide Brighton's prior guidance range on concerns over Queensland demand, but new guidance is lower still, given weak demand in SA and Victoria as well, leading the broker to cut forecasts a further -22%.

The broker had expected a lower dividend, but now no interim will be offered.

Macquarie downgrades to Neutral from Outperform, citing concerns over earnings visibility. It's not just weak demand that is the issue, the broker believing the business model may need to be reconsidered. Target falls to $3.75 from $4.80.

The company has downgraded net profit guidance for the second time for 2019. Management has attributed this partly to market deterioration and partly to company-specific factors. Credit Suisse notes the company's business model has been caught poorly positioned, affected by circumstances more than peers.

Adelaide Brighton is not sufficiently vertically integrated in Queensland and Victoria to pick up infrastructure work, which is one of the factors. The company will not declare a first half dividend and special dividends are dependent on land sales.

Credit Suisse downgrades to Underperform from Neutral and reduces the target to $3.00 from $3.70.

Adelaide Brighton has downgraded net profit guidance, again, to $120-130m, a -25% reduction to Morgan Stanley's estimates. No interim dividend will be paid.

The main drivers of the weakness are soft conditions in residential and civil construction markets and continued competitive pressures in Queensland and South Australia.

Morgan Stanley is concerned about the dramatic decline in earnings since the last downgrade in May and the lack of a dividend removes one of the key pillars of support for the stock.

Rating is downgraded to Underweight from Equal-weight and the target lowered to $3 from $4. Industry view: Cautious.

See also ABC upgrade.

AGL ENERGY LIMITED ((AGL)) Downgrade to Lighten from Hold by Ord Minnett and Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/2/4

Ahead of the company's results on August 8, Ord Minnett downgrades to Lighten from Hold. The broker expects FY20 guidance will lead to significant downgrades to market estimates.

The broker believes management will be cautious about the outlook, being under continued pressure from politicians to lower retail prices.

Ord Minnett also believes AGL Energy will need to better articulate growth plans since it terminated discussions to acquire Vocus Group ((VOC)). Target is reduced to $19.75 from $21.00.

Back in May, AGL flagged several headwinds that would impact on the company in FY20. Yet Macquarie points out consensus estimates have barely changed. Cash generation is strong and the balance sheet under-geared but the broker believes AGL has now entered a multi-year earnings reduction cycle, forecasting a -30% drop by 2023.

Further downside risk is added as 60-70% of earnings are coal related, and under threat from state-based policies, technology and any change in government. Macquarie cuts its target to $19.50 from $21.00 and downgrades to Underperform.

BINGO INDUSTRIES LIMITED ((BIN)) Downgrade to Hold from Add by Morgans .B/H/S: 1/2/0

Morgans revises its modelling to allow for a weaker economic outlook that is implied by government bond yields. A lower cost of capital reflects a lower interest-rate environment but the implications of low bond yields will affect future earnings growth.

Morgans assumes earnings from the existing business decline in FY19 but the DADI acquisition provides growth. The company will report its results on August 22.

Rating is downgraded to Hold from Add, given recent strength in the share price has compressed the total return potential. Target is raised to $2.64 from $2.41.

COMMONWEALTH BANK OF AUSTRALIA ((CBA)) Downgrade to Sell from Neutral by UBS .B/H/S: 0/3/4

UBS is finding it too difficult to justify the share price. While Commonwealth Bank has a strong franchise, with a technological lead and robust financial returns the earnings profile is declining. Hence, the broker downgrades to Sell from Neutral.

UBS believes the bank has a dilemma regarding whether to return excess capital or face a potential shortfall, should the Reserve Bank of New Zealand proceed with its capital review proposals and/or the Australian Prudential Regulatory Authority closes its "capital re-positioning" regulatory arbitrage.

The broker believes it would be more prudent to retain capital for New Zealand until the rules are clarified by the end of the year. However, UBS assesses investors appear to favour a full return of around $5bn up front and then rebuild capital for NZ over time. Target is steady at $72. The bank will report its results on August 7.

COLES GROUP LIMITED ((COL)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/4/2

Credit Suisse notes, while retail share prices appreciated strongly in the fourth quarter, retail trade remains subdued.

The broker believes the market has set earnings expectations low for most retailers and any misses will result in significant reductions to the share prices.

The broker downgrades to Underperform from Neutral. Target is $12.04.

FREELANCER LIMITED ((FLN)) Downgrade to Sell from Neutral by UBS .B/H/S: 0/0/1

FX was a key driver of top-line growth in the first half and UBS estimates the underlying marketplace revenue was essentially flat. While the broker likes the stock, the share price is seen incorporating a hefty recovery as well as some undeveloped opportunities.

Further monetisation and uplift in growth is required. The broker downgrades to Sell from Neutral. Target is raised to $0.88 from $0.70.

GENWORTH MORTGAGE INSURANCE AUSTRALIA LIMITED ((GMA)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/2/0

The company reported in line, with a seasonally stronger second half to come. The market responded favourably to the remaining buyback being paid as an unfranked special dividend instead. Macquarie notes shareholders have already approved the buyback of another 100m shares which could happen in the next six months, subject to regulatory approval.

A reserve release is also possible, with reserves levels remaining high. This, and a cut to forecast investment yields, lead the broker to cut earnings forecasts and its target to $3.25 from $3.50. On the strong share price response, Macquarie pulls back to Neutral from Outperform.

G.U.D. HOLDINGS LIMITED ((GUD)) Downgrade to Sell from Buy by UBS and Downgrade to Neutral from Outperform by Macquarie and Downgrade to Neutral from Buy by Citi .B/H/S: 1/3/1

FY19 results were in line with expectations. UBS was disappointed with the Narva catalogue launch, with industry feedback suggesting weaker sales.

The company faces substantial FX headwinds over FY20, and the broker points out prices have not increased for the largest brand Ryco. Hence, it could be difficult to grow earnings (EBIT) in FY20.

UBS downgrades to Sell from Buy and lowers the target to $9.50 from $12.30.

FY19 results were softer than expected. Valuation is undemanding, in Macquarie's view, yet the automotive division was impacted by several problems that accelerated in the second half and may persist in the near term.

The broker downgrades to Neutral from Outperform, having been disappointed organic growth was not sustained above 5% or boosted by bolt-on acquisitions. Target is reduced to $10.50 from $14.50.

Citi remains cautious, in light of the FY19 results, lowering estimates for FY20-21 by -16-19%. The broker downgrades to Neutral from Buy because of the decline in momentum in the second half.

The company has noted soft demand from re-sellers and also increased competition in filters. Prices remain flat at Ryco. Target is reduced to $11.02 from $14.91.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/5/2

Credit Suisse expects Insurance Australia Group will hit the lower end of its insurance margin target in FY19. Guidance was initially considered conservative and likely to be beaten but following downgrades to consensus estimates over the year, the broker's is not so sure this is the case.

Rating is downgraded to Underperform from Neutral as the risk to the share price is considered skewed to the downside. Target is steady at $7.80.

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

Cost guidance for FY20 is modestly higher than UBS expected and Tropicana production is lower. This has resulted in a -10% downgrade to the broker's FY20 estimates for net profit.

The broker remains concerned that the move higher in the nickel price may not be fundamentally backed. The stock appears to be trading around fair value and UBS downgrades to Neutral from Buy. Target is steady at $5.40.

MARLEY SPOON AG ((MMM)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/0

Investors should expect volatility in Marley Spoon's operating metrics as the company scales up, Macquarie suggests, but a June Q reversal of the prior positive cash flow trend and a decline in active customers has led to market uncertainty when cash flow breakeven is the key focus.

Meal kits still offer high growth potential and the partnership with Woolworths ((WOW)) is supportive but the broker pulls back to Neutral from Outperform, expecting uncertainty to weigh on valuation in the near term. Target falls to 68c from $1.10.

MEDIBANK PRIVATE LIMITED ((MPL)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 0/2/4

Ord Minnett assesses growth in the health insurance sector is constrained. Downgrading of medical insurance cover continues, premium rate increases are low and there is pressure on industry margins.

The broker downgrades to Lighten from Hold, largely on valuation concerns. Target is raised to $3.33 from $3.05 as the model is rolled forward to June 2020. The company will report FY19 results on August 22.

NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 2/4/1

Morgan Stanley assesses major bank PE multiples have re-rated since the federal election but have underperformed the broader Australian market since the first cut to official rates in June.

The combination of subdued loan growth prospects, downward pressure on margins from lower interest rates and a reinvestment burden is likely to mean the banks remain in a downgrade cycle, in the broker's view.

National Australia Bank's rating is downgraded to Equal-weight from Overweight, as it has outperformed the other major banks since the federal election. The target is lowered to $26.40 from $27.30. Industry view: In-line.

NIB HOLDINGS LIMITED ((NHF)) Downgrade to Sell from Hold by Ord Minnett and Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 0/3/4

Ord Minnett believes the company faces regulatory pressures on premium rates that will constrain growth and margins.

Hence, the broker suggests the stock should not be trading on elevated price to earnings (PE) multiples, which are currently around 23x FY20 estimates.

Rating is downgraded to Sell from Hold, although the target is raised to $6.58 from $5.71 because of changes to forecasts as the model is rolled forward to June 2020.

Morgan Stanley believes structural issues continue to overhang the health sector, notwithstanding the federal election outcome as, in a community-based model with falling participation and an ageing pool of participants, claims per policy will experience upward pressure.

In the face of a soft consumer backdrop and continuing downgrades, the broker believes the market is likely to be too bullish on revenue and policyholder growth. Despite this, health insurers continue to over earn, with returns above 22% considered unusually high in a regulated industry with government approved pricing.

Rating is downgraded to Underweight from Equal-weight. Target is raised to $6.00 from $5.30. Industry view: In-line.

NORTHERN STAR RESOURCES LTD ((NST)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/2/4

Northern Stars June Q production missed Macquarie's forecast by 7% and costs were 8% higher, reflecting weakness at Pogo and Kalgoorlie offsetting strength at Jundee. Pogo has nevertheless shown signs of gradual operational improvement.

The company will provide FY20 guidance tomorrow ahead of its strategy day on Saturday. In the meantime, Macquarie downgrades to Underperform from Neutral. Target falls to $11.00 from $11.60.

ORIGIN ENERGY LIMITED ((ORG)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 4/3/0

Ord Minnett believes strong cash flowing from APLNG in FY19 could be overshadowed by earnings downgrades. The broker reduces net profit estimates by -15%, ahead of the results on August 22.

The broker also expects energy market operating earnings (EBITDA) guidance for FY20 will be -10-20% lower. Rating is downgraded to Hold from Buy and the target is steady at $8.35.

PREMIER INVESTMENTS LIMITED ((PMV)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/3/0

Smiggles' UK transition is in its early stages, but cyclical and structural headwinds are persisting, Macquarie notes, and increasing competition is now making its mark. Apparel has been doing the "heavy lifting" but will now begin to cycle tougher comparables.

Cost improvement has nonetheless surprised and should provide somewhat of a buffer, but with the risks now more evenly balanced the broker downgrades to Neutral from Outperform. Target falls to $17.20 from $19.20.

TRANSURBAN GROUP ((TCL)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/4/2

Following a decline in bond yields, UBS is reducing its cost of equity assumptions, which drives an upgrade in valuation. Despite this, the broker finds insufficient upside to warrant a Buy rating and downgrades to Neutral.

With such low bond rates and a low cost of equity the broker muses about whether Transurban may become more aggressive in its growth plans. Target is raised to $15.10 from $13.75.

WESFARMERS LIMITED ((WES)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/2/3

Credit Suisse notes, while retail share prices appreciated strongly in the fourth quarter, retail trade remains subdued.

The broker believes the market has set earnings expectations low for most retailers and any misses will result in significant reductions to the share prices.

The broker downgrades to Underperform from Neutral. Target is $33.41.

WOOLWORTHS LIMITED ((WOW)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/2/4

Credit Suisse notes, while retail share prices appreciated strongly in the fourth quarter, retail trade remains subdued.

The broker believes the market has set earnings expectations low for most retailers and any misses will result in significant reductions to the share prices.

The broker downgrades to Underperform from Neutral. Target is $29.51.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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