Weekly Reports | Aug 05 2019
By Rudi Filapek-Vandyck, Editor FNArena
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.
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.
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.