Weekly Ratings, Targets, Forecast Changes – 18-10-19

This story features ALLIANCE AVIATION SERVICES LIMITED, and other companies. For more info SHARE ANALYSIS: AQZ

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 October 14 to Friday October 18, 2019
Total Upgrades: 11
Total Downgrades: 14
Net Ratings Breakdown: Buy 37.92%; Hold 45.24%; Sell 16.84%

For the week ending Friday, 18th October 2019, FNArena counted 11 upgrades and 14 downgrades for ASX-listed stocks by the seven stockbrokers monitored daily. Of the 11 upgrades, seven moved to a fresh Buy. Half of the downgrades stopped at Hold/Neutral.

Among those stocks receiving a fresh Sell rating we find Bank of Queensland, twice, on the back of yet another disappointing financial report release, also again including a reduction for the shareholders' dividend.

Alumina ltd, HT&E, OZ Minerals, Pilbara Minerals and Suncorp all received one fresh Sell rating during the week.

On the other side of the ledger, fresh Buy ratings befell each of Alliance Aviation Services, HRL Holdings, IOOF Holdings, Nick Scali, Perseus Mining, St Barbara, and Steadfast Group.

Plenty of positive revisions occurred to valuations & price targets with both Perseus Mining and Zip Co enjoying 10%-plus increases, followed by Santos, St Barbara and Megaport. A lot less is happening on the negative side, with only Pilbara Minerals, Bank of Queensland and Afterpay Touch worth mentioning in terms of declining price targets.

The week's table for positive revisions to earnings estimates shows plenty of action, this time with Afterpay Touch in pole position, followed by Perseus Mining and Corporate Travel Management. The table for negative amendments remains equally busy, with the week's largest reduction reserved for OceanaGold, followed by Bank of Queensland, South32 and Orora.

Investor sentiment remains closely tied to international, geopolitical and macro-economic matters, while the domestic AGM season and out-of-season financial result reports are about to ramp up.

Upgrade

ALLIANCE AVIATION SERVICES LIMITED ((AQZ)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/1/0

Credit Suisse reviews the investment thesis as the stock has fallen -11.5% and underperformed the small ordinaries index by -12.8% since the FY19 result.

The broker believes concerns around wet lease arrangements are unfounded, while issues surrounding the Qantas ((QAN)) overhang continue.

Rating is upgraded to Outperform from Neutral and the target raised to $2.90 from $2.60. The broker expects the company should generate around $28m in free cash flow, even after factoring in elevated capital expenditure into FY21.

HRL HOLDINGS LTD ((HRL)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

The company has issued a positive trading update at the AGM, providing earnings guidance for the first half that was stronger than Morgans expected. The broker highlights earnings are significantly skewed to the second half, in line with the production profile of New Zealand's dairy and honey seasons.

The broker increases FY20 forecasts for underlying operating earnings (EBITDA) by 8.2%. FY21 and FY22 forecasts have risen 6.0% and 5.9% respectively. Rating is upgraded to Add from Hold and the target raised to $0.14 from $0.12.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/6/1

The company will sell its 26% interest in the joint venture with State Bank of India. Total consideration is over $640m with an expected increase in Insurance Australia Group's regulatory capital position of over $400m once the transaction completes.

Credit Suisse increases FY20 estimates for reported profit by 34% and also increases the expected FY20 buyback to $750m from $300m. Target increases to $8.00 from $7.50. The broker's rating is now upgraded back to Neutral from Underperform.

IOOF HOLDINGS LIMITED ((IFL)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Neutral from Sell by Citi .B/H/S: 2/3/0

The OnePath Custodians have approved the acquisition by IOOF Holdings of the ANZ Wealth Pension & Investments. A purchase price of $825m has been agreed, $125m below the original price.

Credit Suisse believes it likely the business will transfer to IOOF in the second half of FY20 and incorporates the acquisition in estimates from January 1 2020.

APRA has also advised it will not appeal the Federal Court decision to dismiss its action against IOOF entities, directors and executives.

Target is raised to $8.45 from $5.05 and the rating is upgraded to Outperform from Neutral, as the company has made significant progress on two fronts.

As the ANZ P&I deal now has a strong likelihood of proceeding, having been approved by the custodians, Citi lifts estimates for earnings per share in FY20 and FY21 by 29% and 46% respectively.

The company still faces major hurdles, such as the need to restructure its advice business, but the broker suggests the added scale and associated cost synergies from the acquisition should provide flexibility.

In view of the improved earnings outlook, the rating is upgraded to Neutral/High Risk from Sell/High Risk. Target is raised to $7.30 from $4.40.

NICK SCALI LIMITED ((NCK)) Upgrade to Buy from Sell by Citi .B/H/S: 1/1/0

Interesting twist as Citi had previously carried a Sell rating on the assumption that the disruption of the housing cycle in Australia would be too much to withstand for the small cap furniture retailer. Post yesterday's profit warning, and share price sell-off, the analysts now think their thesis has successfully played out.

Now taking the view that current tough times won't last forever, Citi has decided to upgrade to Buy from Sell. Forecasts have been reduced, but Citi analysts seek comfort in forward looking indicators that are suggesting better times will announce themselves for housing related retailers such as Nick Scali.

Price target has improved by 16% to $6.90.

PERPETUAL LIMITED ((PPT)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/7/0

Perpetual suffered further fund outflows in the Sep Q and the broker forecasts more ahead. While flow trends are a major concern, the stock's de-rating to date and the potential for a positive acquisition announcement in the near term have Macquarie upgrading to Neutral from Underperform.

Target falls to $32.00 from $34.50.

PERSEUS MINING LIMITED ((PRU)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/1/0

Yaoure remains on schedule for first gold by end of 2020. The potential to extend mine life is significant, Credit Suisse assesses. Meanwhile Edikan has moved to a materially lower mining rate for a modest reduction in production.

The broker upgrades to Outperform from Neutral on higher gold price assumptions. Target is raised to $0.88 from $0.62 as valuation methodology is re-assessed.

REGIS RESOURCES LIMITED ((RRL)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 2/4/0

Credit Suisse notes the revised definitive feasibility study for McPhillamys is due in the first half of FY20 and may reveal improved economics on incorporating the higher-grade satellite, Discovery Ridge.

Nevertheless, the severe drought conditions in NSW, as rural properties struggle for water, could add complexity to the granting of permits.

The broker upgrades to Neutral from Underperform, amid higher gold price assumptions. Target is raised $4.95 from $3.90.

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

Further FY20 guidance is to be provided with the September quarter production report. Atlantic Gold is expected to be consistent with the prior owner's guidance for 2019. This could benefit from mining to date that has demonstrated a large portion of previously-assumed waste is mineralised.

Rating is upgraded to Outperform from Underperform as Credit Suisse raises gold price assumptions and re-assesses methodology. Target rises to $3.50 from $2.76.

STEADFAST GROUP LIMITED ((SDF)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/0/0

The company has reaffirmed FY20 guidance for underlying earnings (EBITA) of $215-225m. This implies 11-16.5% growth and Credit Suisse suspects, given the solid trading results in the first quarter, the top of the range is likely.

The broker upgrades estimates by 3%. Given the recent pull back in the shares, Credit Suisse believes here is an opportunity to pick up the stock at a reasonable price and upgrades to Outperform from Neutral.

The main risk is a softening in the premium environment and regulatory changes. Target is raised to $4.00 from $3.85.

Downgrade

ALS LIMITED ((ALQ)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/3/0

While the stock is priced for a recovery in geochemistry Credit Suisse finds little evidence this is occurring. The focus at the upcoming result is likely to be on the volume growth in geochemistry and continued margin improvement in life sciences.

The broker estimates the share price has already priced moderate sample volume growth in the second half of FY20 and, given the history of volatility at results announcements, the rating is lowered to Neutral from Outperform.

Target is steady at $8.40. The company will report its FY20 first half results on November 19.

ALUMINA LIMITED ((AWC)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 2/1/2

Ord Minnett updates commodity price forecasts, noting decelerating global growth. Until there are clear are signs the current cycle has ended, periods of risk-on sentiment lead to a re-rating of key preferences in the bulks and metals sectors.

Aluminium and alumina estimates for 2020 are reduced by -6% and -14% respectively. The broker downgrades to Lighten from Hold and lowers the target to $2.00 from $2.50.

BORAL LIMITED ((BLD)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/3/0

Ord Minnett assesses Boral's share price is trading at roughly fair value, having recovered almost to levels pre-FY19 results. However, the outlook for concrete demand underwhelms the broker and this is forecast to trend lower through to FY23.

The broker is also reluctant to factor in the benefits from the USG joint venture in Asia and the formation of the North American division, following the acquisition of Headwaters.

Returns for North America and Asia are expected to be well short of the rate required to cover the cost of capital. Ord Minnett downgrades to Hold from Accumulate and lowers the target to $4.80 from $5.00.

BANK OF QUEENSLAND LIMITED ((BOQ)) Downgrade to Sell from Neutral by Citi and Downgrade to Reduce from Hold by Morgans .B/H/S: 0/1/5

Citi notes an unexpected rise in bad debts drove a weaker result for Bank of Queensland, attributed to the small number of commercial exposures. While management remains cautious heading into FY20, Citi suspects falling borrowing costs are likely to keep bad debts in check for now.

The broker suspects earnings, the capital position and, possibly, the dividend are all set to deteriorate again. Rating is downgraded to Sell from Neutral and the target lowered to $8.50 from $9.50. FY20-21 estimates are downgraded by -10%.

Bank of Queensland will report its FY19 result on October 17. Citi believes underlying growth in cash earnings will remain challenged relative to the major banks.

The broker believes the bank has plenty of catching up to do in terms of streamlining the back office processes and improving customer facing technology. Moreover, the issues are unlikely to be resolved the next couple of years and the broker expects the home loan book will struggle to grow without compromising too much on margins.

Rating is downgraded to Reduce from Hold and the target is steady at $8.

HT&E LIMITED ((HT1)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 1/1/2

While ad markets have continued to be choppy across broader media, Macquarie was surprised by the extent of Southern Cross' guidance downgrade. Channel checks reveal weakness is across the board, not just in any one sector. The broker has reassessed its general media assumptions.

The broker expects softness in radio will also impact on HT&E. Forecast earnings cut by -9.2% and -10.9% on 2020-21. Target falls to $1.55 from $1.75. Downgrade to Underperform from Neutral.

NETWEALTH GROUP LIMITED ((NWL)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/3/3

Net flows were the best ever in the first quarter of FY20. While the likelihood of a reduction in cash spreads increases as the cash rate nears 50 basis points, the revenue impact needs to be weighed against the other obvious risk – booming net inflows, Ord Minnett suggests.

However, the broker downgrades to Hold from Buy as the stock is now trading in line with the target, which is raised to $9.00 from $8.95.

OZ MINERALS LIMITED ((OZL)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 4/2/1

September quarter production was softer than expected. Cash costs benefited from elevated gold prices and production. Credit Suisse notes Antas is bleeding cash despite a cost-cutting strategy.

Meanwhile unconventional technology is being trialled at West Musgrave. Rating is downgraded to Underperform from Neutral and the target reduced to $8.50 from $9.50.

PILBARA MINERALS LIMITED ((PLS)) Downgrade to Sell from Hold by Ord Minnett .B/H/S: 2/1/1

Ord Minnett updates commodity price forecasts, noting decelerating global growth. Until there are clear are signs the current cycle has ended, periods of risk-on sentiment lead to a re-rating of key preferences in the bulks and metals sectors.

The broker expects the lithium sector will have a difficult period for the next 6-12 months. Pilbara Minerals is downgraded to Sell from Hold. Target is reduced to $0.25 from $0.60.

SANDFIRE RESOURCES NL ((SFR)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/4/0

Ord Minnett updates commodity price forecasts, noting decelerating global growth. Until there are clear are signs the current cycle has ended, periods of risk-on sentiment lead to a re-rating of key preferences in the bulks and metals sectors.

Despite potential upside, the broker notes development risk for Sandfire Resources and would become more constructive once risks diminish.

Ord Minnett downgrades to Hold from Accumulate. Target is lowered to $7.00 from $7.70.

SANTOS LIMITED ((STO)) Downgrade to Equal-weight from Overweight by Morgan Stanley and Downgrade to Hold from Buy by Ord Minnett .B/H/S: 2/4/0

Morgan Stanley downgrades to Equal-weight after being Overweight for three years. The broker assesses the free cash story is diminishing and investors will be required to invest for a medium-term uplift in production. Meanwhile, risks are building across LNG industry and the stock appears fully valued.

The company has announced a US$1.4bn deal to buy the northern Australian interests of ConocoPhillips. While the deal is solid, Morgan Stanley believes it will change the free cash flow profile of the company. Target is $8.00. Industry view: In-Line.

Santos has emerged as the buyer of the ConocoPhillips northern Australian assets, comprising the Darwin LNG, Bayu-Undan, Barossa and Poseidon projects. Ord Minnett considers the transaction positive in so far it gives Santos a majority stake.

Ord Minnett downgrades to Hold from Buy based on valuation and lowers the target to $7.75 from $7.85.

SUNCORP GROUP LIMITED ((SUN)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/1/3

Credit Suisse expects the company will review its targets in coming months as these are unlikely to be achieved in coming years unless the business takes on more risk.

While Suncorp has reduced earnings volatility and improved the underwriting profit of the insurance division, Credit Suisse suggests this is being more than offset by lower bond yields.

The broker considers a 10% return on equity a stretch. FY20 net profit estimates from business lines are decreased by -6%. Rating is downgraded to Underperform from Neutral and the target reduced to $12.75 from $13.90.

SOUTHERN CROSS MEDIA GROUP ((SXL)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/2/1

While ad markets have continued to be choppy across broader media, Macquarie was surprised by the extent of Southern Cross' guidance downgrade. Channel checks reveal weakness is across the board, not just in any one sector. The broker has reassessed its general media assumptions.

Southern Cross forecast earnings fall -15% and -18% in FY20-21. Target falls to $1.05 from $1.40. Rating downgraded to Neutral from Outperform.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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