Weekly Reports | Nov 04 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.
Recommendation upgrades and downgrades for ASX-listed entities were roughly in balance during the week ending on Friday, 1st November 2019. FNArena counted 11 and 12 respectively.
The not so good news is that less than half of all upgrades only moved to Neutral/Hold (5 out of the 11) but then only four of the 12 downgrades sunk to a Sell.
The fourth profit warning during this calendar year delivered Costa Group two fresh Sell ratings. On the positive side, gold producer Regis Resources was upgraded twice to Buy, while struggling scrap trader Sims Metal Management also received two upgrades, one to Buy and one to Neutral.
Lendlease and Woolworths enjoyed the largest increases to price targets during the week, both enjoying a boost in excess of 5%, followed by Blackmores and Coles whose targets increased by more than 4%.
On the flipside, we find a smaller number of stocks impacted negatively, but the numbers are higher. Costa Group, also impacted by another capital raising, saw its consensus target plummet by -31%. For Sims Metal the damage is -8.6% and for Cleanaway Waste Management it is -6.3%.
A small number of stocks enjoyed sizeable increases to earnings forecasts, led by Senex Energy, Viva Energy and Fortescue Metals. ResMed, fresh from another quarterly that beat market expectations, sits fourth on the week's table for positive revisions.
No surprise, Sims Metal and Costa Group -both issuers of multiple profit warnings this year- take the wooden spoon honours for changes to earnings estimates, followed by Sandfire Resources, Newcrest Mining, Qantas and Blackmores.
The banks are not having a great season either, with Westpac announcing a -15% dividend cut on Monday morning, after ANZ Bank lowered its franking level to 70%. This puts the market's background debate about Value vs Growth in a different perspective vis a vis overseas markets, especially since Macquarie Group's result on Friday was well-received.
So was Orica's, vindicating the strong share price performance since May. This week and next will bring more earnings results updates with representatives from both Value and Growth sides featuring prominently. See also the Corporate Results Monitor on the website.
Period: Monday October 28 to Friday November 1, 2019
Total Upgrades: 11
Total Downgrades: 12
Net Ratings Breakdown: Buy 37.64%; Hold 45.97%; Sell 16.39%
ADELAIDE BRIGHTON LIMITED ((ABC)) Upgrade to Neutral from Sell by UBS .B/H/S: 0/3/3
The pullback in housing and construction activity has made it a tough 2019 for Adelaide Brighton, UBS notes. The latest data suggest approvals are bottoming but the floor in commencements has not yet been reached, implying more margin pressure ahead.
However with approvals and house prices rising, the risk of missing 2019 earnings guidance is diminishing, the broker suggests.
Upgrade to Neutral from Sell. Target falls to $3.00 from $3.15.
AGL ENERGY LIMITED ((AGL)) Upgrade to Hold from Reduce by Morgans .B/H/S: 0/4/3
First quarter generation output was 5% higher than the prior corresponding period and Morgans lifts estimates for the first half result. The broker envisages several issues in the medium term in the electricity market, as fuel costs increase and speculation mounts about the future of the Portland smelter.
However, the company's extensive vertical integration and hedging should insulate earnings from major swings in the electricity spot market over the next 12 months and the broker upgrades to Hold from Reduce, raising the target to $17.45 from $16.86.
CLEANAWAY WASTE MANAGEMENT LIMITED ((CWY)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 4/2/0
Management now expects first half earnings to be in line with the prior corresponding half. The reduced guidance for the first half reflects weaker economic activity, soft commodity prices and a reduction in Queensland volumes.
Benefits from price initiatives and cost reductions are likely to be skewed to the second half. Credit Suisse suspects the prior guidance may have been a little optimistic and notes the "wisdom" that suggests waiting for "at least the third profit warning before jumping in".
Rating is upgraded to Neutral from Underperform on valuation grounds. Target is reduced to $1.80 from $1.85.
FREELANCER LIMITED ((FLN)) Upgrade to Neutral from Sell by UBS .B/H/S: 0/1/0
Freelancer posted benign organic growth in the Sep Q once adjusted for currency. The company is at a challenging crossroad, UBS suggests. Underlying growth is underwhelming but changes to the platform and new currency offerings in Escrow have the potential to re-stimulate.
Penetration of Escrow payments into the second hand car market creates significant longer term potential but is as yet unproven.
The broker has reduced forecasts and its target to 79c from 88c but upgrades to Neutral on valuation.
LENDLEASE GROUP ((LLC)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 4/1/0
Having conducted a comprehensive analysis of the company's Barangaroo South development, Ord Minnett estimates this will underpin 30-40% earnings growth over the next 3-5 years.
Based on the company's expanded development backlog and capital base, the broker forecasts FY25 earnings will be at comparable levels to FY23-24, indicating materially higher earnings should be sustainable.
Rating is upgraded to Buy from Accumulate and the target lifted to $22.50 from $17.50.
REGIS RESOURCES LIMITED ((RRL)) Upgrade to Buy from Neutral by Citi and Upgrade to Add from Hold by Morgans .B/H/S: 4/3/0
Citi observes the company has several low-risk organic growth options and delivery is predictable. Moreover, the stock offers a 3% fully franked dividend yield, one of the sector's highest.
Following a pullback in the shares since mid August, the broker envisages value has emerged and upgrades to Buy from Neutral. Target is raised to $5.40 from $5.00.
Morgans changes analysts and, given recent share price weakness, upgrades to Add from Hold. The company's strategy has been to grow organically and optimise current operations.
Guidance has been met for the past five years and, the broker observes, costs are among the lowest in the industry.
The strong growth pipeline includes McPhillamys, which will add around 50% to the production profile once operational. Morgans reduces the target to $5.41 from $5.51.
SCENTRE GROUP ((SCG)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/1/2
Specialty sales growth was 1.8% in the September quarter, a 50 basis points increase on June. Ord Minnett observes Scentre Group has defensive income, improving retail sales and a superior portfolio to Vicinity Centres ((VCX)).
The management business is also considered more valuable and the broker switches preferences, upgrading its rating to Accumulate from Hold. Target is steady at $4.30.
SIMS METAL MANAGEMENT LIMITED ((SGM)) Upgrade to Neutral from Underperform by Macquarie and Upgrade to Buy from Neutral by Citi .B/H/S: 2/2/1
The company has announced its second negative FY20 trading update, now expecting underlying earnings (EBIT) of $20-50m, with a skew to the second half. A first half loss is expected of -$20-30m followed by a second half profit of $50-70m.
Macquarie notes scrap markets have become illiquid and competitive, affecting margins. However, scrap prices have staged some sort of a recovery in recent weeks. The outlook in Turkey is less severe while US market conditions appear to be moderating.
The broker upgrades to Neutral from Underperform, assessing the likelihood of further downside is now more finely balanced. Target is reduced to $9.05 from $9.30.
Operating earnings (EBIT) are expected to fall to the lowest level in 20 years in FY20, Citi observes. Market conditions remain challenging and the company has warned of an underlying earnings loss of -$20-30m in the first half and an FY20 profit of $20-50m.
The broker notes sentiment has turned more bullish in recent weeks and Turkish scrap prices have recently rebounded from the late September lows. Sentiment in US scrap markets is also improving.
Citi upgrades to Buy from Neutral on valuation grounds, cutting the target to $10.50 from $11.50.
WOOLWORTHS LIMITED ((WOW)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/3/2
Macquarie notes supermarket like-for-like sales were up 6.6% in the first quarter and well ahead of rival Coles ((COL)). Nevertheless, this was at the lower bounds of market expectations.
The company has admitted to underpaying 5700 salaried staff and remediation costs of -$200-300m are envisaged. Macquarie notes Woolworths was already facing higher enterprise bargaining costs so the review will put further upward pressure on the wages bill.
The broker rolls forward its model and upgrades to Neutral from Underperform. Target is raised to $37.00 from $29.90.
ARISTOCRAT LEISURE LIMITED ((ALL)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 6/1/0
The stock has rallied recently and Credit Suisse downgrades to Neutral from Outperform. The broker assesses North American revenue share is an area where the company can surpass forecasts, particularly in the premium Class III installed base.
The broker emphasises that earnings are growing strongly and investors may be able to take advantage should the share price weaken. Target is $33.40.
BLACKMORES LIMITED ((BKL)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/3/3
Credit Suisse notes Blackmores has rejuvenated its management ranks. China has been elevated to the status of having a direct CEO reporting to the company. The broker believes this could be a turnaround story and mulls whether there could even be a takeover.
Blackmores has stated it is looking for a partner to help develop the Chinese business. Growth is expected to resume in FY21 after restructuring changes, amid benefits from a new factory and a full year of cost reductions.
Rating is downgraded to Underperform from Neutral. Credit Suisse maintains a target of $69.
COSTA GROUP HOLDINGS LIMITED ((CGC)) Downgrade to Underperform from Neutral by Macquarie and Downgrade to Neutral from Buy by Citi .B/H/S: 2/2/1
Costa Group has announced its fourth downgrade for the year, now expecting 2019 net profit of $28m and operating earnings (EBITDA) of $98m. Macquarie notes tomatoes are the only produce category to meet second half expectations.
While the company has previously highlighted the risks to the downside in blueberries, mushrooms and raspberries there is also adverse yield and size impacts in citrus and avocado.
Macquarie changes analysts and lowers the rating to Underperform from Neutral, noting that earnings visibility continues to be limited. Target is reduced to $2.51 from $3.40. Moreover, 2020 guidance seems optimistic in the broker's opinion.
Costa Group has downgraded earnings for the fourth time in 2019 and has decided to raise equity through a rights issue. Citi lowers estimates for operating earnings by -27% for 2019 and -17% for 2020.
The broker believes the company has a challenge ahead to restore its previous reputation for earnings stability, despite the inherent risks from agriculture.
The broker expects investors will stay cautious and be more reliant on external observations of improved prices in key categories. Rating is downgraded to Neutral from Buy and the target reduced to $2.90 from $4.20.
COLES GROUP LIMITED ((COL)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/4/2
Credit Suisse downgrades to Underperform from Neutral. The broker forecasts no growth in Coles supermarkets in the first quarter.
With no evidence for a change in the performance relative to Woolworths ((WOW)), the broker expects the share price to outperform in the near term.
Investors should note the rating for Woolworths is Underperform. Target is $13.23.
DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Downgrade to Neutral from Buy by UBS .B/H/S: 0/6/0
UBS saw Domino's FY20 to date trading update as mixed, with network sales in line with consensus but new store growth as soft. Store growth is weighted to the second half but running short of expectation.
The stock has run up 34% in three months to a 26x forward PE which the broker considers fair risk/reward, hence a downgrade to Neutral from Buy. Target rises to $50.00 from $48.50.
JAPARA HEALTHCARE LIMITED ((JHC)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 0/3/0
Following the interim report from the Royal Commission Into Residential Aged Care, Ord Minnett downgrades to Lighten from Hold. Target is steady at $1.
The broker is concerned that Japara Healthcare's higher cost base leaves it more exposed to the sector's issue of income vs expenses growth. Spending on new facilities will mean gearing continues to rise at a time when earnings are contracting.
NOVONIX LIMITED ((NVX)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0
The company has exhibited a strong performance in the September quarter, Morgans observes, in anticipation of its first customer contract for the synthetic graphite product.
The broker expects the first 500tpa of production capacity will be commissioned in the current half-year and this will mean the company is likely to need funds to secure the period between commissioning and full-scale production.
The broker requires clarity on a funding package along with customer demand in order to re-assess its view and downgrades to Hold from Speculative Buy. Target is $0.65.
PILBARA MINERALS LIMITED ((PLS)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/2/1
Production was higher and sales lower in the September quarter as production was curtailed at Pilgangoora. The company has reduced December quarter sales guidance because of continued market weakness.
Macquarie notes a muted spodumene market is squeezing the company's sales volumes, and a recovery in demand in the near-term will determine whether curtailment measures are lifted as well as provide more certainty on stage 2.
Target is reduced to $0.32 from $0.60 and the rating is downgraded to Neutral from Outperform.
REGIS HEALTHCARE LIMITED ((REG)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 1/2/1
Ord Minnett notes the interim report from the Royal Commission Into Residential Aged Care was more critical than previously anticipated, raising the potential for more radical recommendations in the final report.
The broker had also not expected commissioners to clearly oppose any funding boost ahead of their recommendations. As the stock is trading close to valuation, the broker downgrades Regis Healthcare to Hold from Buy. Target is $3.15.
RHINOMED LIMITED ((RNO)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0
First quarter revenue was below expectations amid continued volatility in cash flow. Morgans continues to take a cautious approach to the upside potential in the Columbia Care partnership.
Given changes to forecasts, and the dilution from the recent capital raising, the target is lowered to $0.28 from $0.38.
While remaining positive about the long-term view, the broker recognises increasing investor fatigue regarding the time being taken to achieve breakeven. Rating is downgraded to Hold from Speculative Buy.
VICINITY CENTRES ((VCX)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/4/1
The share price has risen 7% in the past month and Ord Minnett switches retail preferences, believing Scentre Group ((SCG)) has a better portfolio.
The broker downgrades to Hold from Accumulate. Target is stead at $2.80.
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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