Weekly Ratings, Targets, Forecast Changes – 15-11-19

This story features AMCOR PLC, and other companies. For more info SHARE ANALYSIS: AMC

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 November 11 to Friday November 15, 2019
Total Upgrades: 9
Total Downgrades: 11
Net Ratings Breakdown: Buy 37.59%; Hold 45.77%; Sell 16.64%

The ASX remains a share market polarised by rising share prices and lack of broad earnings momentum.

For the week ending Friday, 15th November 2019, FNArena registered nine upgrades for individual ASX-listed stocks and eleven downgrades. The difference in favour of downgrades is caused by Incitec Pivot and OZ Minerals who received three and two downgrades respectively while Domain Holdings remained the sole receiver of multiple (2x) upgrades.

Good news stems from the observation eight of the nine upgrades shifted to Buy (or an equivalent) while five of the eleven downgrades moved to Sell.

Confusing for investors, no doubt, is that high flyers such as Afterpay Touch and CSL continue to receive fresh upgrades to Buy. On the negative side of the ledger, AusNet Services, Cromwell Property Group, Incitec Pivot, OZ Minerals and REA Group all received a fresh Sell recommendation.

Positive adjustments to valuations and price targets remain rather benign, also because the out-of-season corporate results releases have not been stellar thus far. One might argue the disappointment from the August results season has simply been extended into November. Domain Holdings received the largest increase during the week (up 5.9%), followed by Stockland and Incitec Pivot.

On the negative side, the adjustments look slightly larger, but here the good news comes with the observation only few stocks truly deserve to be highlighted. Those three are Flight Centre, a2 Milk, and AP Eagers. Both Flight Centre and AP Eagers warned their shareholders about subdued operational dynamics.

The unusual observation is that aggregate amendments to earnings forecasts had a bias to the positive side for the week past. This is not something that occurs on a regular basis in Australia. While one swallow does not a summer make, it is nevertheless something to keep an eye on. For all we know we are witnessing the early signs of a trend change that might have significant consequences down the track.

Investors will be holding their fingers crossed, especially those with portfolios filled with laggard names such as industrial cyclicals, banks, materials and energy producers.

Major honours for the week go to Incitec Pivot, followed by Zip Co, Afterpay Touch, Ardent Leisure, EclipX Group and National Australia Bank. Note the prominent absence of the sectors mentioned in the preceding sentence, NAB being the exception.

For once, the negative side has less weight to throw in the scales, though the top end (bottom) still carries large negative adjustments, including for Nearmap, Nine Entertainment (profit warning), Flight Centre (profit warning), REA Group (subdued market update) and News Corp (see REA).

Australia's out-of-season corporate results season continues this week but companies reporting are of a different calibre, which opens up a different kind of question: are these companies still enjoying the better operational momentum?

Upgrade

AMCOR LIMITED ((AMC)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 5/2/0

The first quarter revealed volume growth in medical flexible packaging and liquid flexible pouches, areas not immediately evident. There is no change to company guidance, with Amcor reiterating FY20 estimates for earnings per share of US61-64c.

Plastic volumes increased and Credit Suisse cannot, therefore, conclude that environmental concerns are affecting overall plastic consumption. Rating is upgraded to Outperform from Neutral and the target raised to $15.50 from $14.75.

AFTERPAY TOUCH GROUP LIMITED ((APT)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/0/1

Citi analysts have dug deeper into web site traffic and app downloads for the Buy Now, Pay Later sector in general. Their conclusion is that Afterpay Touch had a solid October in the USA.

In addition, Citi expects the recent launch of a number of marquee brands to result in strong merchant sales over the upcoming holiday period.

The analysts continue to see fierce competition as the key risk for the company, but given the recent share price retreat, and the above analysis, they have decided to upgrade to Buy from Neutral. Price target $31.10 (was $33.70).

Minor amendments have been made to forecasts.

AUB GROUP LIMITED ((AUB)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/0/0

The company has reaffirmed its FY20 guidance. Credit Suisse was encouraged by the update and notes the share price has underperformed the market by around -30% over the last 12 months following a series of earnings downgrades.

Company specific issues have had an impact and offset a favourable operating environment. With this risk passing, the broker upgrades to Outperform from Neutral. Target is raised to $12.75 from $11.45.

CATAPULT GROUP INTERNATIONAL LTD ((CAT)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

Catapult Group has renewed and expanded its deal with Rugby Australia, in the wake of renewing its deal with the NRL, meaning no more material renewals upcoming in the near future.

The key to RA's renewal was the technology, Morgans notes, not the price, suggesting R&D investment is paying dividends.

The broker now expects Catapult to achieve FY20 sales, earnings and cash flow targets, and has upgraded to Add from Hold in anticipation of outperformance ahead.

De-risking means the broker has also lowered its cost of capital assumption, leading to a target price increase to $2.19 from $1.56.

CSL LIMITED ((CSL)) Upgrade to Buy from Neutral by UBS .B/H/S: 5/2/0

As industry continues to collect plasma, UBS notes the average fractionator has the option of increasing the immunoglobulin price and/or reducing the price of albumin to stimulate demand.

As US albumin pricing is arguably at a floor, the broker believes using the immunoglobulin price lever is more likely to be used.

As CSL has embarked on plasma expansion well in advance of its peers it is likely to grow ahead of the market, in the broker's view. UBS upgrades to Buy from Neutral and raises the target to $295 from $265.

DOMAIN HOLDINGS AUSTRALIA LIMITED ((DHG)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/1/2

Macquarie observes cost management has offered more protection than previously expected against the headwinds to volume. Trading was slightly weaker than expected in July to October but offset by strong cost-cutting.

While some of the costs will return, the broker assesses the business has significant operating leverage. Trends are expected to improve in December.

Rating is upgraded to Outperform from Neutral. Target is raised to $3.60 from $3.20.

FY20 trading was stronger than Ord Minnett expected and a new pricing structure to be rolled out on January 1 should help improve yields and depth penetration.

Ord Minnett expects a recovery in the real estate listings environment in the second half of FY20 and prefers Domain to REA Group ((REA)) , as the former is more leveraged to improvements in Sydney and Melbourne.

Rating is upgraded to Accumulate from Hold and the target raised to $3.65 from $3.15.

ELANOR INVESTORS GROUP ((ENN)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/0/0

The company has announced the IPO of the Elanor Commercial Property Fund and the establishment of the Elanor Wildlife Fund along with a placement of $31m and a $5m share purchase plan at $2.10.

The Wildlife Fund will be seeded from the Featherdale Wildlife Park, which Ord Minnett considers an inflection point for the business, as it re-casts the company as a pure-play fund manager as opposed to a diverse alternative investor.

The broker upgrades to Accumulate from Hold, believing the business is now a more accessible investment. Target is raised to $2.32 from $2.28.

SPARK INFRASTRUCTURE GROUP ((SKI)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 0/5/1

Morgan Stanley assesses the share price has now incorporated the FY21 re-basing of the distribution. The stock is down -9% over the year to date so valuation has become undemanding and the risk/reward is more balanced.

The broker upgrades to Equal-weight from Underweight. Target is reduced to $2.15 from $2.24. Industry view is Cautious.

Downgrade

AP EAGERS LIMITED ((APE)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 4/1/0

Ord Minnett was underwhelmed by the trading update, which indicated pre-tax profit for the first 10 months of 2019 declined -6%. The broker likes the business model over the medium term but is not over confident about 2020.

This leads to a downgrade to the rating to Hold from Accumulate. The broker points out the economics of dealerships have changed and are likely to continue to evolve and AP Eagers is ideally positioned to participate in consolidation and leverage its market leadership.

Yet, Ord Minnett is cautious about consensus expectations, which imply a market recovery and/or meaningful merger benefits in 2020. Target is reduced to $11.50 from $12.50.

AUSNET SERVICES ((AST)) Downgrade to Reduce from Hold by Morgans .B/H/S: 0/4/2

AusNet Services' first half result was weaker than Morgans expected, even after including a one-off boost from a sale of inventory. The broker has materially downgraded forecasts, re-basing to the weak first half performance, and including assumptions of lower-for-longer interest rates and inflation.

Target falls to $1.58 from $1.74. Morgans now calculates a forecast total shareholder return of -10%, hence a downgrade to Reduce from Hold.

CROMWELL PROPERTY GROUP ((CMW)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 0/1/1

Cromwell Property will acquire a portfolio of seven Polish retail properties for around $1bn on an estimated capitalisation rate of 5-5.25%. The transaction will settle in November and the company intends to reduce its interest to 20-30% over the next 18-24 months.

Cromwell Property already manages the assets on behalf of third-party investors. The company has not disclosed its gearing post the transaction, nor its covenants.

Given real estate investment trusts have a chequered history when it comes to leverage during the global financial crisis, Ord Minnett suspects the buffer to covenants will be too tight for some equity investors.

Rating is downgraded to Lighten from Hold. Target is $1.10.

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

Macquarie retained Outperform in the wake of CSR's recent earnings result, but believes valuation has now become full. The stock has rallied 63% year to date, and risk/reward is evenly balanced.

There remain residual uncertainties both at the macro and stock-specific level, the broker notes, and FY20-21 forecast PEs are in line with historical averages. The broker awaits signs of improvement in the residential building market and for now pulls back to Neutral, retaining a $4.80 target.

INCITEC PIVOT LIMITED ((IPL)) Downgrade to Neutral from Buy by Citi and Downgrade to Underweight from Equal-weight by Morgan Stanley and Downgrade to Hold from Buy by Ord Minnett .B/H/S: 2/4/1

Bottom line: Citi analysts believe market forecasts might be due for a reset lower as fertiliser sales remain sluggish. For Explosives, the analysts believe pricing leverage will likely only show up in FY21 (due to longer term contracts).

The release of FY19 financials resulted in a disappointment, not because of FY19 numbers, but because of FY20 guidance. Citi analysts reduced forecasts by -22% and -11% for FY20-21. These cuts have a direct impact on forecast dividends.

The analysts observe drought conditions had a material impact with demand for the company's highest margin ammoniac product literally drying up (that's probably a pun intended). Downgrade to Neutral from Buy. Target price steady at $3.55.

FY19 earnings were 4% ahead of Morgan Stanley's estimates. This was supported by a land sale without which earnings would be in line. North American explosives also surprised to the upside, particularly after declining volumes were experienced in the first half.

The broker does not believe the issues that greatly affected FY19 will persist into FY20. However, delivery of a clean FY20 is crucial for the company and, regardless of the outcome, there are headwinds from challenging fertiliser markets and domestic seasonal conditions.

Hence, the broker considers the stock expensive and downgrades to Underweight from Equal-weight. Cautious industry view. Target is raised to $3.20 from $3.10.

FY19 earnings (EBIT), while down -45.4%, were ahead of Ord Minnett's forecasts. The stock has reached a level where the broker considers the risks and rewards are balanced.

Louisiana earnings and improved explosives demand are expected to support growth, although weak fertiliser pricing and poor weather are likely to remain headwinds.

Rating is downgraded to Hold from Buy as the stock has traded through the new target of $3.40, reduced from $3.45.

OZ MINERALS LIMITED ((OZL)) Downgrade to Lighten from Hold by Ord Minnett and Downgrade to Neutral from Buy by Citi .B/H/S: 3/2/1

The Carrapateena reserve grade has been cut to 1.6-1.8% (-11%) after a re-design of the sub-level cave footprint.

The company has pointed to a one-month delay in first production at Carrapateena while adding one year to the mine life of Prominent Hill. Incorporating the changes, reduces Ord Minnett's valuation by -4%.

This leads to a downgrade to the rating to Lighten from Hold. Target is reduced to $9.60 from $10.10.

Citi has downgraded OZ Minerals to Neutral from Buy with a reduced price target of $12, down from $12.40. The analysts are trying to balance opposing risks with delivering a big project such as is Carrapateena on time and budget with signs the price of copper might be stabilising.

Citi remains of the view this remains a stand-out against other copper exposures, on the ASX and elsewhere. The analysts suggest investors should look through short term set backs at Carrapateena.

QBE INSURANCE GROUP LIMITED ((QBE)) Downgrade to Neutral from Buy by Citi .B/H/S: 4/3/0

Citi downgrades to Neutral from Buy, maintaining a $13.45 target. The broker now believes it highly likely that US crop insurance will endure an adverse outcome in 2019. Both Chubb and Zurich have hinted at adverse outcomes.

The broker also notes a significant second half vs first half headwind for QBE's claims ratio. Potential volatility is envisaged in the stock price as the market assesses the issues, which Citi suspects may lead to a better opportunity.

REA GROUP LIMITED ((REA)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 1/2/2

First quarter results reflected weakness in residential listing volumes, amid a revenue decline of -9%. Credit Suisse finds the valuation difficult to justify, although agrees there is likely to be a recovery in the second half.

The main issue for the broker is whether the contribution to revenue growth from higher depth penetration is now close to a top and, while this is unlikely to be a structural factor, lower developer volumes will probably remain a headwind in the near to medium term.

Rating is downgraded to Underperform from Neutral and the target lowered to $90.00 from $90.50.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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