Weekly Reports | Dec 02 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 November 25 to Friday November 29, 2019
Total Upgrades: 10
Total Downgrades: 11
Net Ratings Breakdown: Buy 37.57%; Hold 45.70%; Sell 16.73%
Changes in recommendations for ASX-listed stocks by the seven stockbrokerages monitored daily continue to carry a slight bias towards downgrades. For the week ending Friday, 29th November 2019 FNArena registered ten upgrades and eleven downgrades with Telstra the sole recipient of two upgrades, both to Buy.
Only three out of the ten upgrades stopped at Hold/Neutral, while four companies received a fresh Sell recommendation: AMP, IOOF Holdings, Perpetual and Sigma Healthcare.
Positive changes to price targets and valuations remain few and far between, but some did leave an impression. Caltex Australia enjoyed an improvement of more than 21% on the back of plans to spin-off property assets and the emergence of a Canadian suitor. Sigma Healthcare, Mineral Resources and IOOF Holdings each enjoyed sizeable increases.
A lot less was happening on the negative side with Bank of Queensland, Westpac and Healius the only ones worth mentioning.
With the out-of-season corporate reports now winding down, and quarterly updates on commodities still ahead, it is no surprise overall activity in further adjustments to earnings estimates remains rather benign. Though, it has to be pointed out, corporate Australia is still issuing profit warnings.
For the week, Caltex Australia took the honours in positive amendments to earnings forecasts, at a distance followed by Mineral Resources, and further down Fisher & Paykel Healthcare (FY19 release), and IOOF Holdings. The negative side of the ledger, on the other hand, has plenty of action on display with Orocobre's forecasts getting yet another chainsaw treatment, followed by equally significant reductions for Nearmap, Nufarm (yet another profit warning), Superloop, Sims Metal Management (was that another profit warning?), and Westpac.
The greatest discrepancy for the Australian share market remains the fact that fresh money keeps flowing in, pushing indices to new all-time highs, while momentum for earnings estimates remains (quite noticeably) weighted to the downside. One cannot help but wondering what the implications are for the upcoming February reporting season.
This, however, might remain a question for next year?
BANK OF QUEENSLAND LIMITED ((BOQ)) Upgrade to Neutral from Sell by UBS .B/H/S: 0/2/4
Bank of Queensland will undertake a capital raising of $275m. The book build will be priced between $7.69 and $7.78 per share, representing a -10-11% discount to the last close and a 6% premium to net tangible assets.
The bank will outline a new strategy in February and UBS expects this will focus on niche areas where Bank of Queensland has an advantage.
The broker does not envisage a rapid turnaround, given the current environment, and upgrades to Neutral from Sell. Target is $8.25.
COLLINS FOODS LIMITED ((CKF)) Upgrade to Add from Hold by Morgans .B/H/S: 1/1/0
The first half highlighted strong momentum in the base KFC Australia business while Europe continues to underperform. The company has highlighted same-store sales growth in the second half to date of 4.5% for KFC Australia.
Store roll-out expectations have been reiterated. Morgans expects FY20 operating earnings (EBITDA) of $122.3m, up 7.5%.
The broker notes the stock trades at a discount to listed peers and points to de-gearing of the balance sheet to the top of the target range with the potential for further accretive acquisitions.
Rating is upgraded to Add from Hold and the target raised to $11.76 from $8.20.
See also CKF downgrade.
CALTEX AUSTRALIA LIMITED ((CTX)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 2/4/0
Caltex Australia has announced a plan to spin off its retail property division, selling up to a 49% interest in 250 sites. This is in addition to the 50 that will be sold separately.
Morgan Stanley considers this a sensible strategy as it improves the balance sheet and offers the potential for buybacks.
At the same time, retail fuel margins appear to have improved and downside risk is reduced, in the broker's opinion.
Rating is upgraded to Overweight from Equal-weight. Target is raised to $34 from $24. Industry view is In-Line.
See also CTX downgrade.
EBOS GROUP LIMITED ((EBO)) Upgrade to Buy from Neutral by UBS .B/H/S: 1/2/1
UBS upgrades to Buy from Neutral as the stock now offers a 16% total return based on the current target. The broker's FY20 operating earnings (EBITDA) forecast now sits at $294m.
Given the strong capital allocation record, UBS would expect the company to, at a minimum, achieve its stated 15% return on capital target on future acquisitions.
Assuming EBOS Group does deploy $300m of capital into acquisitions by the end of FY20 it could add 14% to group earnings (EBIT). Target is reduced to NZ$25.50 from NZ$25.90.
EVOLUTION MINING LIMITED ((EVN)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/3/2
Evolution Mining will acquire Red Lake in Canada from Newmont for US$375m. Citi notes the company intends to deliver the same re-capitalisation that was performed on previous acquisitions.
While the deal fits, Citi cautions that this is a different mine, operationally, to past deals. The broker considers the earnings value is modest for the near term, pending the three-year operational turnaround.
Rating is upgraded to Buy from Neutral on the pullback in the share price. Target is steady at $4.60.
METCASH LIMITED ((MTS)) Upgrade to Neutral from Sell by Citi .B/H/S: 1/3/2
Metcash has confirmed the loss of one of its largest customers, 7-Eleven. While the $800m in wholesale sales is much larger than that of the Drakes contract loss, Citi calculates a similar earnings impact.
The broker expects Metcash will retain around 10% of the contract in Western Australia and selected categories.
The broker upgrades to Neutral from Sell and raises the target to $2.80 from $2.60 as earnings downgrades are offset by revised cost assumptions and a re-rating in global comparable multiples.
See also MTS downgrade.
SPARK INFRASTRUCTURE GROUP ((SKI)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/4/1
The company has flagged a tough environment and a shift to tax being paid. The re-sets in South Australia and Victoria have an -89 basis points reduction in equity risk premium.
Macquarie updates estimates for the final price outcome for the VPN 2020 pricing and change in the timing of the final decision to July 2021. Target is lowered to $2.37 from $2.41.
Rating is upgraded to Outperform from Neutral. The broker notes the yield of 6% in 2021 is superior to the company's regulated utility peers.
TELSTRA CORPORATION LIMITED ((TLS)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/1/1
The company's investor briefing flagged declines in the near term for mobile revenue per unit amid competition in enterprise. However an improving trend has been noted.
Credit Suisse suspects capital intensity is likely to improve while the dividend appears sustainable at $0.16 per share.
While recognising the stock has had a good run over the past 12 months, as momentum is positive Credit Suisse upgrades to Outperform from Neutral. Target is raised to $3.90 from $3.70.
It appears the usual uptick in competitive behaviour among mobile providers in the run-up to Christmas is absent this year. Macquarie hasn't changed its Telstra forecast, but is more confident in its FY21 mobile growth forecasts.
Leading indicators suggests a competition inflection point in the next twelve months.
Mobile improvement, as well as reduced capital intensity, provide scope for dividend growth down the track, the broker suggests. Upgrade to Outperform from Neutral, target rises to $4.00 from $3.75.
WESTPAC BANKING CORPORATION ((WBC)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/5/0
Westpac has announced CEO Brian Hartzer will step down, making this the third CEO of a major bank to have resigned in the last two years. Peter King, the current CFO, has been appointed acting CEO.
Chairman Lindsay Maxsted will also bring forward his retirement. While UBS has a limited basis on which to estimate the extent of the likely fine from AUSTRAC it maintains a -$1bn estimate for the first half of FY20. However, the fine could be significantly higher, or lower.
The broker believes Westpac may need to spend a significant amount of money to address compliance issues. The share price has fallen sharply and UBS upgrades to Neutral from Sell, given it is approaching the price target.
AMP LIMITED ((AMP)) Downgrade to Sell from Neutral by UBS .B/H/S: 1/4/2
UBS envisages risks to the Contemporary platform profit margins while the economics around the pivot towards advice are untested. Execution risks around the strategic outlook are expected to grow.
As a result, with the shares now trading at a 10% premium to the $1.80 target, the broker finds little allowance for medium-term risks and downgrades to Sell from Neutral.
ALUMINA LIMITED ((AWC)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/2/2
Credit Suisse downgrades to Neutral from Outperform as the stock has "defied gravity", despite alumina prices falling significantly. The broker believes the alumina price has found a floor at US$280/t.
While there is no reason to sell the stock, the broker suspects there may be opportunities to enter at a more attractive level if the current macro environment does not improve. Target is reduced to $2.40 from $2.70.
COLLINS FOODS LIMITED ((CKF)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/1/0
The first half result would have beat UBS estimates had the Netherlands not underperformed. Customer uptake at the new Taco Bell locations remains strong and the broker considers this a core driver for medium and long-term growth.
Nevertheless, after a material re-rating the broker considers the valuation fair and downgrades to Neutral from Buy. Target is raised to $10.60 from $8.75.
See also CKF upgrade.
CALTEX AUSTRALIA LIMITED ((CTX)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/4/0
Canada based convenience retailer Alimentation Couche-Tard has made a conditional non-binding bid for Caltex Australia at $34.50 a share. This follows an earlier proposal of $32.00 per share that was rejected by Caltex Australia.
Ord Minnett suspects Foreign Investment Review Board approval may not be easy, given the nature of the infrastructure and terminal assets. Caltex Australia is yet to engage on the deal. Ord Minnett downgrades to Hold from Accumulate and retains a $32 target.
See also CTX upgrade.
IOOF HOLDINGS LIMITED ((IFL)) Downgrade to Sell from Neutral by UBS .B/H/S: 2/2/1
With the acquisition of the ANZ P&I business looking increasingly likely to proceed, UBS expects earnings per share will lift 32% into 2020.
However, the broker highlights risks to platform profit margins from new entrants, while the company's decision to double down on platform administration raises medium-term strategic challenges.
UBS downgrades to Sell from Neutral and raises the target to $6.70 from $6.60.
MCMILLAN SHAKESPEARE LIMITED ((MMS)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/3/0
Credit Suisse observes the company is still struggling to find a tailwind, noting market conditions were described as "challenging" at the recent AGM. Novated lease volumes have been hampered by weak car sales in recent months and yields negatively affected by credit availability.
While the broker believes group remuneration services will generate a modest increase in novated lease volumes and salary packaging, this will mostly be offset by yield pressures and higher expenditure from the Beyond 2020 program.
Rating is downgraded to Neutral from Outperform and the target reduced to $16.10 from $16.55.
METCASH LIMITED ((MTS)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/3/2
Metcash has announced 7-Eleven will not be renewing its east coast supply contract upon expiry in August 2020. UBS notes the profitability of the contract is low but it is the second major loss in two years.
The broker factors in a -$24m earnings (EBIT) impact on the first full year (FY22), to reflect the loss. There is potential for the impact to be less, the broker acknowledges.
Rating is downgraded to Neutral from Buy as, while the stock screens inexpensive, there are few catalysts for outperformance. Target is reduced to $2.80 from $3.10.
See also MTS upgrade.
PANORAMIC RESOURCES LIMITED ((PAN)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/0
Panoramic Resources has slashed its FY20 production guidance for all of nickel, copper and cobalt at its Savannah operation, opening up funding gap of some -30%. The miner has secured short-term financing ahead of a likely rights issue.
The size of the downgrade and the funding gap have surprised Macquarie, leading to material forecast earnings reductions.
The broker downgrades to Neutral from Outperform and cuts its target to 40c from 50c, balanced by Independence Group's ((IGO)) conditional takeover offer at 46c.
PERPETUAL LIMITED ((PPT)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 0/6/1
Perpetual reaffirmed business-as-usual cost and cost savings guidance at its AGM. Macquarie suggests the organic and inorganic pipeline for Perpetual Private is encouraging. Perpetual Investments is still looking for an acquisition as outflows continue.
Those outflows are likely to sustain pressure on the stock's relative multiple to peers thus the broker downgrades to Underperform from Neutral, noting Perpetual has joined in a recent re-rating for the sector. Target rises to $35.50 from $32.00.
SIGMA HEALTHCARE LIMITED ((SIG)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/0/4
Sigma Healthcare has reached agreement with Chemist Warehouse to resume the distribution of FMCG product. The details of the contract remain commercial in confidence and the company is still assessing the required cost.
Citi incorporates the agreement in forecasts, despite the lack of guidance, and believes the share price now fully reflects the benefits of the contract. Rating is downgraded to Sell from Neutral/High Risk.
The broker expects investors will focus on FY21 and the new long-term targets. Citi estimates that the original $1.7bn contract was worth around $35-40m in earnings (EBIT) and new forecasts assume almost half comes back in FY22. Target is raised to $0.65 from $0.52.
SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Downgrade to Hold from Add by Morgans .B/H/S: 2/3/1
Morgans downgrades to Hold from Add, given the strength in the share price has compressed the total return potential.
The share price has surged 14% since early October, which the broker believes has been on the back of a retreat in government bond rates amid the market appetite for high-quality businesses with yield and defensive growth.
Short-term weakness in traffic growth appears to have been disregarded. Target is raised to $8.75 from $8.71.
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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