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.