Weekly Reports | Feb 17 2020
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 February 10 to Friday February 14, 2020
Total Upgrades: 18
Total Downgrades: 21
Net Ratings Breakdown: Buy 37.49%; Hold 46.52%; Sell 15.99%
More downgrades than upgrades for ASX-listed stocks thus far into the February reporting season, with earnings estimates making an unexpected bend upwards, on balance, but also with valuations and price targets coming under intense pressure from companies who fail to live up to expectations.
Welcome to investing in the share market anno 2020.
For the week ending Friday, 14th Feburay 2020, FNArena registered 18 upgrades in recommendations against 21 downgrades. Only nine of the upgrades moved to Buy (50%) while nine of the downgrades moved to Sell.
Several profit results reporters are represented on both sides of the ledger. AGL Energy received two upgrades, as did Oil Search, and Synlait Milk. Carsales received three downgrades. Challenger was downgraded twice.
Possibly the real message from the first week of the local February reporting season is that earnings forecasts have finally made a trend-break in rising during the week. Stockbroking analysts are revising upwards their valuations and price targets for those companies who do not fail. But plenty do fail, and thus reductions in price targets are larger than the increases.
For the week, IDP Education and Challenger both enjoyed 20%-plus increases to consensus forecasts, handsomely beating companies such as a2 Milk, Magellan Financial, CSL, and Carsales (all still enjoying double digit percentage increases). On the flipside, we find Suncorp, Downer EDI and Orora as the week's biggest losers, but their reductions pale in comparison to the gains booked on the positive side.
In terms of positive revisions to target prices, Woodside Petroleum sits on top for the week, followed by Magellan Financial, IDP Education and Challenger. Amongst those suffering declines in targets we find Blackmores, Unibail-Rodamco-Westfield, Megaport, and Orora.
As stated earlier, average increases to forecasts outweigh the reductions, but for price targets the average upgrade is out-muscled by downgrades on the back of profit warnings and earnings disappointments.
The February reporting season steps up a gear (or two) from Wednesday this week onwards.
THE A2 MILK COMPANY LIMITED ((A2M)) Upgrade to Buy from Sell by Citi .B/H/S: 3/2/1
Citi has decided it's time for a double-whammy upgrade; to Buy from Sell. The move is explained by the fact Citi analysts now see upside to forecasts for H2 on the back of the coronavirus outbreak. They note their ebitda forecast for FY20 sits 17% above market consensus presently.
Evidence, albeit anecdotal, that consumers have begun stockpiling essential items, including infant formula, underpins Citi's positive view. While this essentially pulls forward future sales, the analysts are not deterred and anticipate positive impact short-term.
Target price jumps 18% to $17.45 on increased forecasts.
AGL ENERGY LIMITED ((AGL)) Upgrade to Hold from Reduce by Morgans and Upgrade to Neutral from Sell by Citi .B/H/S: 0/3/4
The broker had expected a weak first half from AGL Energy due to the extended outage at Loy Yang but the result surprised to the upside. That said, FY guidance implies a weaker second half, netting out the upside surprise. The company has pointed to a weakening electricity market although FY21 might enjoy a boost from a Loy Yang insurance payout.
The broker sees a challenging longer term outlook but a solid dividend and a buyback resumption should support the share price. Upgrade to Hold from Reduce, target rises to $18.38 from $17.88.
Citi analysts won't hide their amazement today. That interim report by AGL revealed a "stellar performance". Wholesale gas gross margin in particular helped the utility with significantly outperforming market consensus and projections at Citi.
In response, Citi analysts suggest this is AGL putting its incumbency to work, and to work well. Among the factors noted, Citi observes AGL has been opportunistically buying in the relatively cheaper gas spot market.
The outlook for earnings is indisputable stronger, the analysts acknowledge, even though they remain of the view structural challenges longer term remain. Upgrade to Neutral from Sell, price target jumps to $20.12 from $17.35.
AMCOR LIMITED ((AMC)) Upgrade to Add from Hold by Morgans .B/H/S: 5/2/0
First half results were slightly weaker than expected. FY20 underlying growth guidance has been improved to 7-10%.
Management has advised that the Bemis integration is progressing well, with cost synergies of US$30m delivered in the first half.
Morgans upgrades to Add from Hold, believing the share price in the short term should be supported by the ongoing US$500m buyback. Target is raised to $16.62 from $14.70.
See also AMC downgrade.
AMP LIMITED ((AMP)) Upgrade to Neutral from Sell by UBS .B/H/S: 1/5/1
The second half outcome fell well short of UBS estimates. This largely related to AMP life which will be divested in the current half.
Nevertheless, with the stock now trading at an FY21 estimated PE of 14x, and with improving growth thereafter, UBS upgrades to Neutral from Sell. Target is steady at $1.80.
BORAL LIMITED ((BLD)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/3/1
The North American division has again been the main area of disappointment, particularly with respect to margins, and Ord Minnett reduces estimates for earnings per share by -9% over FY20-22 to reflect this.
The broker believes most important strategic decision for the CEO Mike Kane's successor will be whether to persist with the existing North American portfolio, possibly at lower carrying value, or to re-focus on the more profitable business in Australia.
As FY20 guidance is now more realistic, Ord Minnett upgrades to Hold from Lighten. Target is $4.50.
See also BLD downgrade.
CENTURIA CAPITAL GROUP ((CNI)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/0/0
First half earnings were 40% above Ord Minnett's forecasts. The result ticked many boxes in terms of fund manager performance.
The broker incorporates the proposed acquisition of Augusta Capital for $175m. Ord Minnett believes New Zealand is an attractive market and the target has relatively strong growth prospects.
Rating is upgraded to Accumulate from Hold and the target is lifted to $2.75 from $2.00.