Weekly Reports | Mar 23 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 March 16 to Friday March 20, 2020
Total Upgrades: 53
Total Downgrades: 12
Net Ratings Breakdown: Buy 45.21%; Hold 42.85%; Sell 11.95%
And while this Grand Bear Market for global equities continues dragging share prices down, stockbroking analysts keep upgrading recommendations for individual ASX-listed stocks at a frantic pace.
For the first time in a long while, total Buy recommendations for the seven stockbrokers combined that are monitored daily by FNArena now represent the largest group, outpacing the Neutral/Holds 45.21% versus 42.85%, with the remaining 11.95% on Sell.
It has been a long while since Neutral/Hold recommendations no longer represent the largest group of recommendations, but then the Bull market upswing coming out of the brief Bear Market of late 2018 had been strong and elongated. Now the Bear Market that has followed that Bull Market upswing has been quick, ruthless, and savage.
It aint over until the Fat Lady sings and on that account I am listening with intense focus, only to find it's eerily quiet out there.
For the week ending Friday, 23rd March 2020, FNArena registered no less than 53 upgrades in recommendations for individual stocks versus 12 downgrades.
Among those many upgrades are multiple stocks that received multiple upgrades, including Beach Energy, BHP Group, Boral, Flight Centre, JB Hi-Fi, National Australia Bank, Ramsay Health Care, and REA Group. Only fourteen out the 53 upgrades didn't move beyond Neutral/Hold.
So which are the twelve stocks that still received a downgrade (mostly to Hold/Neutral, only Oil Search received one fresh Sell rating)? They are Carnarvon Petroleum, Cooper Energy, GUD Holdings, Lovisa Holdings, Oil Search, Premier Investments, Prospa Group, Senex Energy, Woodside Petroleum, and Worley.
The 2020 Grand Bear Market continues in the weeks, most likely months ahead.
ALTIUM LIMITED ((ALU)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/0/0
UBS upgrades to Buy from Neutral as the valuation appears highly attractive for the long-term growth trajectory. A commercialisation of the relationship with Dassault is a material near-term catalyst.
While the broker believes the company is unlikely to achieve FY20 guidance, demand for the product is unchanged and sales momentum is expected to be maintained into FY21. Target is reduced to $37.50 from $39.00.
AUSTRALIA & NEW ZEALAND BANKING GROUP ((ANZ)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/1
Credit Suisse lowers estimates, increasing bad debt provisions and allowing for a peak in the second half of FY20.
The broker also incorporates additional margin impact from the announcements from the Reserve Bank, although these are less than originally feared given the introduction of a term funding facility.
Dividend forecasts are reduced by -10%. The broker upgrades to Outperform from Neutral and reduces the target to $22.80 from $24.50.
APA GROUP ((APA)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/5/0
APA Group is considered well insulated from supply and demand shocks related to coronavirus, despite having been caught up in the broader equity sell-off. Hence, UBS upgrades to Buy from Neutral.
The stock offers an attractive mix of growth and defensive income and is the preferred exposure across the broker's utilities coverage. Target is $11.40.
AFTERPAY LIMITED ((APT)) Upgrade to Neutral from Sell by UBS .B/H/S: 5/1/0
Following the savage drop in the share price, UBS upgrades to Neutral from Sell. The broker asserts the strong equity funding and high receivables turnover mean the near-term funding risks are low.
The broker believes investors should reconsider longer-term growth assumptions. With higher customer defaults there is the likelihood of an impairment to the longer-term outlook because such customers cannot use the platform again.
Therefore longer-term customer assumptions are lowered to 18m by FY25, from 22.5m. Target is reduced to $13.20 from $17.90.
APPEN LIMITED ((APX)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/0/0
Credit Suisse upgrades to Outperform from Neutral. The broker expects the company's performance in the June half year will be strong.
Thereafter, sales and margins may be negatively affected in a period of economic weakness as customer performance slows. Forecasts are reduced to reflect this.
Rating is upgraded to Outperform from Neutral. Target is reduced to $22 from $27.
BHP GROUP ((BHP)) Upgrade to Overweight from Equal-weight by Morgan Stanley and Upgrade to Buy from Neutral by Citi .B/H/S: 5/2/0
BHP Group's share price has de-rated sharply, Morgan Stanley notes, down -31% year to date on oil exposure compared to Rio Tinto's ((RIO)) -19% and the ASX200's -14% (year to date).
The broker considers this overdone and sees an opportunity to gain exposure to a quality business with potential to generate attractive free cash flow through the cycle, a robust balance sheet and prudent capital allocation.
If the broker plugs in its base case commodity price forecasts and oil at current spot for perpetuity, valuation is still $32.70, well above the traded price. Upgrade to Overweight. Target falls to $36.50 from $37.50.
Industry view: In Line.
Citi runs stress tests to incorporate increasingly bearish commodity prices. While gearing will rise for those companies with growth projects this will not be to levels that should cause concern.
BHP Group is now trading at a -33% discount to the broker's base case and the rating is upgraded to Buy from Neutral. Target is reduced to $35.00 from $39.50.
BORAL LIMITED ((BLD)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Buy from Neutral by Citi .B/H/S: 3/2/0
While Boral may screen as the stock to avoid, given high financial leverage, Credit Suisse believes this is more than compensated for by valuation.
The broker is no longer of the view that Boral will raise equity, beyond the possible extension of the dividend reinvestment plan.
The broker upgrades to Outperform from Neutral. Target is steady at $4.70.
Boral shares have fallen -53% year to date compared to -28% for the index on soft domestic construction and balance sheet concerns, Citi notes. While the virus will derail US housing construction in the June quarter, stimulus measures should enable a strong rebound.
The shares are now trading below GFC lows. Citi believes balance sheet fears are overblown, and, on current valuation, investors are effectively getting the USG-Boral and NAM business for free.
Guidance has been withdrawn despite demand deterioration yet to be seen, except in China, which is now recovering. Management is nonetheless ready for the drop-off. The broker cuts its target to $3.00 from $4.80 and upgrades to Buy from Neutral.
BEACH ENERGY LIMITED ((BPT)) Upgrade to Equal-weight from Underweight by Morgan Stanley and Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/2/0
Morgan Stanley lowers the long-term oil forecast, to US$45/bbl and believes, if this becomes the case, it creates serious risk for Australian energy companies.
While the broker acknowledges the market will debate long-term value, the downward pressure appears assured.
There is a risk oil prices could jump once the coronavirus crisis settles down, but this will depend on whether the price war waged by OPEC and Russia is temporary or structural.
The broker notes these two countries have over 20% of global supply and access to cheap reserves.
Rating for Beach Energy is upgraded to Equal-weight from Underweight. Target is reduced to $1.24 from $2.00. Industry view has changed to Cautious from In-Line.
Ord Minnett materially lowers oil price forecasts to US$42/bbl in 2020 and US$45/bbl in 2021 although, while spot oil prices suggest further downside risk, does not believe the US$30/bbl Brent price is sustainable.
Overall, the energy sector is considered attractive for investors looking for long-term returns and companies with strong balance sheets and limited growth should be the priority, in the broker's view.
Hence preferences include Beach Energy, upgraded to Accumulate from Hold. Target is reduced to $2.15 from $2.45.
BREVILLE GROUP LIMITED ((BRG)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/2/0
Macquarie assumes small retailer revenues will be severely impacted and very low earnings visibility is the near term reality. The broker is focused on balance sheets, cashflow and the ability to trade though the crisis. Share price falls to date suggest investors are acutely aware containment measures will have a negative economic impact.
The broker is recommending selective exposure as a recovery will be fast when it happens. Stimulus, rent holidays and any clarity are positive catalysts. Breville Group upgraded to Outperform from Neutral as it is considered a high quality company with lower liquidity risk as it has no stores of its own. Target falls to $16.00 from $25.14.
COMMONWEALTH BANK OF AUSTRALIA ((CBA)) Upgrade to Hold from Reduce by Morgans .B/H/S: 0/3/3
Morgans downgrades cash earnings and dividend forecasts for all four major banks as a result of expectations for lower net interest margins, lower credit growth and a deterioration in asset quality.
The broker believes Commonwealth Bank and Westpac ((WBC)) are most defensively positioned because their loan books are more skewed to Australian home lending.
The broker upgrades Commonwealth Bank to Hold from Reduce and lowers the target to $67 from $74.