Weekly Reports | Apr 06 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 30 to Friday April 3, 2020
Total Upgrades: 44
Total Downgrades: 15
Net Ratings Breakdown: Buy 49.16%; Hold 41.03%; Sell 9.80%
The French call it Le Deluge, which has a different meaning altogether when used in the proverb "Apres nous, le deluge", but otherwise the expression seems but fitting for what is happening in the Australian share market right now.
The Big Sell Off, inspired by the global covid-19 pandemic and related economic recession, has been replaced with calmer seas and no doubt calmer investor nerves. Analysts updating their modeling and assumptions end up mostly upgrading stocks, which has become the new trend.
For the week ending Friday, 3 April 2020, FNArena registered 44 upgrades for individual ASX-listed entities against 15 downgrades. Total Buy and equivalent ratings for the seven stockbrokerages monitored daily by FNArena has now exceeded 49% versus 41% Neutral/Hold ratings and 9.80% Sells.
History shows total Buy ratings are likely to rise well beyond 50% during Bear Markets like the one the local share market has been subjected to since February. At this rate, it won't be long before 50%-plus is in place.
Twelve of the 44 upgrades did not move higher than Neutral/Hold. Five of the downgrades shifted to Sell. The unlucky receivers of a fresh Sell rating are Redbubble, Qantas, Sydney Airport, TechnologyOne, and Transurban.
Stocks receiving multiple upgrades during the week include Ansell, Brambles, Challenger, IDP Education, Pendal Group, and Scentre Group.
Positive target price adjustments are few and far between, which should surprise no-one. The few worth mentioning are gold miner St Barbara and data centres operator NextDC.
Most of the focus lies on reductions to valuations which are pulling back price targets. The week's biggest victim is another gold miner, OceanaGold, followed by IDP Education, Scentre Group, IOOF Holdings, Pendal Group, and Afterpay. The first nine in the week's Top Ten Table for negative adjustments are all showing a double digit percentage decline.
The situation looks a bit different for earnings estimates where a handful of companies are enjoying some meaty increases, led by Virgin Money UK, Unibal-Rodamco-Westfield and Whitehaven Coal. But don't expect to see low numbers when you check out the week's Top Ten Table for reductions to forecasts.
Enormous, comes to mind.
The week's heaviest blows to forecasts was reserved for Nufarm, oOh!media, and Woodside Petroleum. Investors should expect more of the same in the week(s) ahead.
AGL ENERGY LIMITED ((AGL)) Upgrade to Neutral from Sell by UBS .B/H/S: 0/4/3
UBS upgrades to Neutral from Sell, believing the share price is now at fair value. The broker considers the balance sheet enviable along with the dividend yield.
The fundamental concern is that the stock is over-exposed to falling wholesale electricity prices while securing value-accretive growth is challenged. Target is reduced to $18.00 from $18.80.
See also AGL downgrade.
ALS LIMITED ((ALQ)) Upgrade to Add from Hold by Morgans .B/H/S: 2/4/0
Morgans was surprised by the company's commentary regarding the resilience of life sciences to the coronavirus crisis, although there are clear downside risk for commodities.
Nevertheless, the broker acknowledges extensive experience in managing cyclical shocks means the company is strongly positioned.
The share price has fallen -22% below the broker's valuation which supports an upgrade to Add from Hold. Target is reduced to $6.90 from $8.10.
ATLAS ARTERIA ((ALX)) Upgrade to Add from Hold by Morgans .B/H/S: 2/3/0
Morgans materially downgrades FY20 forecasts, reflecting the company's decision to suspend distribution guidance and the initial traffic impact from coronavirus.
Rating is upgraded to Add from Hold, despite the fact short-term news flow is likely to be negative.
The coronavirus impact in 2020 appears likely to cause the one and three-year distribution lock-up tests to fail while the material step-up in debt service from FY22 will make the tests difficult to pass, Morgans points out.
The broker assumes the tests will not be passed until FY26 and, hence, trapped cash will continue to accumulate. Success with toll escalation applications may improve this view. Target is raised to $8.12 from $7.57.
ANSELL LIMITED ((ANN)) Upgrade to Buy from Neutral by Citi and Upgrade to Hold from Lighten by Ord Minnett and Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/1
The company has reiterated FY20 guidance. Citi observes there is little risk on the balance sheet, given significant liquidity and positive operating cash flow. Ansell also continues to buy back shares.
While the coronavirus has increased demand for surgical gloves and protective health equipment, it has had negative impact on the demand for industrial gloves, given manufacturing shut-downs.
The broker finds the net impact impossible to predict at this stage. Citi upgrades to Buy from Neutral. Target is raised to $34.50 from $32.00.
Sales have held up better than Ord Minnett expected, as coronavirus has caused extreme shortages in the supply of protective equipment in the health and hygiene sector.
The broker expects Ansell will obtain the lower end of its guidance range, even in the face of a substantial drop in demand for industrial safety gloves.
As FY20 forecasts are already in the guidance range, the broker makes no changes. Rating is upgraded to Hold from Lighten. Target is $28.
There is strong demand for single use gloves, surgical gloves and chemical protection. Credit Suisse estimates these divisions account for up to 45% of group sales and are likely to offset the weakness in industrial end-user demand.
Yet, the fixed cost nature of industrial items and the increased supply costs will likely limit the benefit.
The main tailwinds are in raw materials, including the fact Brent is down -60% since February and spot butadiene prices are down -15%. Credit Suisse upgrades to Outperform from Neutral. Target is $32.
ALUMINA LIMITED ((AWC)) Upgrade to Neutral from Sell by UBS .B/H/S: 3/3/0
UBS upgrades to Neutral from Sell, assessing the current share price now reflects the uncertainty in the alumina market. The broker envisages short-term headwinds, amid disruptions to secondary demand for aluminium.
As China returns to work the risk is that demand for finished goods by the rest of the world will not be sufficient to support sustained production.
The broker remains concerned that aluminium in Europe and India is entering a period of extended lock-down and restriction. Target is reduced to $1.50 from $1.90.
AURIZON HOLDINGS LIMITED ((AZJ)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/1/0
Citi upgrades to Buy from Neutral noting the yield appeal along with the defensive earnings mix. Coal export data have been strong, particularly in Queensland since the coronavirus outbreak.
The broker considers the current valuation provides an ideal risk/return for investors. Further upside could be derived from cost efficiencies and new contracts in the bulks segment. Target is reduced to $5.40 from $5.60.
BRAMBLES LIMITED ((BXB)) Upgrade to Outperform from Underperform by Credit Suisse and Upgrade to Outperform from Neutral by Macquarie and Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/2/0
With higher demand for packaged food, fresh produce and beverages through supermarket channels as restaurants close, Brambles is exposed to the current crisis in a positive way, Credit Suisse asserts.
Brambles obtains around 80% of revenue from producers of packaged/fresh food and beverages.
While margins have suffered in the Americas in recent years because of high cost inflation, Credit Suisse expects the economic slowdown will significantly reduce these costs for some time.
Rating is upgraded to Outperform from Underperform and the target lifted to $12.50 from $12.00.
Consumable product volumes are being supported by panic buying, benefiting pallet volumes, although there are higher costs Macquarie notes.
Given the company's highly defensive end-product exposure, the broker expects earnings should be resilient during a global recession. Profit estimates are marginally increased for FY20/21.
Rating is upgraded to Outperform from Neutral and the target raised to $12.90 from $12.50.
Morgan Stanley believes Brambles is well-positioned as it has largely defensive end markets and an ongoing buyback. The company derives 85% of its revenue from staples, which allows it to participate in the surge in supermarket traffic.
The main issue for the broker is the margin outlook, given a mix of increased volume, price momentum, increased variable operating costs and fractionalisation of overheads.
To date, FY20 guidance for mid single-digit revenue and operating profit growth remains in place.
While the stock has outperformed the market over the last three months this is not to the same extent as others that have participated in the "essentials" supply chain.
Hence, Morgan Stanley upgrades to Overweight from Equal-weight. Target is raised to $13.00 from $12.80. Industry view is In-Line.
COCA-COLA AMATIL LIMITED ((CCL)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/1
Credit Suisse considers Coca-Cola Amatil is well placed to meet financial obligations. The broker assesses leverage could remain around 1.3x in 2020 reducing to 1.0x in 2021.
Flat revenue is assumed for Australia in 2020 and the key December quarter is expected to be largely unaffected by coronavirus restrictions.
A -10% volume decline is assumed in Indonesia and 2% volume growth in New Zealand.
The broker upgrades to Outperform from Neutral because of recent weakness in the share price. Target is reduced to $10.70 from $11.40.
CHALLENGER LIMITED ((CGF)) Upgrade to Buy from Neutral by Citi and Upgrade to Hold from Sell by Ord Minnett .B/H/S: 1/6/0
Citi observes the risks on the balance sheet have been significantly reduced as the business increases the defensiveness of its asset portfolio.
As the stock is sold off substantially, the broker envisages scope for it to rally a little and raises the rating to Buy from Neutral.
While Challenger has reiterated FY20 normalised pre-tax profit guidance of $500-550m, this is a wide range and the broker notes the changes only affect FY20 profit for 3-4 months.
The larger earnings impact is likely to be felt in FY21, but then only to the extent the cash is not been redeployed. Target is $5.45.
Challenger has updated the market on the extent of its de-risking. The capital position has improved significantly yet Ord Minnett still has reservations.
There is still downside risk on property and sub investment-grade fixed income, suggest the analysts.
The broker considers the return on equity very low for the risks the business takes, suspecting in the short term dividends on assets may be reduced.
Rating is upgraded to Hold from Sell and the target lowered to $4.00 from $4.70.
CLOVER CORPORATION ((CLV)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/0/0
First half results were softer than UBS expected. The miss was attributed to Australasia and Asia sales growth. The broker believes the medium-term growth story is intact and upgrades to Buy from Neutral.
UBS points to defensive qualities, changes in European regulations and exposure to structural growth markets as underpinning the stock. Target is reduced to $2.20 from $2.75.
CHARTER HALL LONG WALE REIT ((CLW)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/1/0
Charter Hall Long WALE REIT has long lease terms and strong tenant covenants. The balance sheet is also strong, Macquarie observes, with no refinancing risk until FY23.
One of the key risks is pub/hotels, which provide 13% of earnings. While it is unclear how much funding landlords will provide, the broker notes this will have a short-term impact.
Rating is upgraded to Outperform from Neutral as Macquarie expects the solid balance sheet will underpin the distribution in the medium term and the risk from rental abatements is lower versus peers. Target is reduced to $5.50 from $5.61.
CALTEX AUSTRALIA LIMITED ((CTX)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/4/0
Ord Minnett upgrades to Accumulate from Hold, having reviewed earnings estimates for the oil refining stocks. Restrictions on international air travel and a significant reduction in domestic flights should dramatically reduce demand for jet fuel.
Meanwhile, retail fuel margins have been very strong in February and March, a positive. Ord Minnett prefers Caltex Australia versus Viva Energy ((VEA)) as the latter's product mix is a headwind and there is limited potential for cost savings. Target is reduced to $26.50 from $30.00.
CROWN RESORTS LIMITED ((CWN)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/2/0
UBS suggests the market is discounting the longer-term outlook for Crown Resorts. The broker estimates cash burn of -$40m per month during the period the casinos are shut down.
This provides significant flexibility against a cash balance of around $850m. Nevertheless, the broker assumes construction of Crown Sydney slows down.
Liquidity and gearing should not be an issue after the re-opening, if the company can collect on its estimated $800m of apartment sales.
The main downside risk is the NSW public casino inquiry, which has been postponed. Rating is upgraded to Buy from Neutral and the target reduced to $9.15 from $11.40.
G.U.D. HOLDINGS LIMITED ((GUD)) Upgrade to Buy from Neutral by Citi .B/H/S: 1/4/0
Citi upgrades to Buy from Neutral. Demand is expected to increase over the medium term as higher unemployment and reduced wages translate to consumers holding onto existing vehicles for longer and shifting from original equipment manufacturer services to cheaper independent services.
The broker also suspects the weak environment could assist the company in consolidating the automotive aftermarket. Moreover, the relatively non-discretionary nature of the automotive and water businesses should translate to a faster recovery when the crisis ends. Target is reduced to $10.30 from $12.10.
IDP EDUCATION LIMITED ((IEL)) Upgrade to Buy from Accumulate by Ord Minnett and Upgrade to Buy from Sell by UBS and Upgrade to Add from Hold by Morgans .B/H/S: 5/0/0
The company has raised $240m, and increased the size of its debt facility by $150m. There is also a series of cost reduction initiatives announced.
The coronavirus crisis is likely to cause a material disruption to the business but Ord Minnett asserts structural drivers underpinning international student mobility have not changed.
With enhanced capital flexibility and a strong long-term outlook the broker upgrades to Buy from Accumulate. Target is reduced to $16.98 from $22.34.
While the next 6-9 months will be challenging, UBS assesses the $190m capital raising and incremental debt facilities provide ample flexibility.
While student-related revenue should return to normal after the coronavirus disruptions, the broker envisages some risk to business/immigration related IELTS testing.
Valuation previously held UBS back but now the stock is trading on an FY22 PE estimate of 22.6x the rating is upgraded to Buy from Sell. Target is reduced to $13.95 from $18.90.
IDP Education was travelling along fine at the beginning of the year before the wheels fell off in March, a trading update revealed. This has prompted a $240m capital raising and debt refinancing. Morgans has cut earnings per share forecast by over -40% and does not expect a full recovery until FY22.
The broker notes, nonetheless, the nature of IDP's business means it may recover faster than expected, and a strengthened balance sheet will make the company better positioned, operating as a large global player with limited competition. Target falls to $15.07 from $24.49. Upgrade to Add from Hold.
IOOF HOLDINGS LIMITED ((IFL)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/5/0
Ord Minnett upgrades to Hold from Lighten. Earnings estimates are reduced as a result of marking to market.
The broker suspects the current crisis will likely change the short-term focus of the corporate and prudential regulators.
There remains some risk the market slump may create other issues within the sector, but large operators such as IOOF are likely to fare better than smaller ones in the broker's opinion. Target is reduced to $4.50 from $7.00.
IGO LIMITED ((IGO)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/1/1
IGO Group remains a preferred nickel exposure and UBS upgrades to Buy from Neutral. The stock has fallen -29% in the year to date.
The broker now believes that a US$4.00/lb nickel price is factored in and exploration success is a free option. The balance sheet is also very strong. Target is reduced to $6.00 from $6.75.
INVOCARE LIMITED ((IVC)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/2/1
The company is beginning to experience an impact on the core business as a result of social distancing measures.
The government has restricted the number of people able to attend funerals in Australia to 10 and this will result in a loss of revenue as InvoCare will not be able to offer the same range of services.
Citi reduces FY20 and FY21 forecasts by -10% and -5% respectively and now assumes social distancing lasts three months.
The broker expects the share price to re-rate higher once any uncertainty around the amount of headroom on the balance sheet is removed.
Target is reduced to $13.50 from $14.50. Rating is upgraded to Buy from Neutral.
MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 2/3/2
Macquarie continues to believe Magellan Financial is the highest quality fund manager on the ASX. However, following the recent rally and perceived flight to quality, the stock is considered fairly valued.
Marking to market reduces funds under management by -12% in February and March. Rating is upgraded to Neutral from Underperform and the target reduced to $50 from $60.
MOUNT GIBSON IRON LIMITED ((MGX)) Upgrade to Neutral from Sell by Citi .B/H/S: 1/1/0
Citi's commodity analysts have shifted from a base case to a bear case in the short term, leading to cuts to all metal and mineral price forecasts and a subsequent cut to earnings for the miners, net of forex.
For iron ore, earnings actually rise initially on a mark-to-market basis, but the broker expects the price to fall to US$70/t. My Gibson Iron's earnings forecasts are also impacted by the virus disrupting volumes on Koolan Island, but given the company has $400m in cash, its in a very different situation to peers.
A big fall in share price leads the broker to upgrade to Neutral (High Risk) from Sell. Target falls to 75c from 80c.
MACQUARIE GROUP LIMITED ((MQG)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 4/1/1
Ord Minnett suggests the stock has now overshot fundamentals, pointing out the market was slow to factor in the downside risks from the coronavirus outbreak.
Ord Minnett makes further reductions to forecasts but considers the -40% drop in the share price from the February peak presents a strong buying opportunity.
While further risks cannot be dismissed the extraordinary support being offered by governments is expected to ensure the coming recession is shortened.
Rating is upgraded to Buy from Hold. Target is lowered to $112 from $132.
NORTHERN STAR RESOURCES LTD ((NST)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 1/4/1
Northern Star has announced a -10-15% reduction to March quarter production, withdrawing FY20 production and cost guidance. All mines are operating but at reduced rates.
Credit Suisse reduces estimates for FY20 earnings per share by -35%, assuming the impact involves two weeks of the March quarter and two months of the June quarter. Liquidity appears sound.
The broker upgrades to Neutral from Underperform and raises the target to $11.50 from $10.30.
PENDAL GROUP LIMITED ((PDL)) Upgrade to Neutral from Underperform by Credit Suisse and Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/3/0
Credit Suisse lowers estimates for earnings by -11% in FY20, -25% FY21 and -25% in FY22. This is driven by lower funds under management from the drop in equity markets and an assumption that markets will remain flat for the remainder of 2020.
The broker estimates that only around 5% of JO Hambro retail is outperforming over one year and only 50% over three and five years as of the end of February 2020.
As the share price is down -44% over the last three months, and having downgraded estimates, the broker is more comfortable with its earnings forecasts.
Target is reduced to $4.90 from $6.60 and the rating upgraded to Neutral from Underperform.
Following recent market movements, Macquarie reviews the impact on Pendal Group. The relative performance is improving and, following a recent de-rating, the stock is now trading around -27% below the five-year average.
Macquarie considers this an attractive entry point and upgrades to Outperform from Neutral. Target is reduced to $6.00 from $8.75.
PERPETUAL LIMITED ((PPT)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/5/1
Following recent market movements, Macquarie reviews the impact on Perpetual. The relative equities performance is improving and fixed income has moderated.
The broker has no issues with the balance sheet and does not expect Perpetual to pursue any additional offshore acquisitions in the current environment.
Macquarie considers the valuation more appealing now and upgrades to Neutral from Underperform. Target is reduced to $27.50 from $40.00.
PERSEUS MINING LIMITED ((PRU)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 1/2/0
Credit Suisse implements a revised gold price deck. The performance at Edikan is meeting budget and provides cash flow to support the wider business. The risk of forced mine suspensions remains.
The broker upgrades to Neutral from Underperform and raises the target to $1.09 from $1.03.
RESAPP HEALTH LIMITED ((RAP)) Upgrade to Spec Buy from Hold by Morgans .B/H/S: 1/0/0
ResApp Health has announced it has completed initial integration with its first major commercial partner, Coviu, and signed binding commercial terms for the non-exclusive two-year license for the technology, which Morgans sees as a significant step.
The broker has reduced its discount to valuation due to a view that the recently announced Medicare rebate for telehealth consultations will likely drive increased demand for remote diagnostics.
Target rises to 24c from 8.6c. Rating upgraded to Speculative Buy from Hold.
REGIS RESOURCES LIMITED ((RRL)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 6/1/0
Credit Suisse increases estimates for earnings per share by 7% and 27% in FY20 and FY21 respectively, implementing higher gold and lower FX estimates.
Rating is upgraded to Outperform from Neutral and the target reduced to $4.70 from $4.75.
SCENTRE GROUP ((SCG)) Upgrade to Neutral from Sell by UBS and Upgrade to Overweight from Underweight by Morgan Stanley .B/H/S: 3/1/2
The viability of retail tenant businesses is being undermined worldwide. Longer-term, UBS anticipates a re-basing of specialty retail rents -20% lower.
In the current period of uncertainty, the broker expects Scentre Group will resort to capital preservation to ensure a flexible balance sheet.
While gearing is elevated, the broker believes the capital position is sound. To preserve long-term gearing UBS lowers distribution forecasts by -35%.
Rating is upgraded to Neutral from Sell as the current share price implies a -40% decline in asset prices. Target is reduced to $1.53 from $3.70.
Morgan Stanley upgrades to Overweight from Underweight, believing Scentre Group is one of the best placed stocks to outperform after the crisis has passed.
There is valuation support and the broker considers the demographics exposure enviable.
Morgan Stanley acknowledges retail sentiment is low and there are headwinds, but the company's shopping centres are located in the wealthiest suburbs.
Target is reduced to $2.20 from $3.11. Industry view: In Line.
SHOPPING CENTRES AUSTRALASIA PROPERTY GROUP ((SCP)) Upgrade to Overweight from Underweight by Morgan Stanley .B/H/S: 1/4/1
Morgan Stanley upgrades to Overweight from Underweight, believing the company is one of the best placed to outperform after the crisis has passed.
The stock has one of the best defensive aspects, in terms of its shopping centres being located in regional areas where housing affordability and serviceability are superior compared with peers.
There is also the highest exposure to supermarkets and lowest exposure to the shrinking department store sector compared with the rest of the sector under the broker's coverage. In-Line industry view. Target is raised to $2.90 from $2.45.
THE STAR ENTERTAINMENT GROUP LIMITED ((SGR)) Upgrade to Buy from Neutral by UBS .B/H/S: 6/1/0
UBS assumes debt covenants will be relaxed by lenders over the next year. The broker also assumes the company will undertake a range of measures to ensure gearing remains under 3x thereafter.
These include a deferral of dividends, a -15% reduction in labour costs and a slowdown in construction at Queens Wharf as well as deferral of the second Gold Coast tower.
The broker upgrades to Buy from Neutral on the basis the value is backed by hard assets with long-dated casino licenses that are currently being discounted by over -50% versus historical averages. Target is to reduce to $3.00 from $4.40.
TRANSURBAN GROUP ((TCL)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/2/2
UBS assumes a three-month shock to traffic, whereby Australian private vehicle traffic declines -50% and heavy vehicles -20%. This is slightly greater than the current rate, but more moderate than international anecdotes.
While the duration of the disruption is unclear, the broker points out traffic should be one of the first activities to recover.
The company has disclosed $3.5bn in liquidity against $2.9bn of capital expenditure requirements and debt refinancing to June 2021.
This suggests to the broker that the disruption in the bond market should be manageable. UBS upgrades to Buy from Neutral and reduces the target to $13.85 from $16.05.
See also TCL downgrade.
TASSAL GROUP LIMITED ((TGR)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/0/0
The analysts suggest Tassal Group is well-placed in terms of both demand for product and ability to supply. That said, Credit Suisse expects some disruption will occur.
The company has pointed to the restaurants segment for domestic wholesale salmon shutting down, while parts of the takeaway, online and home delivery business are showing growth.
Credit Suisse upgrades to Outperform from Neutral and reduces the target to $3.90 from $4.90.
WEBJET LIMITED ((WEB)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/1/1
The company has addressed liquidity for the short term and Credit Suisse upgrades to Outperform from Neutral. The main focus is now on managing the cash burn and collecting debts.
The broker assesses the market disruption could create a significant opportunity for the company's "bedbank" division by way of industry consolidation. The equity raising is expected to raise a total of $346m. Target is $4.50.
WOODSIDE PETROLEUM LIMITED ((WPL)) Upgrade to Buy from Neutral by UBS .B/H/S: 5/2/0
UBS cuts oil price forecasts by -15-30% for the next five years. Brent is now expected to remain below US$60/bbl until 2024. This will mean a material impact on earnings.
The broker lowers assumptions for oil stocks to reflect the value of the base business, as investors are not expected to pay for growth in this environment.
Woodside Petroleum is upgraded to Buy from Neutral as it is trading at a -21% discount to valuation and has the strongest balance sheet. Target is reduced to $22.60 from $34.60.
WESTERN AREAS NL ((WSA)) Upgrade to Buy from Neutral by UBS .B/H/S: 6/1/0
UBS upgrades to Buy from Neutral and lowers the target to $2.50 from $2.90. Despite the risks, the broker considers the valuation attractive.
The stock is considered highly leveraged to nickel prices and, while there is downside risk in the short term, the broker suspects the Indonesian nickel ore ban and the uptake of electric vehicles will resume importance.
AGL ENERGY LIMITED ((AGL)) Downgrade to Hold from Add by Morgans .B/H/S: 0/4/3
A drop in European electricity demand is a sign of what's ahead in Australia. Morgans expects demand to remain resilient in essential retail and heavy industries but bad debts are expected to grow among retail customers. Spot prices are now significantly weaker.
The balance sheets of both AGL Energy and Origin Energy are strong, the broker notes, but cash flow will be challenging for Origin in FY21.
AGL downgraded to Hold from Add. Target falls to $17.39 from $18.35.
See also AGL upgrade.
AUTOSPORTS GROUP LIMITED ((ASG)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/0
Although Macquarie considers the luxury exposure of the business a positive, the company's earnings are not immune to the current crisis. New and used volumes are expected to decline.
The broker revises new vehicle sales estimates because of disruptions and expects a slowdown in back-end revenue under the current isolation directives.
Rating is downgraded to Neutral from Outperform and the target lowered to $1.10 from $1.75.
DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Downgrade to Hold from Add by Morgans .B/H/S: 2/3/2
It's a case of pros and cons for fast food chains at this time, Morgans notes, as an increase in home delivery demand is offset by a drop-off in store pick-ups, pantry loading and a lack of footy on TV to drive demand. Store closures in France and NZ add to the issues for Domino's Pizza, and an update shows slowing sales.
The broker does not see a significant earnings hit, but is mindful that the stock fell only -8% in March compared to -21% for the index, thus there is a risk of earnings disappointment. All will revert quickly on the other side, but for now the broker pulls back to Hold from Add and awaits further updates. Target falls to $57.19 from $58.67.
HASTINGS TECHNOLOGY METALS LTD ((HAS)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/1/0
Ord Minnett reduces the valuation and target to 15c from 30c and downgrades to Hold from Speculative Buy. The valuation is sensitive to delays and changes in capital expenditure.
Negotiations for project funding are ongoing, the broker notes, and the issues regarding the German state debt appear complex, albeit not insurmountable.
NIB HOLDINGS LIMITED ((NHF)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/4/1
A drop in private health insurance claim costs is increasingly likely, although UBS suggests the potential earnings implications are less clear.
Moreover, postponing premium rises, providing hardship relief and other initiatives could reduce net benefits for listed insurers.
Hence, value upside appears constrained and the broker downgrades to Neutral from Buy. Target is raised to $5.10 from $4.75.
NEXTDC LIMITED ((NXT)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 4/2/0
The company has raised $672m to provide flexibility and accelerate the development of S3. Macquarie notes demand from hyper-scale and enterprise customers remains strong.
NextDC is one of the few businesses to benefit from the current crisis and has reaffirmed FY20 guidance. Still, while remaining positive on the outlook, the broker considers the stock fully valued.
Rating is downgraded to Neutral from Outperform and the target lowered to $8.50 from $8.80.
OCEANAGOLD CORPORATION ((OGC)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 4/1/0
Credit Suisse decreases FY20 earnings estimates to nil, removing Didipio entirely from forecasts. A six-week closure in New Zealand is assumed.
The duration of the shut-down of mines may have implications for liquidity, which the broker suspects will become increasingly tight.
A resolution at Didipio would act as a considerable positive catalyst but the market has no insight into when this may be achieved.
Rating is downgraded to Neutral from Outperform and the target is lowered to $1.72 from $4.20.
QANTAS AIRWAYS LIMITED ((QAN)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/1/1
Credit Suisse forecasts Qantas to gain a $290m benefit from the federal government's JobKeeper subsidies. However, the longer the shut-down, the more difficult and costly the re-start will be, in the broker's view.
Credit Suisse pushes out expectations for a full recovery to FY23. Cash flow is expected to be steered towards balance sheet repair and fleet renewal once the crisis is over. Rating is lowered to Underperform from Neutral. Target is $2.20.
REDBUBBLE LIMITED ((RBL)) Downgrade to Reduce from Add by Morgans .B/H/S: 0/0/1
Redbubbles' sales growth has slowed and become more volatile due to the increasing toll on consumer finances. The company had $31m in cash at the end of March, Morgans notes, and has taken steps to reduce costs. Guidance for becoming cash flow positive has nevertheless been withdrawn.
The broker cuts forecasts and now anticipates a capital raising in the second half of 2020. Target falls to 50c from $1.53, double-downgrade to Reduce from Add.
SG FLEET GROUP LIMITED ((SGF)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/2/0
The company has withdrawn guidance. Macquarie reassesses earnings estimates and adjusts for the anticipated economic impacts. Upfront and end-of-life lease fees are considered the major drivers of reduced earnings.
Working capital risk also increases because of the potential for delayed credit collection, asset value risk and reduced revenue. Rating is downgraded to Neutral from Outperform and the target lowered to $1.85 from $2.60.
SONIC HEALTHCARE LIMITED ((SHL)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 4/2/1
Ord Minnett reviews its forecasts, resulting in further reductions to estimates, albeit partially offset by a higher contribution from coronavirus testing.
The broker expects the business will recover rapidly when the lock-down is lifted but remains wary about the market underestimating the hit to earnings in the short term.
Rating is downgraded to Hold from Accumulate and the target is lowered to $27.50 from $28.50.
SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 4/1/2
Credit Suisse expects international passengers will be down -70% and domestic down -58% in 2020.
A slower recovery is expected after the crisis, with the broker now expecting full passenger recovery will be delayed until 2023 for domestic and 2024 for international.
No dividend is expected in 2020. Credit Suisse assumes Sydney Airport grants some level of rent relief to tenants, or tenants default.
Rating is downgraded to Underperform from Neutral. Target is reduced to $4.50 from $5.00.
TRANSURBAN GROUP ((TCL)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/2/2
Traffic deteriorated through March although heavy vehicle traffic was resilient. Credit Suisse forecasts a -40% decline in traffic over the next six months.
The broker notes the company's liquidity is sufficient, with unrestricted cash of $400m and undrawn credit facilities of $3.1bn. FY21 distribution estimates are reduced by -38%.
The broker suspects companies may become more risk averse after the crisis, which could lead to more conservative capital structures and cash being steered to strengthen balance sheets rather than restoring dividend pay-outs to historical levels.
Rating is downgraded to Underperform from Neutral and the target is $10.65.
See also TCL upgrade.
TECHNOLOGYONE LIMITED ((TNE)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/2/0
Ord Minnett adjusts forecasts to account for the potential impact of coronavirus. The broker believes it prudent to factor in the potential risks and downgrades to Lighten from Hold.
Revenue forecasts are reduced by -3%. The broker now forecasts pre-tax profit growth of 11.5% in FY20. Target is reduced to $7.30 from $7.50.
VIVA ENERGY GROUP LIMITED ((VEA)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/4/0
Ord Minnett reviews earnings estimates for the oil refining & marketing sector. The broker downgrades to Hold from Accumulate, despite recent share price weakness.
The company's product mix is considered a headwind and there is limited potential for cost savings. Hence, the broker prefers Caltex Australia ((CTX)). Target is reduced to $1.40 from $2.25.
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