Weekly Ratings, Targets, Forecast Changes – 03-04-20

Weekly Reports | Apr 06 2020

By Rudi Filapek-Vandyck, Editor FNArena

Guide:

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.

Summary

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 equivalentratings 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% duringBear 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.

Upgrade

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 coronaviruscrisis, 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 forsurgical 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 sustainedproduction.

The broker remains concerned that aluminium in Europe and India is entering a period of extended lock-downand 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 havebeen 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 isIn-Line.


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