Weekly Ratings, Targets, Forecast Changes – 24-04-20

This story features ALUMINA LIMITED, and other companies. For more info SHARE ANALYSIS: AWC

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 April 20 to Friday April 24, 2020
Total Upgrades: 15
Total Downgrades: 17
Net Ratings Breakdown: Buy 49.45%; Hold 41.45%; Sell 9.09%

The Australian share market has taken a breather from the strong rally off the 4400 sell-off low point and stockbroking recommendations are finding an equilibrium between downgrades and upgrades for individual ASX-listed entities.

For the week ending Friday, 24th April 2020 FNArena registered 15 upgrades and 17 downgrades, confirming a slight bias towards downgrades is creeping into the market as stocks made up for previously lost ground.

Total Buy recommendations for the seven stockbrokers monitored daily now sits at 49.45%, with 41.45% in Neutral/Holds and the remaining 9.09% in Sell ratings.

Only one stock received two upgrades during the week, Australian Pharmaceutical Industries, of which only one shifted to Buy. On the other side of the ledger, only one stock was downgraded twice, Evolution Mining, of which only one descended to Sell.

Five upgrades didn't move beyond Neutral/Hold while only three of the downgrades shifted to a fresh Sell. Apart from Evolution Mining, fellow gold miner Northern Star and perennial disappointer G8 Education also received a fresh Sell rating.

Not surprising given the overall context, any upward adjustments to valuations and price targets remain few and far between. On the week's tally, only Evolution Mining is worth highlighting.

The flip side reveals a lot more damage has been inflicted on the likes of Graincorp (spin-off), Flight Centre (capital raising), Incitec Pivot, Carsales, and others.

There is decidedly more positive news about upward adjustments to profit forecasts with Galaxy Resources leading a full table also including Evolution Mining, a2 Milk, and Nearmap.

All of the above turns to grey when looked at the week's table for negative adjustments to earnings estimates. Here the realisation kicks in that in order to make it into the week's bottom top ten consensus forecasts had to fall by a minimum -25%.

Sydney Airport and Flight Centre took the biggest hits last week, followed by QBE Insurance, Cooper Energy, and others. The first recession in Australia since the early 1990s is having a devastating affect on corporate profit prospects, and it is very noticeable indeed.

Upgrade

AUSTRALIAN PHARMACEUTICAL INDUSTRIES ((API)) Upgrade to Neutral from Underperform by Credit Suisse and Upgrade to Buy from Neutral by Citi .B/H/S: 1/1/1

First half operating earnings were slightly ahead of estimates. The company experienced increased demand for pharmaceuticals in March, as a result of both the pandemic and panic buying.

Credit Suisse assumes a material slowdown over the next 3-6 months. No guidance was provided for the second half. All Priceline stores remain open but sales have slowed in April because of social distancing.

Credit Suisse expects no dividend in the second half. Rating is upgraded to Neutral from Underperform and the target is reduced to $1.10 from $1.25.

First half results will were in line with indications by the company in late March. The result does not reflect any impact from the pandemic. In the light of an uncertain environment, Australian Pharmaceutical has suspended the dividend and provided no guidance for FY20.

The biggest variable for the second half is the removal of the lock-down, which Citi assumes will be June 1 2020. The broker reduces estimates for FY20-22 by -17-22%. Rating is upgraded to Buy from Neutral and the target is reduced to $1.15 from $1.40.

ALUMINA LIMITED ((AWC)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/0

The alumina market is weak, with the company effectively receiving no distributions in February and March. The June quarter will also be soft, although Credit Suisse notes the balance sheet is in good shape.

While the environment remains tough and there are probably opportunities to buy the stock at a cheaper price the broker's rating system triggers a move to Outperform from Neutral. Target is reduced to $1.80 from $2.40.

See also AWC downgrade.

CARSALES.COM LIMITED ((CAR)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/3/0

Most parts of Carsales' business have been impacted, Macquarie notes. The company moved early to waive advertising costs in April and this will extend to a -50% discount in May, with further discounts possible. The payment of the dividend in April has not dented a robust balance sheet nonetheless, which should see Carsales through, the broker believes.

To that end Macquarie upgrades to Outperform from Neutral, noting Carsales will remain a core and dominant platform as sales begin to recover over time. Target falls to $15.30 from $18.60.

CENTURIA OFFICE REIT ((COF)) Upgrade to Buy from Neutral by UBS .B/H/S: 1/2/0

UBS expects the pandemic will affect Centuria Office less than the broader sector. While earnings guidance has been withdrawn the distribution guidance is maintained.

The broker upgrades to Buy from Neutral, assessing the reaction is overdone and given a -10% underperformance compared with the sector. Target is reduced to $2.50 from $3.02.

CSR LIMITED ((CSR)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/1/2

Macquarie assesses CSR has the strongest balance sheet in the sector while the valuation is attractive. Market conditions remain choppy, nevertheless, and housing market data is expected to get worse over coming months.

While the risks are elevated, the broker considers the valuation and balance sheet compensate and upgrades to Outperform from Neutral. Target is reduced to $4.10 from $4.80.

GPT GROUP ((GPT)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/2/1

UBS upgrades GPT to Buy from Neutral on valuation grounds. The broker expects the east coast office and logistics market should remain attractive to global investors.

The broker allows for short-term abatements for relevant tenants and has also revised longer-term assumptions. Funds management earnings are also revised down. Target is reduced to $4.70 from $6.35.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 2/5/0

Morgan Stanley expects general insurers will be relatively resilient during the recession.

Insurance Australia's rating is upgraded to Overweight from Equal-weight.

The broker considers the stock presents compelling value and warrants a premium in the current environment as it is a defensive pure domestic insurer.

Target is reduced to $7.00 from $7.90. Industry view: In Line.

INCITEC PIVOT LIMITED ((IPL)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 3/4/0

Ord Minnett notes the near-term outlook for fertiliser prices is soft but the company should benefit from improved weather conditions in Australia and the US.

Currency movements are also favourable and the broker upgrades to Buy from Hold. Target is reduced to $2.95 from $3.40.

ORICA LIMITED ((ORI)) Upgrade to Hold from Lighten by Ord Minnett and Upgrade to Buy from Neutral by UBS .B/H/S: 1/6/0

Ord Minnett upgrades to Hold from Lighten based on valuation, supported by favourable currency movements for the company's US earnings.

Target is reduced to $17.80 from $18.10.

The stock has dropped -25% over the past 2 months yet UBS expects explosives volumes will remain relatively resilient over the medium term.

The broker points out Orica is Australia's largest mining services company and, globally, a leading supplier of explosives to the mining sector.

FY20 and FY21 forecasts for earnings per share are reduced by -6%. UBS upgrades to Buy from Neutral and reduces the target to $21.38 from $23.90.

OIL SEARCH LIMITED ((OSH)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 3/3/0

Credit Suisse found  no major surprises in the March quarter result. The sell-off in the stock has brought back the value proposition and the broker considers growth is now appropriately priced.

The main concern is that growth may not return even if oil prices recover. In 2021 PNG government negotiations could once again weigh on the share price.

On the back of the sell-off in the stock the broker upgrades to Neutral from Underperform. Target is reduced to $2.45 from $2.47.

SCENTRE GROUP ((SCG)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 2/3/1

A review of the discretionary mall outlook in Australia suggests to Macquarie rents need to decline by -15%, leading to an earnings decline for Scentre Group of -27%, increasing gearing to 38%. To reduce gearing to 35%, Scentre would need to sell $2bn of assets or raise $1.2bn of new capital, the broker calculates.

However were either to occur, the stock would still be offering a 7.6-7.9% dividend yield and a price to net asset value discount of -32%. Given the value on offer, Macquarie upgrades to Neutral from Underperform. Target falls to $2.18 from $2.34.

VICINITY CENTRES ((VCX)) Upgrade to Outperform from Underperform by Macquarie .B/H/S: 2/3/1

Macquarie has reviewed the discretionary retail REIT sector and assessed the implications for Vicinity Centres. The broker believes the balance sheet can sustain a -15% fall in asset values, but capital may need to be raised if value falls further. The broker is assuming a -25% fall in values in its $1.70 target price, plus an additional -5% risk discount.

However, this still suggests value is on offer, hence despite cyclical and structural headwinds and a share price bounce from the bottom, while noting Vicinity has a strong balance sheet, Macquarie double-upgrades to Outperform from Underperform.

VOLPARA HEALTH TECHNOLOGIES LIMITED ((VHT)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/1/0

The company has announced a $35m capital raising, expecting revenue of NZ$16.2m in FY20 and operating loss of -NZ$16.4m.

Ord Minnett considers the business model more resilient than most as its revenue is substantially underpinned by recurring software-as-a-service fees, charged annually in advance.

However, disruptions could affect the business, particularly in some parts of the US, and may impede sales activity for the year ahead.

The capital raising is ensuring the balance sheet is in good shape, nevertheless, and the broker upgrades to Hold from Lighten. Target is reduced to $1.47 from $1.62.

Downgrade

APA GROUP ((APA)) Downgrade to Hold from Add by Morgans .B/H/S: 1/6/0

APA Group has revised down FY20 operating earnings (EBITDA) guidance to $1635-1655m, i.e. 4-6% growth, as a result of delays in reaching commercial operations on the Orbost gas processing plant.

Distribution guidance is unchanged. Morgans notes since lifting the stock to Add on March 12 the share price has lifted 11%. Hence, the rating moves back to Hold. Target is reduced to $10.81 from $10.90.

ALUMINA LIMITED ((AWC)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/3/0

Alumina posted a solid March quarter result, Macquarie suggests, with production, sales and the share of AWAC earnings all in line with expectations. Distributions from the AWAC joint venture with Alcoa were 7% higher than forecast and AWAC is looking to cut capex to offset weaker alumina prices.

Downside risk for alumina prices is nevertheless increasing, Macquarie warns, with spot currently -21% below the broker's 2020 forecast. Were the broker to run spot prices in its valuation, forecast earnings would fall -57% and -66% in 2020-21. 

Downgrade to Neutral from Outperform. Target falls to $1.50 from $1.90.

See also AWC upgrade.

CHALLENGER LIMITED ((CGF)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/7/0

March quarter sales were largely in line with expectations and appear resilient. This reflects the trend of strong Japanese and institutional sales, offset by weak domestic retail sales.

Citi assesses there is still likely to be a high risk of defaults in the investment portfolio. Moreover, the company is in a dilemma in that it has likely locked in around half of its investment losses and cannot re-invest while it is somewhat capital constrained.

Rating is downgraded to Neutral from Buy and the target lowered to $4.60 from $5.45.

EVOLUTION MINING LIMITED ((EVN)) Downgrade to Neutral from Buy by Citi and Downgrade to Sell from Hold by Ord Minnett .B/H/S: 4/2/1

Citi is pleased with the consistent cash flow, asset diversity and growth potential but considers the stock priced for success. Hence, the rating is downgraded to Neutral from Buy.

The company has guided to 195,000 ounces in the June quarter, ex Red Lake, up 15% on the March quarter. Citi increases the target to $4.90 from $4.40.

Ord Minnett notes ASX-listed gold stocks have continued to rally, with some outperforming the Australian dollar gold price by a further 25% since the beginning of April.

Margins remain elevated, although some valuations are becoming stretched. Evolution Mining's rating is downgraded to Sell from Hold. Target is steady at $3.70.

FINEOS CORPORATION HOLDINGS PLC ((FCL)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 1/1/0

Ord Minnett assesses, since the market peak on February 21, the company has outperformed the ASX 200 by 25%.

The main issue for the broker is whether the fall-out from the pandemic causes a short delay in revenue growth or a more protracted slowdown.

Rating is downgraded to Hold from Buy and the target lowered to $3.59 from $3.85.

G8 EDUCATION LIMITED ((GEM)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 1/3/1

The institutional placement portion (182m shares) of G8 Education's $301m raising begins trading tomorrow. The raising shores up the company's balance sheet, while the government assistance package should lead to a break-even of revenues and costs, management suggests.

Macquarie nevertheless sees excess supply to continue until 2022 as development projects complete and ramp up post-virus. On the demand side, the broker sees a drop when government assistance ends due to higher unemployment. Ahead of the new shares coming on, the broker downgrades to Underperform from Neutral. Target unchanged at 78c.

GOLD ROAD RESOURCES LIMITED ((GOR)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/0

Gold Road's March quarter production was below expectation due to planned mill shutdowns. The company has maintained Gruyere guidance but warned the virus has the potential to drive downgrades or complete withdrawal.

However, management believes the shutdowns will add stability and consistency to progressing performance. Due to the run up in the share price, Macquarie pulls back to Neutral from Outperform. Target unchanged at $1.60.

LIVETILES LIMITED ((LVT)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/1/0

Citi considers the company's move to materially reduce cash burn is prudent.

Further afield, a permanent increase in working from home could accelerate the adoption of the digital workplace solutions over the medium term.

Citi lowers FY20-22 revenue forecasts by -13-26%, assuming customers delay or cancel transformation projects because of the recession.

Rating is downgraded to Neutral/High Risk from Buy/High Risk. Target is reduced to $0.28 from $0.39.

MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 1/4/2

Despite meaningfully upgrading forecasts, Ord Minnett considers Magellan Financial is trading at fair value and downgrades to Hold from Buy. Target is raised to $48.60 from $44.25.

That said, the business remains one of the best performing global managers under coverage, in the broker's view, with a strong foundation for growth in retail flows as the business emerges from the pandemic crisis.

METCASH LIMITED ((MTS)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/5/0

Ord Minnett downgrades to Hold from Accumulate. This is based on valuation and a mixed outlook. The company has announced an equity raising of up to $330m to strengthen the balance sheet.

There was a significant uplift in food sales in March and early April and this division is considered well-positioned. There is some trade risk in hardware, the broker assesses, nevertheless. Target is $3.

MYER HOLDINGS LIMITED ((MYR)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/2/0

Myer has extended store closures until at least May 11, while noting online sales growth has been strong. Ord Minnett assesses the shape of a recovery in sales is uncertain.

Despite the valuation support the broker finds the risk/reward proposition less attractive and downgrades to Hold from Accumulate. Target is steady at $0.20.

NORTHERN STAR RESOURCES LTD ((NST)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/3/1

Ord Minnett notes ASX-listed gold stocks have continued to rally, with some outperforming the Australian dollar gold price by a further 25% since the beginning of April.

Margins remain elevated, although some valuations are becoming stretched. Forecasts are largely unchanged, although Northern Star has experienced some pandemic-related productivity losses.

Rating is downgraded to Lighten from Hold. Target is $11.20.

OCEANAGOLD CORPORATION ((OGC)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/2/0

Ord Minnett notes ASX-listed gold stocks have continued to rally, with some outperforming the Australian dollar gold price by a further 25% since the beginning of April.

Forecasts for OceanaGold are tweaked to allow for the closures in New Zealand. Margins remain elevated, although some valuations are becoming stretched.

Rating is downgraded to Hold from Accumulate. Target is reduced to $2.20 from $2.80.

RAMSAY HEALTH CARE LIMITED ((RHC)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/3/1

Ramsay Health Care has raised $1.2bn in a placement and another $200m in the share purchase plan. Citi assesses the raising is -7% dilutive to earnings per share in FY21.

The broker believes the magnitude of the capital raising is more than required but now has a more positive view on the timeframe for health systems to return to normal.

Moreover, there may be opportunities for acquisitions down the track. Rating is downgraded to Neutral from Buy. Target is lowered to $69 from $70.

SOUTH32 LIMITED ((S32)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 5/2/0

South32's quarterly update revealed production of most key commodities falling short of Macquarie's expectations. Headwinds are increasing, with current spot prices suggesting -35% lower earnings than the broker's FY21-22 forecasts.

Free cash flow becomes marginal at current spot prices, the broker warns. Downgrade to Neutral from Outperform, target falls to $2.10 from $2.40.

SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/2/2

Sydney Airport is taking a range of measures to mitigate the loss of traffic, which declined -96% in the first 16 days of April. The interim distribution has been cancelled and liquidity is increased via new bank facilities.

Ord Minnett believes this is a great infrastructure asset which will recover, although the extent of the headwinds and duration is likely to be greater than previously assumed, particularly for international travel.

Rating is downgraded to Hold from Accumulate and the target lowered to $5.60 from $5.80.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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