Weekly Ratings, Targets, Forecast Changes – 15-05-20

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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 May 11 to Friday May 15, 2020
Total Upgrades: 15
Total Downgrades: 16
Net Ratings Breakdown: Buy 49.46%; Hold 41.66%; Sell 8.88%

As the share market effectively moves sideways, through a lot of volatility, stockbroker changes in ratings for ASX-listed stocks stay fairly balanced between upgrades and downgrades.

For the week ending Friday, 15^th May 2020, FNArena registered 15 upgrades and 16 downgrades.

As a direct result, total Buy (and equivalent) recommendations for Australian stocks by the seven stockbrokers monitored daily has thus far failed to break above 50% of total stock recommendations.

As at Friday, the net breakdown in percentages stands at 49.46% in Buy recommendations, with Neutral/Holds representing 41.66% and the remaining 8.88% in Sell ratings.

Equally noteworthy, only two of the seven stockbrokers -Citi and Morgans- carry more Buy ratings than Neutral/Holds.

Two of the week’s upgrades did not move beyond Neutral/Hold, and both went to CSR post results release.

Pretty much all of the fresh Buy ratings went to stocks that have thus far lagged the strong share market recovery, including Suncorp, Stockland, BHP Group, and Charter Hall.

Among the downgrades, one sole Sell rating went to AusNet Services whose results update included a future cut to the dividend.

Here the field looks a lot more diverse with laggards such as Ainsworth Gaming and the aforementioned CSR still receiving a downgrade on disappointing market updates.

REA Group and AusNet Services were the sole recipients of two downgrades during the week.

The week revealed a few bright spots in terms of positive revisions to valuations and price targets, and they remain few and far between.

Pendal Group crowned itself to the week’s supremo with its consensus target lifting by 7.9% following a quarterly market update. In its wake stand REA Group, Appen, and Virtus Health.

A lot more damage is still being done on the opposite side of the ledger, with Incitec Pivot, Dexus Property, Graincorp and GPT Group om average suffering larger declines.

A similar picture is starting to open up for analysts’ changes to earnings estimates. The number of positive revisions is noticeably growing, with Xero commanding the week’s top spot, but the damage done on the opposite side is many times over greater in size.

Out-of-season reporting season continues in the week ahead, while trade wars and domestic politics remain in focus for investors seemingly looking for firm direction.

Upgrade

APN INDUSTRIA REIT ((ADI)) Upgrade to Add from Hold by Morgans .B/H/S: 1/1/0

APN Industria has withdrawn FY20 guidance following the release of the code of conduct from the federal government.

The company has indicated the potential impact of a requirement to waive a proportion of attendance rent is not possible to determine at the moment.

As a result, Morgans lowers forecasts for FY20 and FY21 income by around -2% and -3%, respectively. The balance sheet is considered sound.

Following weakness in the security, the broker upgrades to Add from Hold and reduces the target to $2.68 from $3.16.

BHP GROUP ((BHP)) Upgrade to Buy from Neutral by UBS .B/H/S: 7/0/0

UBS observes the stock has declined -20% since February because of the pandemic and the breakdown of the OPEC negotiations which have affected oil prices.

Yet, UBS assesses the company is in a strong position and should be able to return surplus cash to shareholders at a time when other more traditional dividend-paying stocks cannot.

Rating is upgraded to Buy from Neutral and the target reduced to $38 from $39. Meanwhile, the easing of lockdown restrictions across Europe and the US is a positive and the broker flags the fact India opening up will mean coal imports resume.

CHARTER HALL GROUP ((CHC)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/2/0

Ord Minnett’s medium to long term outlook on Charter Hall Group is mostly unchanged despite covid-19. With a weighted average lease expiry (WALE) of 8.9-years and annual rent increases of 3.5%, the broker considers the portfolio as one the least-risky and most defensive among REITs.

The broker estimates a three-year EPS compound annual growth rate (CAGR) of 8% while assets under management (AUM) for FY21 are forecasted at $38.9bn and expected to rise to $57bn by FY25.

Rating upgraded to Accumulate from Hold with target price increased to $9 from $8.40.

CSR LIMITED ((CSR)) Upgrade to Neutral from Underperform by Credit Suisse and Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 2/4/0

FY20 net profit was ahead of expectations. The company has noted a boost to FY20 income from stocking up during the pandemic.

While the decrease in residential business has played out for the building products segment, Credit Suisse notes revenue has still been remarkably resilient.

The broker upgrades to Neutral from Underperform, now assuming CSR materially outperforms the end market.

A -20-30% expected decline in volumes over the next couple of years precludes the broker from becoming more positive. Target is raised to $4.10 from $2.80.

CSR reported full year earnings 16% ahead of Morgan Stanley, although the broker had expected a 7c dividend but nothing was forthcoming. No guidance was offered, with management expecting an impact to be evident in FY21 but timing and extent is uncertain.

The housing cycle was already declining, the broker notes, so it remains to be seen what the additional virus hit might be. CSR has plenty of cash on the balance sheet, thus the dividend suspension likely reflects conservatism, Morgan Stanley assumes.

With risks now more evenly balanced at the price, the broker upgrades to Equal-weight from Underweight. Target rises to $3.75 from $2.90. Industry view: Cautious.

See also CSR downgrade.

GARDA DIVERSIFIED PROPERTY FUND ((GDF)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

Garda Property Group, with exposure to 17 east coast office/industrial properties, has withdrawn its FY20 guidance after the announcement of the mandatory Code of Conduct for commercial tenants and landlords.

Morgans assumes dividends to be $0.074 for FY20 from $0.09 earlier and a longer Botannica 9 asset lease. The broker also highlights uncertainty surrounding rent relief measures.

The broker takes a long term view and upgrades rating to Add from Hold with target price at $1.07.

GPT GROUP ((GPT)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/0/1

Falling market rents have caused Citi to lower office income forecasts. While Sydney and Melbourne entered the pandemic restrictions in a strong position, with rents near historical highs and vacancies at their lows, economic conditions have deteriorated.

The broker believes the pandemic will significantly accelerate the structural tailwinds that have driven the strong performance of industrial property and the increase in e-commerce is likely to be sustained.

Citi currently forecasts office asset values to decline more than -15% while industrial asset values could hold up relatively well.

GPT's rating is upgraded to Buy from Neutral as the stock appears attractive to the broker, given relatively low gearing. Target is reduced to $4.49 from $6.17.

HOME CONSORTIUM LIMITED ((HMC)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/1/0

Credit Suisse considers, with around 90% of the company stores remaining open, the impact of the pandemic is moderated. The net cash impact from lower cash rent is expected to be relatively minor because of the cost savings and dividend reductions.

While acknowledging the challenging conditions could hinder the timing of the company's strategy, the broker considers the asset locations and relatively low rents may provide an advantage over other traditional retail outlets.

Rating is upgraded to Outperform from Neutral, with the stock expected to appeal to longer-term investors. Target is reduced to $3.18 from $3.89.

INVESTEC AUSTRALIA PROPERTY FUND ((IAP)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/0/0

Ord Minnett updates forecasts, following the FY20 result. The business is considered able to withstand the uncertainty associated with the pandemic as it has low gearing and there should be high tenant retention.

Rating is upgraded to Accumulate from Hold while the target is steady at $1.20. The Investec property fund has restructured its debt facilities, securing a new 10-year fixed-rate facility and extending bank facilities.

The hedge book has also been re-set at a cost of -$27m for terminating out-of-the-money hedge positions.

INTEGRAL DIAGNOSTICS LIMITED ((IDX)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 4/1/0

Integral Diagnostics has experienced a material decline in volumes in April which are only just beginning to recover, given Australasian success in controlling the pandemic outbreak.

In the event the restrictions continue to be unwound, Ord Minnett expects volumes will recover incrementally.

Meanwhile the fundamental drivers of industry growth remain intact and the broker upgrades to a Buy rating from Accumulate. Target is reduced to $4.07 from $4.58.

JAMES HARDIE INDUSTRIES N.V. ((JHX)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 6/0/0

US reports signal to Credit Suisse there was a -20% US market decline in April yet the outlook is improving. The broker observes James Hardie has re-established market share gains, validating the success of its commercial strategy.

The broker also notes the downside scenario is diminishing as end markets stabilise. Rating is upgraded to Outperform from Neutral and the target raised to $26.90 from $21.50.

KATHMANDU HOLDINGS LIMITED ((KMD)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/1/0

Following a short restriction (from just ahead of the pandemic outbreak), Credit Suisse resumes coverage, upgrading to Outperform from Neutral and reducing the target to NZ$1.40 from NZ$3.65.

The broker acknowledges there is earnings uncertainty but believes the strength of the company's execution during the lockdown, the consumer appeal of its brands and robust balance sheet contribute to confidence going forward.

The broker assumes revenues decline by -55% in the second half compared with FY19, with the company not fully returning to FY19 levels until the first half of FY23. This drives substantial revisions to underlying estimates for operating earnings (EBITDA).

STOCKLAND ((SGP)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/3/1

The company has provided no certainty over the quantum of deferrals or abatements within the commercial tenant portfolio. Hence, earnings uncertainty continues, although Credit Suisse suggests this applies to most A-REITs.

The broker lowers rental income estimates and also believes it may be a stretch to hit the company's original FY20 target of over 5200 residential settlement lots.

FY20-22 estimates are downgraded and the target is reduced to $3.56 from $4.97.

Still, the land bank and relatively strong balance sheet mean Stockland is well-positioned and considered an undervalued asset play, and the rating is upgraded to Outperform from Neutral.

SUNCORP GROUP LIMITED ((SUN)) Upgrade to Add from Hold by Morgans .B/H/S: 3/3/1

Suncorp Group’s trading update shows mark to market investment losses in the third quarter amounting to circa -$200m along with a bank collective provision of -$133m booked to deal with a difficult economic scenario.

EPS estimates for FY20 and FY21 downgraded by -30% and -16% by Morgans mainly driven by the investment market losses, bank collective provision and overall low growth rates. 

Even so, robust CET1 capital and medium-term value prompts the broker to upgrade its rating to Add from Hold, with target price at $10.44.

VIRTUS HEALTH LIMITED ((VRT)) Upgrade to Add from Hold by Morgans .B/H/S: 2/1/0

The company and its banks have agreed that current funding facilities are sufficient to cover the short term. From an operating perspective, IVF treatment in Australia resumed on April 27 and diagnostics are increasing as staff and operations return to more normal levels.

A gradual return to normal activity is anticipated over the next six months. Morgans upgrades to Add from Hold, assessing there is more than 10% upside in the stock. Target is raised to $3.17 from $3.04.

Downgrade

AINSWORTH GAME TECHNOLOGY LIMITED ((AGI)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/1

Macquarie expects reduced demand over the medium term across all geographies. The company's largest exposure is outright sales which have traditionally accounted for more than 70% of revenue. However, buyers have constrained budgets at present.

The broker considers it fortunate Ainsworth Game is conservatively positioned financially. Estimates are materially reduced and the broker downgrades to Neutral from Outperform. Target is lowered to $0.50 from $0.80.

ALTIUM LIMITED ((ALU)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/2/0

The pandemic lockdowns are affecting the company to a greater extent than UBS previously expected for the North American and European business.

Small business customers are preserving cash and this is affecting sales conversions in the seasonally strongest months of May and June.

In response, the company has accelerated its online sales functionality and launched discounted pricing. The discounting is expected to be a driver of lower revenue over the short term.

UBS downgrades to Neutral from Buy and the target is reduced to $37.00 from $37.50.

ALACER GOLD CORP ((AQG)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/1/0

The company has proposed a nil-premium merger with SSR Mining. Credit Suisse believes Alacer Gold has potentially navigated the risk of overpaying for assets with the deal, which also provides geographic diversification without a 20-30% takeover premium attached.

Value enhancement remains contingent on operations execution and the broker notes both parties have a sound track record for exploration success. Rating is downgraded to Neutral from Outperform and the target raised to $8.60 from $8.10.

AUSNET SERVICES ((AST)) Downgrade to Lighten from Hold by Ord Minnett and Downgrade to Neutral from Buy by UBS .B/H/S: 1/3/2

Underlying net profit in FY20 was slightly below Ord Minnett's forecasts. The broker notes lower distribution guidance for FY21 and the possibility that Ausnet Services will need additional capital to fund growth.

As the stock is now offering only a 4.6% yield, based on distribution guidance, the broker downgrades to Lighten from Hold and lowers the target to $1.75 from $1.90.

Underlying net profit in FY20 beat UBS estimates. The broker estimates the current pandemic relief package reduces FY21 revenue by around -1.5%.

However, the bigger issue arises from the recent rule change proposed by the regulator to extend retailer payment terms to networks to six months, from 10 days.

This could strain FY21 working capital if applied in Victoria. With credit metrics under pressure until capital is raised, UBS downgrades to Neutral from Buy. Target is raised to $1.90 from $1.85.

CSR LIMITED ((CSR)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/4/0

Citi expects CSR to report a net profit dip of -40% to $111.1m in its upcoming FY20 results, reflecting top-line earnings pressure and negligible property earnings. Further, the broker expects a final dividend of $0.05 per share (50% franked).

The aluminium hedging profile will be the focus medium-term with CSR having a large exposure to aluminium spot prices, comments Citi.

The outlook looks challenging with emerging top-line headwinds in aluminium and housing putting pressure on earnings, anticipates the broker.

Rating downgraded to Neutral from Buy with target price reduced to $3.45 from $5.60.

See also CSR upgrade.

DEXUS PROPERTY GROUP ((DXS)) Downgrade to Neutral from Buy by Citi .B/H/S: 4/2/0

Falling market rents have caused Citi to lower office income forecasts. While Sydney and Melbourne entered the pandemic restrictions in a strong position, with rents near historical highs and vacancies at their lows, economic conditions have deteriorated.

The broker believes the pandemic will significantly accelerate the structural tailwinds that have driven the strong performance of industrial property and the increase in e-commerce is likely to be sustained.

Citi currently forecasts office asset values to decline more than -15% while industrial asset values could hold up relatively well.

Dexus Property is downgraded to Neutral from Buy as falling office values are considered a headwind. Target is reduced to $9.44 from $14.47.

KOGAN.COM LTD ((KGN)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 0/2/0

Sales growth accelerated in April and, while marketing expenses remain high, profit was likely supported by Marketplace sales and reduced price competition, Credit Suisse notes.

The broker is comfortable holding the stock for now following a period of strong share price performance and downgrades to Neutral from Outperform. Target is raised to $8.36 from $6.64.

MACQUARIE GROUP LIMITED ((MQG)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/2/1

Credit Suisse continues to believe Macquarie Group is a quality business but there are multiple headwinds over the short-term around transaction volumes, asset realisations and the potential for further impairments.

Earnings estimates are modestly downgraded by -6%, attributed to lower activity following the impact of the pandemic.

Rating is downgraded to Neutral from Outperform as the share price is up in excess of 40% since mid March. Target is reduced to $107.50 from $110.00.

OIL SEARCH LIMITED ((OSH)) Downgrade to Hold from Add by Morgans .B/H/S: 2/4/0

Morgans notes Australian oil & gas stocks are pricing in a rapid V-shaped recovery in oil prices that is looking increasingly unlikely. Global supply may be curtailed (beyond OPEC+) but demand will remain weak for some time even as lockdowns are lifted. The broker does not see consumption reaching 2019 levels before 2022.

Oil Search downgraded to Hold from Add. Target falls to $2.82 from $3.55.

PENDAL GROUP LIMITED ((PDL)) Downgrade to Hold from Add by Morgans .B/H/S: 3/4/0

Pendal Group reported a 2% growth in cash net profit to $86.6m for the first half. The operating profit exceeded Morgans estimates by circa 10% driven by better than anticipated funds under management (FUM) and fee revenue margins.

The group’s second half is off to a subdued start with -13% lower FUM than the previous half, notes Morgans, expecting this to continue in the near term. The broker considers medium-term outlook, backed by cost control, a strong balance sheet and market leverage, to be positive.

Rating downgraded to Hold from Add with target price increased to $6.50 from $6.37.

REA GROUP LIMITED ((REA)) Downgrade to Neutral from Outperform by Macquarie and Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/3/0

REA Group posted a solid March quarter, Macquarie notes, featuring a return to revenue growth and an 8% increase in earnings. The virus impact will be felt in the June quarter, hence the company will lower its operational expense to provide at least some offset.

REA is highly leveraged to a rebound in listings, has a strong balance sheet and good cost discipline, the broker suggests. But the stock is now trading around fair value following a 41% run-up from the March low. Downgrade to Neutral from Outperform. Target rises to $95 from $90.

Revenue growth in the third quarter was lower than Credit Suisse expected. Residential revenue was broadly flat on a -7% decline in national listings.

The broker continues to expect a recovery in volumes from the low point over the next few months but, given the recent rally, believes this is appropriately priced.

Hence, rating is downgraded to Neutral from Outperform and the target lowered to $94.50 from $94.80.

SANTOS LIMITED ((STO)) Downgrade to Hold from Add by Morgans .B/H/S: 4/2/0

Morgans notes Australian oil & gas stocks are pricing in a rapid V-shaped recovery in oil prices that is looking increasingly unlikely. Global supply may be curtailed (beyond OPEC-plus) but demand will remain weak for some time even as lockdowns are lifted.

The broker does not see consumption reaching 2019 levels before 2022. Santos downgraded to Hold from Add. Target falls to $4.29 from $4.72.

WOODSIDE PETROLEUM LIMITED ((WPL)) Downgrade to Hold from Add by Morgans .B/H/S: 4/3/0

Morgans notes Australian oil & gas stocks are pricing in a rapid V-shaped recovery in oil prices that is looking increasingly unlikely. Global supply may be curtailed (beyond OPEC-plus) but demand will remain weak for some time even as lockdowns are lifted.

The broker does not see consumption reaching 2019 levels before 2022. Woodside Petroleum downgraded to Hold from Add. Target falls to $22.56 from $26.23.

XERO LIMITED ((XRO)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/2/1

FY20 results revealed the company is executing well, although Macquarie notes the pandemic is creating uncertainty over the short term.

The main challenge is to drive subscriber business in Australasia to join the broader platform and this is likely to be difficult, given the pandemic.

Still, the broker notes the business is in the early stages of growth in an industry with structural tailwinds.

Rating is downgraded to Neutral from Outperform and the target is lowered to $75.00 from $80.50.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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