Weekly Ratings, Targets, Forecast Changes – 22-05-20

This story features ABACUS PROPERTY GROUP, and other companies. For more info SHARE ANALYSIS: ABP

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 18 to Friday May 22, 2020
Total Upgrades: 9
Total Downgrades: 14
Net Ratings Breakdown: Buy 49.17%; Hold 42.04%; Sell 8.78%

Recommendation downgrades have started to outnumber upgrades for ASX-listed stocks.

For the week ending Friday, 22th May 2020, the seven stockbrokers monitored daily by FNArena upgraded nine stocks but they also issued 15 downgrades.

Charter Hall was the lucky receiver of two upgrades, both to Buy, while commodity exposures Fortescue Metals and Sims Metal Group saw the only two upgrades that didn’t move beyond Neutral/Hold.

Among downgrades, only two went as far as Sell with Fortescue Metals and TechnologyOne the unlucky targets.

Stock receiving downgrades to Neutral/Hold during the week include Appen, Nanosonics, Western Areas, and Woodside Petroleum.

A number of companies has been receiving positive updates to stockbrokers’ price targets, with Baby Bunting leading for the week, followed by Breville Group, Appen and Arena REIT.

Unfortunately, and certainly not unexpected, negative adjustments remain larger in size. The week’s heaviest blow was reserved for Abacus Property Group. Others seeing targets shrink include Charter Hal, AP Eagers, and Boral.

Amendments to earnings estimates continue to reveal a similar dynamic. On the positive side, all of Xero, Oil Search, City Chic, Zip Co, Santos, Cooper Energy and Arena REIT enjoyed double digit percentage increases to consensus forecasts.

But then some eye-popping downward adjustments befell the likes of Ardent Leisure, OceanaGold, and Graincorp while the likes of Aristocrat Leisure, AP Eagers, Boral and James Hardie shared in the pain.

The local out-of-season reporting season is now winding down with only a few (Select Harvests, ALS Ltd, Mesoblast) on the calendar.

Soon, analysts will start looking towards what might/should/can be expected for the August reporting season, preceded by what is commonly referred to as “confession season".

Upgrade

ABACUS PROPERTY GROUP ((ABP)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/1/0

Credit Suisse revises estimates in light of the current conditions. The broker assumes around 25% of tenants have sought rental relief.

Within the storage portfolio, there appears to be no material impact of mandatory closures or social distancing but income assumptions are conservatively lowered.

Credit Suisse does not believe Abacus Property needs to raise equity for defensive purposes as gearing is well below the covenants.

The broker assesses the downside risks are more than priced in and upgrades to Outperform from Neutral. Target is reduced to $2.86 from $3.93.

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

Credit Suisse expects a cautious, albeit confident update, from the company when it reports its results on May 27. Drilling activity in April was up 25%, primarily because of an uplift in gold exploration.

The broker also assesses life sciences testing is more defensive than the commercial and industrial segments, although management previously noted a slowing in sample flow because of the pandemic.

Rating is upgraded to Outperform from Neutral and the target is lowered to $8.00 from $8.60.

CHARTER HALL GROUP ((CHC)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Buy from Neutral by UBS .B/H/S: 6/0/0

The company has reaffirmed FY20 guidance. Credit Suisse observes commentary on retail values was lacking and all fund assets will be revalued as of June 30, 2020.

Funds under management growth has moderated in the quarter, to $39.2bn, but Credit Suisse assesses capacity for growth remains. The outlook for FY21 was always going to be lower because of elevated performance fees in FY20.

Despite investor concern over the growth outlook in the current environment, the company has noted its capital partner demand remains robust.

FY21-22 estimates for earnings per share are downgraded and the target is lowered to $9.17 from $13.58. Rating is upgraded to Outperform from Neutral.

UBS upgrades to Buy from Neutral. The broker having reviewed assumptions regarding growth, transaction/performance fees and property investments revises estimates for earnings in FY21-24 down by -11%, but expects growth of 6% from FY21.

UBS observes concerns regarding real estate valuations, capital raisings and fund flows have meant the stock underperformed the A-REIT market over the past three months. Target is reduced to $9.80 from $13.80.

FORTESCUE METALS GROUP LTD ((FMG)) Upgrade to Hold from Reduce by Morgans .B/H/S: 3/3/1

The fundamental story for iron ore continues to improve and stockbroker Morgans is now predicting the price could reach as high as US$120/tonne on the back of covid-19 induced supply interruptions affecting exports by major producer Brazil.

Morgans notes Brazil is the second largest producer of iron ore, after Australia, and it looks like the odds are very much favouring a disappointing outcome in terms of volumes leaving the country in the months ahead, which will only make the global market even tighter.

On Morgans' calculations, share prices of BHP Group, Rio Tinto and Fortescue Metals are incorporating iron ore priced at US$75/t, US$61/t, and US$76/t, respectively. This implies Rio Tinto's shares carry the most upside potential, and that's even without the prospect of a juicy dividend.

Fortescue Metals is hereby upgraded to Hold from Buy. The price target has jumped to $11.50 from $8.51 prior.

See also FMG downgrade.

PERSEUS MINING LIMITED ((PRU)) Upgrade to Buy from Neutral by Citi .B/H/S: 1/2/0

Citi upgrades valuations across the gold sector, given a more constructive long-term outlook for gold. The broker is convinced gold prices will outperform consensus expectations and drive earnings momentum.

In a rising price environment, valuation matters less as the share price is driven by the gold price, suggest the analysts. Citi upgrades Perseus Mining to Buy/High Risk from Neutral/High Risk.

Despite social distancing disruptions in the short term, going forward the broker believes the development of Yaoure should position the company as a sizeable producer. Target is raised to $1.40 from $1.30.

SIMS METAL MANAGEMENT LIMITED ((SGM)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/5/0

Looking beyond the current crisis, Ord Minnett suggests there is value support for the steel sector, yet Sims Metal is facing a combination of low scrap volumes and low prices, which are affecting margins.

However, as lockdowns ease volumes should start to pick up again. Rating is upgraded to Hold from Lighten and the target raised to $6.90 from $6.10.

TPG TELECOM LIMITED ((TPM)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/4/0

The scheme booklet for the merger with Vodafone Australia signals to Ord Minnett that Vodafone Australia will begin generating substantial free cash flow.

This provides the merged company an option to reinvest and compete more aggressively to win market share, eliminating one of the largest concerns of the broker.

The financial position of the merged company is also better than the broker expected. Rating is upgraded to Accumulate from Hold and the target raised to $8.65 from $8.25.

WAGNERS HOLDING COMPANY LIMITED ((WGN)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/1/1

Credit Suisse believes Wagners is well-placed to benefit from the pulling forward of small regional infrastructure projects in Queensland. However, current activity is coming off a low base.

Nevertheless, the haulage business has provided stability, serving mining customers that have continued to operate. This is offset by an expected -20% decline in prices for Boral ((BLD)) volumes following an update on the pricing dispute.

Credit Suisse upgrades to Outperform from Neutral and reduces the target to $1.00 from $1.50.

Downgrade

AP EAGERS LIMITED ((APE)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/2/0

AP Eagers has announced cost cutting measures and steps to preserve liquidity. Together with the refrigerated logistics sale, this makes Credit Suisse more confident that the company can manage the downturn from the balance sheet and cash flow perspective.

2020 earnings are expected to decline sharply but the extent of this is hard to forecast and the broker prefers to focus on 2021-22 when the company is likely to emerge in a stronger competitive position amid a strong rebound in earnings.

Following a near doubling of the share price from recent lows, Credit Suisse downgrades to Neutral from Outperform. Target is reduced to $6.45 from $9.90.

APPEN LIMITED ((APX)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/1/0

At current levels, Credit Suisse suggests an upgrade is required to support the share price appreciation and this may be challenging in the current environment.

The broker remains concerned about high margins and rising competition. Still, the demand outlook is robust and the prospective market is growing.

Rating is downgraded to Neutral from Outperform, primarily because of the surge in the share price. Target rises to $30 from $22.

BABY BUNTING GROUP LIMITED ((BBN)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/1/0

Baby Bunting's outperformance relative to the broader retail sector is expected to slow as the lockdowns are eased and consumers stop stockpiling.

The broker also suspects the pandemic may have temporarily reduced demand for second-hand products and that would have been a positive for the company.

The broker considers the current FY21 price/earnings ratio of 17x is a fair reflection of the rewards and risks. Rating is downgraded to Neutral from Buy and the target raised to $3.35 from $2.65.

BORAL LIMITED ((BLD)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/3/0

Credit Suisse describes the drop in profitability in the latest update as "stunning", with margins down -7-10%, despite little apparent impact from the pandemic on revenue.

The broker assesses, in Australia, the margin decline was driven by operating leverage, disruptions to plants, pricing and mix. North America was affected by the working down of inventory and disruptions as well.

The broker downgrades to Neutral from Outperform, lacking confidence that this margin destruction will reverse any time soon. Target is reduced to $2.65 from $3.70.

BREVILLE GROUP LIMITED ((BRG)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/2/0

Macquarie considers Breville an attractive long-term portfolio holding, given the extended growth potential for the business, but downgrades to Neutral from Outperform, given the strong re-rating of the stock.

The company's capital raising makes sense to the broker as it provides flexibility to continue investing for growth.

Entry into new markets is progressing and the current cost reductions will support the corporate structure in the event of volatility in demand stemming from the pandemic. Target is raised to $20 from $16.

CLOVER CORPORATION ((CLV)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/1/0

UBS believes the company offers attractive characteristics, being well regarded and a market leader. The business is also relatively defensive in the current environment.

However, the qualities are now reflected in the share price and UBS downgrades to Neutral from Buy. Target is raised to $2.50 from $2.20.

The company has forecast a strong increase in demand from infant formula customers in the fourth quarter, which the broker assesses could be partly because of inventory stocking and a pulling forward of demand from FY21.

ELDERS LIMITED ((ELD)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

First half results were stronger than Morgans expected. Trading in February and March was particularly strong, following improved seasonal conditions.

The company has indicated it is comfortable with consensus forecasts for FY20 earnings (EBIT) of $96.5-112.9m.Second half should benefit from improved winter cropping conditions and strong livestock prices.

However, Morgans assesses, after a strong appreciation in the share price, the stock is fairly valued and downgrades to Hold from Add. Target rises to $10.20 from $7.10.

EVOLUTION MINING LIMITED ((EVN)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 2/4/1

Morgan Stanley expects gold to be supported in 2020 on the basis of economic and market headwinds. Selective opportunities still exist in gold stocks, with the broker calculating that, if those under its coverage return to respective peak multiples, there is 30% upside for all except Evolution Mining.

Hence, the broker downgrades to Equal-weight from an Overweight rating. Target is raised to $4.70 from $4.30. Industry view: In-Line.

FLETCHER BUILDING LIMITED ((FBU)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/5/0

Citi observes the skew to New Zealand and exposure to residential construction has put the company in a weak position vis-a-vis sales trends. While sales improved in May they were still down -10-20% compared with budget.

Disruptions in April and May are expected to materially affect profitability, given the fourth quarter is typically 40-45% of full year earnings.

Citi downgrades underlying net profit forecasts by -40% and -62% for FY20 and FY21, respectively. Rating is downgraded to Neutral from Buy. Target is reduced to NZ$3.50 from NZ$6.25.

FORTESCUE METALS GROUP LTD ((FMG)) Downgrade to Sell from Neutral by Citi .B/H/S: 3/3/1

Citi marks to market for iron ore prices, upgrading FY20 and FY21 estimates for earnings per share by 12% and 8%, respectively. The broker forecasts FY20 and FY21 dividends of $1.45 and $0.88 per share, respectively.

The dividend yield is assessed as impressive in the near term but drops to 3.7% in FY22 as the broker's forecast iron ore price declines to US$63/t.

Citi downgrades to Sell from Neutral as the valuation now appears stretched. Target is raised to $11.10 from $10.50.

See also FMG upgrade.

NANOSONICS LIMITED ((NAN)) Downgrade to Hold from Add by Morgans .B/H/S: 1/1/1

Share price of Nanosonics has been relatively stable during this period of pandemic-generated volatility, observes Morgans.

The broker believes revenue will be uncertain till the first quarter of FY21 and has left forecast unchanged, having lowered it before by -2%.

The company’s technology platform will continue to be prized and the current offering – Trophon2 – to be expanded soon.

With the share price close to the broker’s target, Morgans downgrades its rating to Hold from Add with a target price of $6.92.

TECHNOLOGYONE LIMITED ((TNE)) Downgrade to Sell from Neutral by UBS .B/H/S: 0/2/1

Margins were in line with UBS estimates in the first half although revenue was slightly lower. The broker believes tight cost controls will be required to deliver on estimates.

Valuation remains the primary challenge for UBS and the rating is downgraded to Sell from Neutral. Target is raised to $8.20 from $7.25.

WOODSIDE PETROLEUM LIMITED ((WPL)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/4/0

Macquarie believes growth projects remain challenging. Woodside has been preparing for a major decision on Scarborough mid-2020 but this is now deferred to 2021.

The shares are down -37% during the bear market for oil but have significantly outperformed both Santos ((STO)) and Oil Search ((OSH)).

Macquarie suggests Woodside investors rotate into these two ahead of an oil market recovery and downgrades to Neutral from Outperform. Target is raised to $23.50 from $23.00.

WESTERN AREAS NL ((WSA)) Downgrade to Neutral from Buy by Citi .B/H/S: 5/2/0

Citi downgrades to Neutral from Buy, given a more bearish nickel price forecast.

Nickel is expected to underperform on a relative basis over the next 12-18 months as demand from end-use sectors wanes. The broker retains a $2.50 target.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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