Weekly Ratings, Targets, Forecast Changes – 05-06-20

This story features ARENA REIT, and other companies. For more info SHARE ANALYSIS: ARF

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 June 1 to Friday June 5, 2020
Total Upgrades: 14
Total Downgrades: 16
Net Ratings Breakdown: Buy 49.75%; Hold 41.32%; Sell 8.93%

The most surprising observation for the first week of June is probably the fact that stockbroking analysts continue to issue nearly as many upgrades as downgrades for individual ASX-listed companies.

Clearly, while the market keeps running as hard as investors’ legs can carry the general optimism, analysts still see plenty of laggards and cheap left-behind stocks that deserve a better rating, and thus a higher share price.

The week ending on Friday, 6^th June 2020 saw 14 upgrades and 16 downgrades on FNArena’s counting with 13 of those 14 ratings moving to a Buy.

GWA Group received the sole upgrade that did not move beyond Neutral/Hold.

Among the 16 downgrades, five sank to a fresh Sell with the ASX itself one of the receivers. Other fresh Sell ratings were targeted at Lovisa Holdings, Northern Star, and Nufarm (2x).

This small selection summarises the downgrades perfectly. All about high valuation, gold producers and disappointing share market updates.

On the positive side of the ledger, the story centres around share market laggards that were largely ignored up until last week, led by mining stocks, retail landlords, and banks.

Both Westpac and National Australia Bank were upgraded to Buy last week.

The table for the week’s largest increases to price targets continues on the same theme, with exception of Afterpay. Santos leads the week’s ranking, followed by Super Retail Group, Arena REIT, and Afterpay.

Somewhat in contrast to the positive sentiment that has gripped financial markets, the negative side is still showing larger reductions to valuations and price targets. The week’s largest casualty is Freedom Foods Group (disappointing market update), followed by OceanaGold, Vicinity Centres, and Incitec Pivot.

The good news is only five of the week’s reductions are worth paying attention to. The underlying tide really has changed from March to May.

The changing dynamic for valuations has not yet translated to earnings forecasts, where the bias remains very much to the downside.

The general picture is exactly the opposite with Austal, Super Retail Group, Iress, and Star Entertainment Group the only worth mentioning as far as positive revisions are concerned.

But when it comes to reducing forecasts, there is still plenty to pay attention to with perennial disappointer Nufarm leading the week’s table for negative revisions, followed by Freedom Foods Group, oOh!media, Viva Energy Group, Santos, WiseTech Global, and Vocus Group.

All companies mentioned suffered downgrades to their profit outlook in double-digit percentage. But that’s no longer the message investors pay attention to.

Upgrade

ARENA REIT ((ARF)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 2/1/0

Arena REIT is raising $60m via a placement in order to fund growth opportunities over the next 18 months. Despite the pandemic, the company has confirmed FY20 distribution guidance of 13.9-14.0c.

Gearing will decline to less than 18% post the capital raising, which Morgan Stanley assesses will provide plenty of room to fund the expenditure required in the pipeline over the next 18 months and also provide potential for acquisitions.

Rating is upgraded to Overweight from Equal-weight and the target is raised to $2.68 from $2.40. Industry view is In-Line.

ALUMINA LIMITED ((AWC)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/2/1

The market in 2020 has experienced reduced demand because of lockdowns associated with the pandemic, amidst limited supply cuts. As restrictions are lifted, prices are expected to lift.

UBS envisages a surplus in the aluminium market in 2020 but a balanced alumina market. While alumina prices are now 10% above the mid April lows, rising input costs are likely to further steepen the cost curve.

The broker assesses Alumina Ltd is poised to benefit from this through margin expansion. Rating is upgraded to Buy from Neutral and the target raised to $2.10 from $1.50.

BINGO INDUSTRIES LIMITED ((BIN)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/2/0

Citi lowers FY20 forecasts by around -8% to reflect weaker waste collections and post collections volumes. Volumes are expected to return to trend growth from the second half of FY21.

The broker still expects Bingo Industries can reach its long-run margin target of around 30%. The broker also suspects consensus estimates and expectations for a market share war are overdone.

Rating is upgraded to Buy/High Risk from Neutral/High Risk and the target lowered to $3.10 from $3.30.

COSTA GROUP HOLDINGS LIMITED ((CGC)) Upgrade to Add from Hold by Morgans .B/H/S: 3/1/1

Morgans assesses the outcome of the 2020 citrus crop is the main risk for the remainder of the year and will be the determinate of whether guidance is achieved.

The broker also believes Costa Group has done a good job of navigating pandemic-related challenges.

Amid signs the headwinds are moderating, Morgans upgrades to Add from Hold. Target is raised to $3.60 from $3.05.

GWA GROUP LIMITED ((GWA)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/4/0

Home improvement activity has been supported by changes to working arrangements during the pandemic. Credit Suisse believes GWA Group will be a beneficiary although growth has historically been more modest compared with hardware sales.

The broker likes the primary exposure to new housing and is less concerned about a decline in demand for interior projects as restrictions ease.

Rating is upgraded to Neutral from Underperform and the target is raised to $3.15 from $2.20.

JB HI-FI LIMITED ((JBH)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/5/0

Macquarie envisages potential for JB Hi-Fi to surprise to the upside at the FY20 results. Recent feedback has indicated strong demand for electronics and hardware continued throughout May.

The broker also notes discretionary expenditure has been propped up by the increased earnings of the JobSeeker population as well as indications that funds from early superannuation access went towards discretionary expenditure.

While the effects will wear off in September as the JobKeeper winds up, the pace at which the Australasian economies are reopening has underpinned a more positive view on the outlook.

Rating is upgraded to Outperform from Neutral and the target raised to $41.00 from $35.60.

NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Upgrade to Buy from Neutral by UBS .B/H/S: 7/0/0

While the numerous pressures on banks have weighed over recent years and the stocks have consistently underperformed, UBS suggests the outlook may not be so bleak.

While the economy is not emerging from its problems as yet, the broker believes the market is likely to factor in a recovery in bank returns unless there is further deterioration.

National Australia Bank is upgraded to Buy from Neutral. In a good environment credit losses could fall back to mid-cycle levels by FY22 and asset inflation may begin to normalise. A sector return of around 9% still appears possible, in the broker's view. Target is raised to $20.50 from $16.50.

NEWCREST MINING LIMITED ((NCM)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/4/0

The Australian dollar gold price has increased by 18% over the year to date driving the ASX gold index 24% higher. However, UBS notes relative performance among stocks has diverged with Newcrest Mining underperforming.

This has created an opportunity to consider rotating into Newcrest and the broker upgrades to Buy from Neutral. Target is raised to $35 from $33.

SOUTH32 LIMITED ((S32)) Upgrade to Buy from Neutral by UBS .B/H/S: 6/1/0

UBS upgrades to Buy from Neutral, assessing the risk/reward is attractive. There is upside risk to spot alumina, aluminium and metallurgical coal in the medium term, partly offset by manganese.

Moreover, there is a strong balance sheet and the business is reshaping the portfolio with the Hermosa project, Ambler & Eagle Downs and via the exit of South African energy coal and manganese alloy smelters.

UBS envisages a number of potential catalysts. Estimates are reduced for FY20 by -6% and for FY21 by -14% to reflect new guidance. Target is reduced to $2.80 from $2.90.

STOCKLAND ((SGP)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/2/1

Residential stimulus and the restructure of stamp duty are expected to provide support for Stockland. Morgan Stanley lifts FY21 and FY22 settlement estimates to 5000 and 5400 lots, respectively.

The broker takes a more positive view, given housing stimulus at both federal and state levels and support for retail as stores re-open faster than expected.

Rating is upgraded to Overweight from Equal-weight and the target raised to $4.30 from $3.10. In-Line industry view.

SANTOS LIMITED ((STO)) Upgrade to Add from Hold by Morgans .B/H/S: 6/1/0

Morgans believes the hurdles to new growth have increased substantially. Oil is recovering and large producers have regained profitability, which is an essential improvement in fundamentals.

Santos is considered best placed to resume growth with a significant competitive advantage over close peers. Dorado is likely to provide an attractive growth option and the increased stake in Darwin LNG has raised confidence in the Barossa development.

PNG remains the risky proposition. Rating is upgraded to Add from Hold and the target to $6.30 from $4.39.

VICINITY CENTRES ((VCX)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/3/1

Vicinity Centres has recently reported that 50% of retailers in its centres were open in the first week of May. The impact of rent relief on earnings remains unclear.

While Credit Suisse is unable to quantify the impact of the pandemic with any certainty, FY20-22 estimates are reduced by -8.0-14.5% to reflect the potential impact of rent relief and negative re-leasing spreads.

The company appears to be more inclined to take other capital management options, including cutting the dividend, rather than raising equity.

Nevertheless, the broker considers the downside is captured in the current price and upgrades to Outperform from Neutral. Target is reduced to $1.93 from $2.38.

See also VCX downgrade.

VIVA ENERGY GROUP LIMITED ((VEA)) Upgrade to Add from Hold by Morgans .B/H/S: 3/3/0

Morgans suggests the recent sell-off in Viva Energy shares is overdone. Refining market conditions remain depressed but the recent divestment of property has ideally positioned the balance sheet, suggests the broker.

There is potential for a relief rally, stemming from initial signs that traffic activity is recovering, the report suggests. The broker upgrades to Add from Hold. Target is raised to $1.90 from $1.47.

WESTPAC BANKING CORPORATION ((WBC)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/2/1

While the numerous pressures on banks have weighed over recent years and the stocks have consistently underperformed, UBS suggests the outlook may not be so bleak.

While the economy is not emerging from its problems as yet, the broker believes the market is likely to factor in a recovery in bank returns unless there is further deterioration.

Westpac is upgraded to Buy from Neutral. In a good environment credit losses could fall back to mid-cycle levels by FY22 and asset inflation may begin to normalise. A sector return of around 9% still appears possible, in the broker's view. Target is raised to $20.50 from $18.50.

Downgrade

ATLAS ARTERIA ((ALX)) Downgrade to Hold from Add by Morgans .B/H/S: 0/5/0

Atlas Arteria is undertaking a capital raising via a $420m institutional placement and share purchase plan of up to $75m. Proceeds are to be used to repay the debt related to the APRR investment.

Morgans recommends clients take up the offer as the price represents at least a 12% potential return compared with the target, which is reduced to $6.98 from $7.21.

Given the recent strength of the share price and reduction in the target, the potential return at current prices has compressed to 5%. Hence, Morgans downgrades to Hold from Add.

AFTERPAY LIMITED ((APT)) Downgrade to Hold from Add by Morgans .B/H/S: 2/3/1

The stock is trading at its highest multiples compared with historical averages. Morgans upgrades earnings forecasts for the next two years because of improved revenue and bad debt assumptions, based on recent trends.

However, the rating is downgraded to Hold from Add on valuation grounds. Target is raised to $46.00 from $33.11. The fact Tencent has taken a 5% stake in the company is an advantage, in the broker's view, providing substantial options going forward.

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

The Australian dollar gold price has increased by 18% over the year to date driving the ASX gold index 24% higher. However, UBS notes relative performance among stocks has diverged.

Alacer Gold is downgraded to Neutral from Buy because of the share price outperformance. Target is raised to $10.30 from $9.50.

ASX LIMITED ((ASX)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/3/4

Cash equity activity remained strong in May with the ASX on track for a record second half. ASX 24 derivatives activity was very weak, which Credit Suisse suggests was likely the result of the RBA rate targeting initiatives.

Equity raisings also remained elevated. However, going into FY21 revenue growth is expected to slow and the fall in the BBSW rate will create a further obstacle.

The broker assesses earnings estimates are starting to look stretched and downgrades to Underperform from Neutral as the stock has outperformed the market over the last three months. Target is steady at $73.

EVOLUTION MINING LIMITED ((EVN)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/4/2

The Australian dollar gold price has increased by 18% over the year to date driving the ASX gold index 24% higher. However, UBS notes relative performance among stocks has diverged.

Evolution Mining has improved 63% over the year to date, outperforming peers.

From here, UBS believes a higher gold price or material improvement in operations is required and downgrades to Neutral from Buy. Target is $5.50.

EVENT HOSPITALITY AND ENTERTAINMENT LTD ((EVT)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/1/0

The share price has increased 52% since March 23 and, as a result, Citi downgrades to Neutral from Buy. The downgrade relates to risks to the cinema division outlook and the valuation of property.

While the hotel division should benefit from a resurgent domestic tourism sector, the broker still expects challenges from lower corporate travel because of increased use of videoconferencing.

Citi also suspects Event Hospitality will try to avoid raising equity and/or selling assets. New debt, however, may have higher borrowing costs or restrictions on dividends and growth capital expenditure. Target is raised to $9.75 from $7.45.

FREEDOM FOODS GROUP LIMITED ((FNP)) Downgrade to Hold from Add by Morgans .B/H/S: 2/1/0

The company's high-margin products have been severely affected by the restrictions relating to the pandemic. Morgans downgrades forecasts materially, expecting it will take time for the out-of-home channel to fully recover.

The broker believes Freedom Foods needs to closely manage its balance sheet or an equity raising will be required. As earnings will take time to recover and multiples are stretched, the broker downgrades to Hold from Add. Target is reduced to $4.33 from $5.05.

IRESS LIMITED ((IRE)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 2/1/1

The company has announced a $170m capital raising and will acquire OneVue Holdings ((OVH)) at an implied equity value of $107m. In the near term, the acquisition is dilutive but offers longer-term upside potential.

While Iress has withdrawn guidance, trading in the year to April has been in line with expectations and there is no material impact from the pandemic thus far.

Ord Minnett updates forecasts and reduces the rating to Accumulate from Buy. Target is lowered to $11.85 from $12.65.

LOVISA HOLDINGS LIMITED ((LOV)) Downgrade to Sell from Buy by Citi .B/H/S: 1/2/1

Citi downgrades to Sell from Buy, following the V-shaped recovery in the share price, up 219% since March 19. The broker does not envisage downside risks are factored into consensus net profit forecasts, which assume FY22 will more than double FY20.

The broker envisages risks stemming from costume jewellery underperforming the broader discretionary retail category as well as dependence on shopping centres for foot traffic.

There is also the prospect of a slower roll-out of stores and exposure to countries that have experienced a greater impact from the pandemic. Target is reduced to $5.85 from $6.90.

NORTHERN STAR RESOURCES LTD ((NST)) Downgrade to Sell from Neutral by UBS .B/H/S: 0/3/2

The Australian dollar gold price has increased by 18% over the year to date driving the ASX gold index 24% higher. However, UBS notes relative performance among stocks has diverged and Northern Star has outperformed, lifting 31%.

As a result, the broker downgrades Northern Star to Sell from Neutral, raising the target to $14.50 from $13.70.

NUFARM LIMITED ((NUF)) Downgrade to Reduce from Hold by Morgans and Downgrade to Underperform from Neutral by Macquarie .B/H/S: 3/1/2

Covid-19 is starting to impact Nufarm’s fourth quarter and Europe’s second-half earnings forecast has been lowered by Morgans. The broker also expects an increase in finance costs with more FX volatility.

The balance sheet looks fine following the sale of the South American operations for $1bn. Morgans downgrades its rating to Reduce from Hold due to uncertainty over earnings with target price increased to $4.76 from $4.60.

Macquarie was disappointed with the trading update and the outlook for the fourth quarter as the impact of the pandemic creates uncertainties and challenges. The fourth quarter is Nufarm's largest seasonal quarter.

Europe is experiencing the greatest impact from the pandemic and earnings are likely to be well behind in the second half.

Meanwhile, North America has been affected by changed consumer demand in the turf and ornamental segments, although improved crop protection performance has more than offset this weakness in the third quarter.

Macquarie downgrades to Underperform from Neutral and reduces the target to $4.85 from $5.10.

PRO MEDICUS LIMITED ((PME)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/1/0

Pro Medicus has been awarded a five-year contract worth $22m by Chicago-based Northwestern Memorial Healthcare, which UBS considers is further validation of the Visage viewing platform. Material upside is envisaged from this contract.

The company has not experienced any major delay or deferral from the pandemic. However, the broker reduces FY20 and FY21 revenue estimates by -7% and -5%, respectively, to account for a more conservative recovery in elective examination volumes.

Rating is downgraded to Neutral from Buy as, despite the growth outlook, the valuation risks are considered evenly balanced. Target is raised to $29.65 from $29.30.

THE STAR ENTERTAINMENT GROUP LIMITED ((SGR)) Downgrade to Neutral from Buy by Citi .B/H/S: 5/2/0

Star Entertainment has achieved tax certainty regarding the NSW government's gambling tax regime, moving to fixed tax rates as expected.

Citi increases FY20 estimates for operating earnings by 10% following the re-opening of Sydney, although acknowledges the pace of recovery remains uncertain.

Rating is downgraded to Neutral from Buy as, once Queens Wharf in Brisbane is operating and earnings normalise, the free cash flow no longer offers a significant margin of safety, given competitive pressures and VIP restrictions. Target is raised $3.10 from $2.95.

SUPER RETAIL GROUP LIMITED ((SUL)) Downgrade to Neutral from Buy by UBS .B/H/S: 5/2/0

UBS downgrades Super Retail to Neutral from Buy and increases earnings (EPS) estimates for FY20-22 by 8-26% to reflect improved trading conditions. Target is raised to $8.70 from $7.50.

Over the medium to longer term UBS suggests the company is well-placed to emerge from the pandemic in a stronger position, however given the share price performance and near-term earnings risk the risk/reward is considered balanced.

VICINITY CENTRES ((VCX)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/3/1

Vicinity Centres has raised $1.2bn equity via an underwritten placement at $1.48 a share along with a share purchase plan.

Ord Minnett believes covenant and liquidity pressures were not the trigger but rather the board elected to keep gearing below the upper end of the target range.

This is a big dilution for investors to wear, in the broker's view. In addition, the company will not pay a second half distribution.

The stock has bounced since early April and is now trading in line with valuation. Ord Minnett downgrades to Hold from Accumulate and lowers the target to $1.70 from $1.80.

See also VCX upgrade.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Click to view our Glossary of Financial Terms