Weekly Ratings, Targets, Forecast Changes – 31-07-20

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

By Mark Woodruff

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 July 27 to Friday July 31, 2020
Total Upgrades: 4
Total Downgrades: 16
Net Ratings Breakdown: Buy 48.83%; Hold 39.89%; Sell 11.28%

Over the course of the last month, a clear trend has emerged toward downgrades for stockbroking analysts' company ratings on individual ASX-listed stocks. Downgrades have totalled ninety compared to forty upgrades over that period.

For the week ending Friday, 31st of July, FNArena registered four upgrades versus sixteen downgrades, with six of those moving to a direct sell.

Brokers have continued to downgrade recommendations for gold mining shares, largely on valuation concerns, as they rally in response to a climbing gold price. This week, three of the sixteen downgrades were gold shares, including Regis Resources, St Barbara and Gold Road Resources.

Two of the upgrades related to property. CSR was upgraded due to unrealised value in its large property portfolio and GWA Group as a result of the potential continuation of elevated home improvement expenditure.

Ongoing weak demand for lithium had Orocobre represented in the ratings downgrade table, while Galaxy Resources was third in the table for the largest negative earnings downgrades of the week. Cooper Energy had the largest earnings downgrade due to weaker-than-expected future earnings guidance, while another gold casualty was OceanaGold Corp following an earnings downgrade.

Both Insurance Australia Group (margin concerns) and QBE Insurance Group (covid-19 costs) had negative earnings revisions of greater than 10%. Meanwhile, on a positive earnings revision note, AP Eagers led the table with a material structural reduction in costs and coming in second was Janus Henderson Group due to consensus-beating profits.

Weak first half results resulted in Cimic Group suffering the largest percentage reduction in target price, followed by the above-mentioned Cooper Energy. Mineral Resources had the largest positive increase in target price due in large part to strong shipments of iron ore.

Total Buy ratings for the seven brokers monitored daily remains high at 48.83% of total ratings, versus 39.89% on Neutral/Hold, and 11.28% in Sell ratings.

Upgrade

CSR LIMITED ((CSR)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/1/1

Citi believes the housing cycle is turning in Australasia which will weigh on demand for building products.

CSR has lagged peers despite its more variable cost structure, which makes the stock the best placed to manage the downturn.

There is also unrealised value in the large property portfolio, Citi points out.

Rating is upgraded to Buy from Neutral and the target raised to $4.30 from $3.95.

CORPORATE TRAVEL MANAGEMENT LIMITED ((CTD)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 3/3/0

Despite plenty of headwinds, Ord Minnett thinks there is nothing wrong with Corporate Travel Management’s business model. This is partly because the broker expects a number of competitors are unlikely to survive or at least be seriously wounded from the crisis.

The company has an estimated 33-100 months of liquidity due to its $200m undrawn debt facility. The broker expects positive catalysts in the next 12 months. 

Ord Minnett upgrades its rating to Buy from Accumulate with the target price increasing to $12.97 from $10.59.

GWA GROUP LIMITED ((GWA)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/3/0

Elevated home improvement expenditure is likely to continue, Credit Suisse assesses. The company reports results on August 17.

The broker acknowledges the risks to renovation expenditure, as working-from-home trends ease. Declines in house prices and turnover historically drive lower business in this area.

Still, the broker observes renovation-exposed companies have been more resilient during prior downturns compared with new construction.

The broker upgrades to Outperform from Neutral as the stock has fallen around -20% and is now seen as at a reasonable entry point. Target is reduced to $3.05 from $3.15.

NUFARM LIMITED ((NUF)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/1/2

Nufarm is trading at a discount to global peers driven by a deterioration in sentiment around its European division. UBS feels this division may be at an earnings trough with cyclical factors beginning to reverse.

The stock has already priced in the broker’s downside earnings scenario, notes the broker. European operating income margin is expected to be restored to 23% by FY22.

UBS upgrades its rating to Buy from Neutral with a target price of $5.19.

Downgrade

AGL ENERGY LIMITED ((AGL)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 0/4/3

Morgan Stanley notes wholesale energy prices have fallen but it looks like the markets have not priced in the fall being passed onto consumers. Retail prices are expected to fall and many of the larger players will likely be pricing at the cheapest available price.

AGL Energy’s appeal could decrease led by structural challenges. The broker sees downside risk due to lower electricity prices, legacy gas contract re-pricing, smelter re-contracting and retail competition.

Morgan Stanley downgrades its rating to Underweight from Equal-weight rating with the target price decreasing to 15.68 from $18.68. Industry view: Cautious.

BORAL LIMITED ((BLD)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/3/0

While the outcome of the strategic review could streamline the business and drive a re-rating, Citi believes this is balanced by the risk of a re-basing and potential capital raising.

Meanwhile, the earnings outlook is challenged because of the shifting nature of infrastructure projects and the headwinds to housing.

Rating is downgraded to Neutral from Buy/High Risk and the target is raised to $4.22 from $3.00.

BUBS AUSTRALIA LIMITED ((BUB)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/1/0

While infant formula sales grew 20% in the June quarter there was a -19% slowdown relative to the prior quarter. This was not unexpected and Citi continues to believe Bubs Australia has a promising future.

Nevertheless, the rating is downgraded to Neutral/High Risk from Buy/High Risk as the value/sales ratio does not adequately reflect the risk that the slowdown could persist into the first quarter of FY21 and delay profitability.

Citi reduces FY20 net sales estimates to $58m and cuts estimates for FY21 and FY22 by -7% and -10%, respectively. Target is reduced to $1.00 from $1.10.

CLEANAWAY WASTE MANAGEMENT LIMITED ((CWY)) Downgrade to Hold from Add by Morgans .B/H/S: 4/3/0

Cleanaway Waste Management is due to release FY20 results on August 26.

Morgans makes some minor adjustments to forecasts and downgrades the recommendation to a Hold from Add largely due to recent share price strength.

The target price is increased to $2.14 from $2.12.

DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Downgrade to Sell from Neutral by UBS .B/H/S: 0/4/3

Domino’s Pizza Enterprises has outperformed the ASX200 by about 109% year to date, reports UBS. This was driven by covid-19 induced effects like an uptake in delivery. The broker notes the stock exhibits defensive characteristics.

Earnings forecasts for FY20-22 have been upgraded due to strong like-for-like sales, currency tailwinds and an increasing number of stores. The company is positively affected by the shift to online but the broker believes this has already been priced in.

The company will declare its FY20 result on Aug 19.

No earnings upside expected for FY20. This leads UBS to downgrade its rating to Sell from Neutral with the target price increasing to $64 from $50.80.

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

The June quarter was broadly in line with Macquarie's estimates and the processing plant continues to perform above nameplate.

The broker also notes production guidance for 2020 has been maintained while costs are higher. Still, Gold Road is now debt free.

After a strong run up in the share price, the broker downgrades to Underperform from Neutral. Target is lifted 6% to $1.80.

G.U.D. HOLDINGS LIMITED ((GUD)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/5/0

Citi finds a lot to like about the stock including a resilient automotive business and strong cash conversion. FY20 net profit was broadly in line with estimates.

Still, with the share price increasing 39% since March the broker considers the FY22 PE of 17x reasonable and downgrades to Neutral from Buy.

The double-digit growth in automotive business seen in July is not considered sustainable and the broker expects it will soften to 5% over the first half. Target is reduced to $12.75 from $12.85.

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

Healius expects underlying net profit in FY20 of $54-56m. Citi awaits the results on August 21 for clarification, finding it impossible to reconcile margins to its forecasts.

The company is guiding to higher FY21 earnings (EBIT) with pathology expected to grow significantly as coronavirus testing remains elevated.

Still, in terms of day hospitals comparisons are considered impossible without revenue disclosure and Citi downgrades to Neutral from Buy, lowering the target to $3.35 and $3.55.

MACQUARIE GROUP LIMITED ((MQG)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 3/3/0

The AGM commentary and first quarter trading update were in line with Ord Minnett's expectations. The broker suspects subsequent quarters may be more subdued because of delays in capital recycling, although activity is assumed to recover in the fourth quarter.

The stock has run up strongly over recent months and the broker envisages only modest potential upside. This leads to a downgrade to Accumulate from Buy. Target is raised to $133 from $130.

OROCOBRE LIMITED ((ORE)) Downgrade to Sell from Hold by Ord Minnett .B/H/S: 2/3/2

Ord Minnett observes, despite the company's good work with costs, stage 1 operations are losing cash and stage 2 expenditure has exceeded estimates.

The prospect of further delays resulting from the pandemic could also raise costs. In the short term the market is oversupplied and any recovery is expected to be well into 2021.

As the stock no longer offers valuation support, Ord Minnett downgrades to Sell from Hold and lowers the target to $2.00 from $2.10.

PARADIGM BIOPHARMACEUTICAL ((PAR)) Downgrade to Reduce from Hold by Morgans .B/H/S: 0/0/1

Paradigm Biopharmaceutical posted its 4Q20 cashflow report with the most significant item being an uptick in R&D expenses, according to Morgans.

These expenses of -$4.7m were incurred as a number of studies and regulatory submissions are imminent.

The broker is concerned about a number of issues including large management and founder selling of shares and the sudden departure of the chairman. The analyst also sees risk to the viability of the drug, named Ph2b, as a commercial asset with its low IP value and heading into an expensive Phase 3 trial.

Morgans also suggests delays are likely to occur to clinical timelines as a result of covid-19. Additionally, the analyst sees downside risk ahead of filing the investigational new drug (IND) application for the Phase 3 trial by the end of 2020.

All this, combined with recent share price strength, has led Morgans to downgrade the recommendation to Reduce from Hold. The target price is maintained at $1.74.

REECE LIMITED ((REH)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/2/1

Citi downgrades to Sell from Neutral, expecting lower earnings growth over the next two years.

The operating performance early in the pandemic is unlikely to be severely affected but the broker expects sales will slow later in FY21 as the pandemic has spread across the US.

The Australian alterations and additions market is also forecast to slow materially in the December quarter, reflecting weaker activity and lower house prices. The target is reduced to $8.55 from $8.85.

RIO TINTO LIMITED ((RIO)) Downgrade to Hold from Add by Morgans .B/H/S: 2/4/1

The Rio Tinto 1H20 result was ahead of consensus estimates, according to Morgans.

The company announced an interim ordinary dividend of US$1.55ps, with no special dividend. This fell short of the broker's estimate of US$1.74ps.

Resilient iron ore pricing helped offset lower copper and aluminium prices.

The broker believes Rio Tinto may seek to further expand its copper business through inorganic options, with buoyant iron ore earnings creating an earnings and share price advantage over base metal peers.

Morgans still views the company as a core holding for most investor types, with an attractive yield profile, high margin earnings and a strong balance sheet. Despite this, the rating is downgraded to Hold from Add, after the broker altered various inputs into the forecast model. The target price is decreased to $107 from $110.

REGIS RESOURCES LIMITED ((RRL)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/2/2

June quarter production was affected by a two-week unplanned outage at Garden Well as well as pandemic-related costs.

FY21 guidance is for 355-380,000 ounces. Credit Suisse observes FY20 was solid despite the challenges and operations reflect a slightly lower operating risk profile compared with peers.

The broker assumes McPhillamys proceeds although no material advancement was made in the quarter.

Target is raised to $5.90 from $5.50 and the rating is downgraded to Neutral from Outperform on valuation grounds.

ST BARBARA LIMITED ((SBM)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 2/2/1

St Barbara announced June-quarter production figures for gold in-line with the Ord Minnett forecast. However, FY21 guidance for Gwalia was about -20% below the broker's estimate and FY22 onward has also been set -20% lower. 

The analyst still sees significant value-adding potential across Gwalia, Moose River and Simberi. The rating is lowered to Hold from Buy. The target price is decreased to $3.60 from $4.40.

SANDFIRE RESOURCES NL ((SFR)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/4/0

Sandfire Resources’ June quarter was strong with higher than expected production and shipments. Production of both copper and gold was 9% and 26% higher than Macquarie’s forecasts.

FY21 guidance was weaker than expected. DeGrussa is expected to produce 67-70kt of copper and 36-40koz of gold. This has led the broker to decrease its earnings forecasts for FY21-23.

Macquarie downgrades the stock to Neutral from Outperform with the target price decreasing to $5.20 from $5.60.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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