Weekly Reports | Aug 03 2020
By Mark Woodruff
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.
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.
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.
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.