Weekly Reports | Aug 17 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 August 10 to Friday August 14, 2020
Total Upgrades: 12
Total Downgrades: 10
Net Ratings Breakdown: Buy 48.48%; Hold 40.03%; Sell 11.49%
For the week ending Friday 14th of August, the second week of the August reporting season, downgrades and upgrades were fairly evenly matched for stockbroking analysts’ company ratings on individual ASX-listed stocks. Of the ten downgrades, three moved to a direct Sell including Charter Hall Retail REIT due to falling occupancy and softening leasing spreads, Wisetech Global from a combination of macroeconomic conditions and a slowing in acquisitions, and Mineral Resources, as the broker believes valuation has not kept up with the share price.
Twelve companies received upgrades and seven went to a Buy recommendation. The only company to receive two upgrades was Sydney Airport (to a Neutral from Sell), after launching a capital raise. Another travel-related upgrade was Serko (to a Buy from Neutral). Though it is too early to be adamant, these upgrades may point to a wider view by analysts across the travel sector that after making post-result negative earnings adjustments, some travel companies may be approaching a nadir.
Those adjustments are clearly highlighted in the table showing negative updates to earnings estimates, in which three of the top four percentage downgrades were Serko, Sydney Airport and Flight Centre. Understandably, the official line from analysts is that many uncertainties remain. The top three positive updates to earnings estimates were Insurance Australia Group, News Corp and Downer EDI. Of the three, only News Corp had a slight beat to earnings, while analysts are attempting to discern the effect of Downer EDI allocating capital toward more profitable segments of the business.
Enjoying the biggest percentage change to price targets for the week were Breville Group and Treasury Wine Estates. This may be described as catch-up by certain brokers as both reported in-line profit results. More representative of reporting-season effects were AGL Energy and Telstra. They came first and second on the table for the largest percentage target price decrease, after both reporting a ‘miss’ on net profit guidance for FY21.
Total Neutral/Hold recommendations take up 48.48% of the total, versus 40.03% on Neutral/Hold, while Sell ratings account for the remaining 11.49%.
AGL ENERGY LIMITED ((AGL)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/3/3
Underlying net profit in FY20 was below Ord Minnett's forecasts. The result was affected by weaker commodity prices and driven by lower wholesale electricity prices. Net profit guidance for FY21 of $560-660m implies earnings are likely to decline further.
Despite management's warnings that market headwinds are intensifying, Ord Minnett believes there are now reasons to own the stock predicated on the unsustainable nature of current commodity prices and a recovery in wholesale electricity as a positive catalyst.
The broker estimates FY21 dividends could result in yields up to 6-7%. Rating is upgraded to Accumulate from Hold and the target is reduced to $17.30 from $18.40.
AMP LIMITED ((AMP)) Upgrade to Neutral from Sell by Citi .B/H/S: 1/5/1
While the proposed capital return of $544m will likely be welcomed, Citi points out up to $200m of this is in the form of a buyback over 12 months and, therefore, not necessarily a done deal.
The broker makes compositional changes to forecasts to allow for a higher second half compared with the first half and the buy-out of the minority stake in AMP Capital.
Although the short-term outlook is challenging, because of the special dividend, Citi lifts its rating to Neutral/High Risk from Sell/High Risk. Target is steady at $1.45.
CHALLENGER LIMITED ((CGF)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/6/0
The FY21 normalised profit (NPBT) of $390m-$440m for Challenger missed consensus guidance of the broking community by around -7%, says Macquarie.
The analyst notes Life book growth of 2.1% was achieved, with a 2H20 new business tenor of around 10.7 years, versus 9.1 years in 1H20.
No final dividend was declared.
Macquarie likes the long-term growth thematic and considers valuation has become attractive.
Following recent stock price pressures, Macquarie upgrades to an Outperform rating from Neutral. The price target is increased to $4.50 from $4.40.
DOWNER EDI LIMITED ((DOW)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/3/0
Citi suggests Downer EDI should re-rate with an outlook for stronger and more resilient earnings and a stronger balance sheet after the recent capital raising.
Resilient second half revenues were a standout feature of the FY20 result for the broker. The analyst upgrades FY21 profit (NPATA) estimates by 29%, revenue by 10% and EBITA margins by around 40 basis points.
The rating is upgraded to Buy from Neutral. The target price is increased to $5.32 from $4.65.
JB HI-FI LIMITED ((JBH)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/7/0
Government support measures, particularly superannuation withdrawals, have led to a near term bubble in household goods spending, suggest the analysts, leading Credit Suisse to upgrade its forecasts for JB Hi-Fi till the first half FY21.
The broker expects JB Hi-Fi’s net profit for FY20 to be $325m. The company will report its FY20 results on August 17.
Credit Suisse upgrades its rating to Neutral from Underperform with the target price increasing to $42.71 from $34.52.
METCASH LIMITED ((MTS)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/2/0
Trading conditions for the grocery businesses in general remain buoyant and the analysts have penciled in higher than usual growth numbers for the six months ahead.
Apart from elevated sales growth, Citi cites rational market conditions and earnings/dividend stability which all justify an overweight portfolio position towards the main industry stalwarts in Australia.
Metcash has been upgraded to Buy from Neutral, with a price target of $3.50.