Weekly Ratings, Targets, Forecast Changes – 04-09-20

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

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 August 31 to Friday September 4, 2020
Total Upgrades: 13
Total Downgrades: 8
Net Ratings Breakdown: Buy 48.25%; Hold 40.74%; Sell 11.01%

Rounding out the August reporting season for ASX-listed stocks, the week ending Friday 4th September yielded thirteen upgrades and eight downgrades to company ratings by stockbroking analysts. Of the thirteen upgrades, nine went to a direct Buy, while half of the eighth downgrades were moved to a direct Sell.

NextDC received two upgrades to Buy from separate brokers who forecast the increased demand for public cloud and data services will continue post-pandemic. Meanwhile, Pointsbet Holdings received two downgrades after announcing an agreement with NBCUniversal. After a spectacular rise in share price, one broker downgraded on valuation concerns, while the other projects it will be at least FY25 until the company realises any operating earnings in the US.

NextDC had the largest positive percentage adjustment by brokers to its target price. Next followed Zip Co after brokers factored in the company’s FY20 result, a capital raising for the recently acquired QuadPay in the US and the entrance of PayPal into the BNPL sector.

The target price for OceanaGold received the largest percentage downgrade due to a reassessment of the Haile mine plan and downgraded production guidance. Coming in second was Nufarm after the company provided lower-than-expected FY20 guidance and its European business was downgraded by brokers.

Consistent with target price reductions, both OceanaGold and Nufarm received significant earnings downgrades. Also featuring in the top three negative percentage earnings downgrades was Air New Zealand due to the grim outlook for international travel, despite the company beating FY20 result expectations.

On a more positive note, the largest lift in percentage terms for earnings was Cooper Energy, after some easing of concerns over the Sole gas project near Orbost in Victoria. Afterpay was second on the table with momentum expected to continue and execution expected to be key. The cashed-up Reece came in third as brokers expected the company to deploy some of its capital into further acquisitions.

Total Neutral/Hold recommendations take up 48.25% of the total, versus 40.74% on Neutral/Hold, while Sell ratings account for the remaining 11.01%.

Upgrade

AGL ENERGY LIMITED ((AGL)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/4/2

AGL Energy has acquired Click for around $155m. Macquarie observes Click offers limited strategic value as customers are spread across the eastern seaboard where AGL Energy already has a good position.

Churn in this group is naturally higher and the credit risk is elevated, the broker adds. Nevertheless, this is a low-risk acquisition that provides operating earnings upside of around $30m, funded with cash.

Macquarie observes cyclical pressure on the share price has peaked and upgrades to Neutral from Underperform. The target is lifted to $14.98 from $14.65.

AURELIA METALS LIMITED ((AMI)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 2/0/0

Ord Minnett believes the stock remains misunderstood in terms of the quality of the portfolio. While operational risks continue, the broker advises buying any dips as Aurelia Metals trades at a discount relative to fundamentals & peers.

The broker believes the Federation project is a game changer and early exploration results warrant a re-rating. Rating is upgraded to Buy from Accumulate and the target lifted to $0.75 from $0.60.

AUTOSPORTS GROUP LIMITED ((ASG)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/0/0

Strong support from original equipment manufacturers and JobKeeper led Autosports Group to a better result than Macquarie first spotted on release. Lead indicators of order writing are exceeding deliveries heading into FY21, making the broker more positive.

No guidance provided due to uncertainty, but Macquarie suggests a swift bounce out of Victoria's lockdowns should provide a catalyst for re-rating. Upgrade to Outperform, target rises to $1.65 from $1.10.

AUSTRALIAN VINTAGE PTY LTD ((AVG)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

Australian Vintage delivered a solid FY20 result slightly ahead of Morgans forecasts.

The broker highlights the UK/Europe business was the standout, while Australia also performed strongly. Conditions remain challenging in North America and Asia.

FY21 outlook comments were positive and management is targeting a 48% improvement in return on capital employed (ROCE), with lower wine costs to provide a significant tailwind, explains the analyst.

The rating is upgraded to Add from Hold and the target price is increased to $0.62 from $0.50.

EVOLUTION MINING LIMITED ((EVN)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/3/4

The investor briefing highlighted the potential the company envisages for Red Lake. Macquarie finds the prospect of an open pit at the site compelling but awaits more clarity on the costs and the path to approval before including it in forecasts.

The broker assumes a higher conversion of resources to reserves, which extends assumed mine life of the assets. This leads to an upgrade to Neutral from Underperform. Target is raised to $5.60 from $5.20.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 5/2/0

Macquarie believes concerns about the potential for a new CEO to re-base earnings are overdone and business interruption losses are over estimated.

The broker calculates probable business interruption losses at -$125m but estimates, at current levels, the market is pricing in a -$1.9bn loss post reinsurance for Insurance Australia Group, which is considered highly unlikely.

 The broker believes the valuation has finally become attractive and upgrades to Outperform from Neutral. Target is $5.50.

IOOF HOLDINGS LIMITED ((IFL)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 2/2/0

Ord Minnett notes risks around IOOF Holdings' proposed acquisition of National Australia Bank's ((NAB)) MLC business. The broker highlights the company has bought businesses like MLC that have negative net flows and it is unclear if the negative flow can be stopped.

On the bright side, the company will be the largest superannuation player in the market which, the broker feels, should ensure longevity.

Ord Minnett upgrades its recommendation to Buy from Hold with the target price lowered to $4.15 from $5.00.

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

Nufarm, which reports its FY20 result on September 23, anticipates underlying FY20 operating earnings of $230-240m. A non-cash impairment of -$215m will be taken in relation to the European assets.

Europe is the main culprit in the weaker-than-expected outcome although there was some potential relief on the way with lower raw material costs over the last quarter.

Given the extent of the recent share price decline, Macquarie upgrades to Neutral from Underperform. Target is reduced to $4.26 from $4.85.

NEXTDC LIMITED ((NXT)) Upgrade to Accumulate from Hold by Ord Minnett and Upgrade to Add from Hold by Morgans .B/H/S: 5/2/0

FY20 results highlight the appeal of the stock, in Ord Minnett's view. Revenue was in line with forecasts. The net loss of -$45m included a large one-off adjustment for tax losses and timing differences.

The broker envisages NextDC is well-placed to benefit from the increased demand for public cloud and data centre services post the pandemic. Rating is upgraded to Accumulate from Hold and the target lifted to $13 from $10.

NextDC’s FY20 result was in-line with guidance and the result and outlook demonstrates to Morgans how uncorrelated digital infrastructure is to economic cycles and what a high quality the company’s business model and earnings streams are.

The broker projects earnings to exceed $200m in the next four years and potentially $300m in the next five, if options granted to cloud solution provider (CSP) customers are granted.

Morgans poses are we currently seeing a short-term spike in cloud demand due to remote working or has the world permanently changed? The broker is betting on demand remaining robust.

The rating is upgraded to Add from Hold and the target price is increased to $13.89 from $11.11.

SONIC HEALTHCARE LIMITED ((SHL)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/5/0

On calculating the contribution of coronavirus testing to the company's financial performance, UBS makes material upgrades over the short term.

Well aware that rates may fall and reimbursement rates may decline, the broker believes Sonic Healthcare will still be a beneficiary of above-normal free cash flow for 1-2 years.

This could be used to fund growth opportunities not previously accessible. UBS upgrades to Neutral from Sell and raises the target to $32.10 from $29.80.

TRANSURBAN GROUP ((TCL)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/2/2

As the stock has underperformed the market by -10-15% since late May and there is an end in sight to the lockdowns in Melbourne, UBS upgrades Transurban to Buy from Neutral. Target is raised to $15.50 from $14.70.

UBS assesses Transurban is highly leveraged to a recovery in the Melbourne network as it accounts for one third of group operating earnings. Moreover, the market is seeking growth in a structurally weaker environment.

The broker expects a dividend in FY21 of $0.46, to reflect underlying growth of 10%. Growth estimates in FY22-25 of 13% rely on the completion of WestConnex stage 3 in Sydney, WestGate Tunnel in Melbourne and a number of projects in Washington.

WEST AFRICAN RESOURCES LIMITED ((WAF)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/0/0

West African Resources reported a profit of $3.7m in the first half with a net debt position of -$204.1m. This is in-line with Macquarie's estimate.

The company also noted its first earnings from Sanbrado and the broker expects production to progressively grow over the next year.

Even so, Macquarie decides to take a more conservative view and predicts production of 275koz between the third quarter 2020 to second quarter 2021 versus West African Resources' 300koz plus outlook.

Macquarie upgrades its rating to Outperform from Neutral with a target price of $1.10.

Downgrade

LINK ADMINISTRATION HOLDINGS LIMITED ((LNK)) Downgrade to Hold from Add by Morgans .B/H/S: 4/1/1

Link Administration Holdings reported a FY20 result broadly in-line with consensus for revenue and operating profit (NPATA), according to Morgans.

The broker expects FY21 to be a tough year before growth recovers on cost-out, the Pepper European Servicing (PES) acquisition and property Exchange Australia, PEXA.

The analyst downgrades EPS estimates for FY21 and FY22 by -11% to -18% on reduced revenue and margin forecasts in both years.

The rating is downgraded to Hold from Add pending signs of improving earnings momentum, which Morgans believes will be more a FY22 story, and the target price is decreased to $4.21 from $4.80.

NATIONAL TYRE & WHEEL LIMITED ((NTD)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

The rating for National Tyre and Wheel is downgraded to Hold from Add, following a strong share price rally and increased debt position.

Morgans notes the earnings from the Tyres4U (T4U) acquisition are key to the future performance. The broker awaits the findings of the T4U strategic review in September.

The FY20 earnings result was 8% above Morgans forecast, with a strong surge in demand/trading in the fourth quarter.

The post balance date acquisition of T4U has seen the group gear up its balance sheet to a net debt position of circa $24m.

The target price is increased to $0.633 from $0.501.

OCEANAGOLD CORPORATION ((OGC)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/1/0

2020 production guidance has been downgraded to 295-345,000 ounces. This stems from disruptions at Haile. Meanwhile, progress at Didipio remains stalled and the operation has now been shut for over a year.

UBS removes assumptions for a re-start and does not factor in earnings or valuation from this asset. This has resulted in a material downgrade to estimates.

The broker downgrades to Neutral from Buy, contemplating no near-term catalysts to close the gap to peers. Target is reduced to $3.40 from $4.40.

OZ MINERALS LIMITED ((OZL)) Downgrade to Lighten from Accumulate by Ord Minnett .B/H/S: 3/2/1

Ord Minnett suggests investors take profits after a surge of 50% in the share price over the past three months.

The broker now considers the stock expensive and downgrades to Lighten from Accumulate. Target is reduced to $14.50 from $10.50.

The next catalyst is expected from the Prominent Hill expansion scoping study in the fourth quarter.

POINTSBET HOLDINGS LTD ((PBH)) Downgrade to Hold from Buy by Ord Minnett and Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/1/1

FY20 results were better than Ord Minnett forecast. Results were overshadowed by the partnership deal with NBC, which should allow the PointsBet brand awareness to "skyrocket" in key markets.

Despite the merits of the deal and the strong chance of success in building USmarket share, the jump in the share price means the stock is now trading around fair value. Hence Ord Minnett downgrades to Hold from Buy. Target is raised to $13.60 from $6.15.

The company has announced an agreement with NBCUniversal, to be funded by scrip and options which Credit Suisse asserts actually turns PointsBet into an option.

The market commitment, at US$393m over five years, is so large that the company is unlikely to deliver operating earnings in the US until at least FY25, predicts the broker.

Given the power of NBCUniversal, if PointsBet can demonstrate revenue that covers the new costs investors are likely to focus on revenue for valuation purposes, in the broker's view.

Credit Suisse downgrades to Underperform from Neutral. Target is $6.50.

STOCKLAND ((SGP)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/4/0

Ord Minnett observes Stockland was the best performing A-REIT in August as the share price rose 24.1% compared with the index rising 7.9%. The broker assesses the good results and spike in residential sales in June are now priced into the stock.

Ord Minnett also believes there are further devaluations to come from the retail and retirement portfolios. The improving residential outlook is encouraging but diluted by the cycling of project profits worth $100m from FY20.

Thus, rating is downgraded to Lighten from Hold and the target lowered to $3.60 from $3.70.

ZIP CO LIMITED ((Z1P)) Downgrade to Sell from Neutral by Citi .B/H/S: 2/0/3

Citi envisages potential for the share price to outperform in the near term. Still, the stock is up 35% over the last month and the entry of PayPal into the BNPL segment increases concerns regarding growth expectations for the medium term.

Citi downgrades to Sell/High Risk from Neutral/High Risk and retains a $6.70 target. Zip intends to step up in investment and has recently signed up new enterprise merchants and Quadpay's trends continue to improve.

While the core Australian business is differentiated, Citi remains concerned that Zip is a late entry in the US, given Afterpay ((APT)), Klarna and Affirm's sizeable lead.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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