Weekly Reports | Oct 12 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 October 5 to Friday October 9, 2020
Total Upgrades: 17
Total Downgrades: 5
Net Ratings Breakdown: Buy 51.12%; Hold 38.27%; Sell 10.61%
The week ending Friday October 9 was positive for individual ASX-listed stocks covered by stockbroking analysts in the FNArena database. There were seventeen upgrades and five downgrades. Of those seventeen, fourteen received an upgrade to a Buy. However, five of the seventeen upgrades were for oil companies due to Credit Suisse increasing oil prices forecasts in the broker’s valuation models. Of the five downgrades in ratings for the week, two were lowered to a Sell.
Nanosonics received the leading percentage reduction in target price for the week, after Ord Minnett initiated coverage with a rating of Lighten. The broker is concerned over delays in the announcement of an anticipated second infection control product. It’s considered a positive outcome has already been priced into the current share price by the market for a number of years. Additionally, the analyst believes budgets in hospitals will be constrained as a result of the pandemic well into FY22. This is problematic for the existing product called Trophon, as it may reduce demand for units and upgrades, explains the Ord Minnett.
The most spectacular percentage increase in target price of recent times was reserved for Netwealth Group. The target price went to $17.50 from $7.25 as material increases to fund inflow expectations by Macquarie reflects increased market share. The broker also upgraded the company rating to Neutral from Underperform. To determine if there is an element of catch-up by the broker, it may be wise to await further updates from the remaining three brokerage houses in the FNarena database who are yet to assess the first quarter for the company. Credit Suisse updated during the week and maintained a $14.75 price target. The broker warned of the impact upon the company's earnings of another RBA rate cut.
The rating downgrade/price target increase trend from last week continued for Reliance Worldwide. The company received a rating downgrade from Morgan Stanley based on the company’s current valuation. The broker believes a strong start to the financial year should not be extrapolated and growth into FY22 is likely to be limited. However, this didn’t exclude the company from receiving the second largest percentage gain in target price for the week. The company also came in third on the table for largest percentage rise in earnings.
Both Karoon Energy and Whitehaven Coal appeared above Reliance Worldwide on the same earnings table. Macquarie determined the recent FY20 result for Karoon Energy was above expectations, but earnings were largely lifted as a consequence of the broker raising base case forecasts for Brent oil. Meanwhile, earnings estimates were lifted by Ord Minnett for Whitehaven Coal after a 20% rally in coal prices. This is considered the reason for recent material outperformance by the company. The broker also upgraded the rating for the company to Lighten from Sell.
With lithium market conditions to remain challenging, Galaxy Resources received a large percentage downgrade to forecast earnings. Second on the table for downgrades was Serko despite general agreement on the transformational qualities of the company’s deal with Booking.com. This was due to a capital raise and low corporate travel volumes due to covid-19.
Transurban Group also suffered a large percentage decline in earnings forecasts after a first quarter traffic update. In addition, there was a rating downgrade by one broker who noted covid-19 continues to ravage Citylink traffic volume by -59% and declines of between -30% to 50% for the US.
Total Neutral/Hold recommendations take up 51.12% of the total, versus 38.27% on Neutral/Hold, while Sell ratings account for the remaining 10.61%.
AUSTRALIA & NEW ZEALAND BANKING GROUP ((ANZ)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 6/1/0
While Macquarie continues to envisage underlying trends are challenging, ANZ Bank's institutional book skew should result in better impairment experience in the short term.
Hence, the broker considers the risks are more balanced and upgrades to Outperform from Neutral. Target rises to $18.50 from $18.00.
Nevertheless, the broker believes consensus continues to underestimate the margin pressures that are resulting from competition and lower interest rates as well as a lack of credit growth.
BHP GROUP ((BHP)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 5/2/0
After an exceptionally strong June quarter, Ord Minnett expects Western Australia Iron Ore (WAIO) exports to fall -5% on a quarterly basis to 72Mt. Petroleum output is forecast to be flat with output for coal and copper expected to fall slightly.
The broker does not expect any changes to BHP Group's production guidance. Net profit forecasts remain above consensus for 2020.
The broker upgrades BHP's rating to Buy from Accumulate with the target reducing to $44 from $45.
BEACH ENERGY LIMITED ((BPT)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 5/1/0
Ord Minnett has updated its oil price forecasts in line with the forward curve. The broker has shifted its US$60 per barrel (bbl) long-term oil price assumption from 2023 to 2024. Using the forward curve over the next 13 quarters, the broker sees a lower 2023 oil price of US$45/bbl.
Investors are recommended to seek a broad sector exposure.
Beach Energy's rating has been upgraded to Buy from Accumulate with the target price falling to $2.20 from $2.25.
COOPER ENERGY LIMITED ((COE)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 2/2/0
Ord Minnett has updated its oil price forecasts in line with the forward curve. The broker has shifted its US$60 per barrel (bbl) long-term oil price assumption from 2023 to 2024. Using the forward curve over the next 13 quarters, 2023 oil price is expected to be lower at US$45/bbl.
Investors are recommended to seek a broad sector exposure. Within its small-cap coverage, Ord Minnett prefers Cooper Energy because of the company's fixed-price contracts and strong balance sheets.
Ord Minnett upgrades its rating to Buy from Accumulate with the target price reducing slightly to $0.57 from $0.58.
COLES GROUP LIMITED ((COL)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/3/0
Credit Suisse upgrades earnings estimates, expecting food retailing will grow at a rate at least equivalent to the increase in the resident population, with holiday events likely to provide an additional boost.
Cost control and an improvement in gross margins are also likely to provide a basis for strong profit leverage. Meanwhile, a recent pull back provides an attractive entry point and the broker upgrades to Outperform from Neutral. Target is raised to $20.16 from $19.97.