Weekly Reports | Oct 19 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 12 to Friday October 16, 2020
Total Upgrades: 14
Total Downgrades: 5
Net Ratings Breakdown: Buy 51.29%; Hold 38.36%; Sell 10.34%
Another positive week (ending Friday October 16) for ASX-listed stocks, resulted in fourteen upgrades and five downgrades by FNArena database stockbroking analysts.
Bank of Queensland received two upgrades and one downgrade to ratings. This may be explained in terms of two brokers having the same positive outlook and one being diametrically opposed. On most occasions, when a stock is simultaneously upgraded and downgraded it is explained by the relative starting position of the target prices in relation to the current share price.
On this occasion all three broker’s started with identical target prices or estimated valuations in 12 months time. On the one hand the bank was described as conservatively provisioned with limited downside, while on the other hand it was overvalued with a price earnings (PE) premium 25% above its five-year average relative to peers. It’s sometimes all in the eye of the beholder and happily this creates a marketplace of buyers and sellers.
In a similar vein Link Administration received one upgrade and one downgrade in rating. However, the waters are more muddied in this case due to an approach by a consortium to acquire 100% of the company’s shares. The upgrade was on the basis of the strategic interest in the company, while the downgrade was prompted by a strong uplift in the share price following interest from the consortium.
There were immaterial percentage decreases in target prices for companies in the database during the week and thus no commentary is necessary.
In the table for the highest percentage uplift in target price for the week, Bank of Queensland and Link Administration came second and fourth on the table, respectively. This change for both companies may be explained by the narrative for ratings upgrades above. Eagers Automotive topped the table and received a downgrade in rating during the week. Sales were up strongly in a quarterly update and the company’s margins are benefiting from an ongoing cost-out program. Ord Minnett downgraded the company’s rating on the basis of recent share price gains, but like three other brokers in the FNArena database raised the target price.
Given the above, it was no surprise Eagers Automotive had the second largest percentage increase in earnings upgrades by brokers in the FNArena database.
The largest percentage increase in earnings was reserved for NextDC, after a renegotiation of debt facilities. According to some brokers, this not only significantly reduces interest costs but also de-risks the company’s data centre roll-out strategy. Next in order of percentage increase in earnings was ARB Corp after reporting strong sales figures. The company is benefiting from multiple drivers including higher consumer spending and domestic tourism. Bluescope Steel also received a significant boost to earnings forecasts from US steel spreads, which have effectively doubled since their July lows. There is an expectation that the company's free cash flow yield will improve materially in coming years.
As highlighted last week, 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 last week, that noted covid-19 continues to ravage Citylink traffic volume by -59% and declines of between -30% to 50% for the US.
Opinions varied for six brokers casting an eye over the third quarter operational performance of Whitehaven Coal. On balance, strong production and sales were overwhelmed by weaker pricing for coking and thermal coal. As a result, the company received a large percentage downgrade to earnings estimates for the week.
Despite favourable target price moves for Audinate, EPS estimates moderated for the company. Not far behind in the percentage earnings downgrades table were both Galaxy Resources and Viva Energy Group. Lower production and weakness in the lithium market amid elevated inventory and mothballed capacity is not a happy recipe for Galaxy Resources. Neither is lower than expected retail and commercial volumes and a worse than anticipated loss in refining for Viva Energy Group.
Brokers were generally disappointed with Iluka Resources’ production and sales of zircon and rutile in the September quarter. The immediate issue/catalyst for the stock is the demerger of Deterra, which (assuming shareholder approval) will be listed on October 23.
Total Neutral/Hold recommendations take up 51.29% of the total, versus 38.36% on Neutral/Hold, while Sell ratings account for the remaining 10.34%.
ANSELL LIMITED ((ANN)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/3/1
Ansell is a clear beneficiary of the coronavirus pandemic to date, observes Ord Minnett. The broker also thinks this will continue given the increased demand for hygiene and personal protective equipment (PPE) products is likely to endure well into the future.
The broker highlights higher input costs have been fully passed on to customers, unlike in the past. Earnings estimates have been raised and the broker now thinks Ansell is undervalued.
Recommendation upgraded to Accumulate from Hold with the target price increasing to $44.00 from $36.20.
AUSTRALIA & NEW ZEALAND BANKING GROUP ((ANZ)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 7/0/0
Ord Minnett's stance on the major banks has turned somewhat positive. While the fundamental revenue outlook has not improved, the broker notes the stocks are cheap and trading below book values (except Commonwealth Bank).
House prices are holding up better than feared, points out Ord Minnett, and housing finance approvals continue to improve. This is further bolstered by the federal budget aiding the households and small- to medium-sized enterprises (SME).
The broker expects a rally in value stocks into year-end and also believes all the major banks will pay dividends this year.
Reflecting its incrementally more positive view on the sector, Ord Minnett upgrades its recommendation on ANZ Banking Group to Accumulate from Hold. The target price rises to $20 from $19.50.
BANK OF QUEENSLAND LIMITED ((BOQ)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Add from Hold by Morgans .B/H/S: 3/3/1
Following the FY20 result Credit Suisse upgrades cash earnings estimates by 3-4% for FY21 and FY22.
The broker now envisages the downside is limited, amid a conservatively set provision for the pandemic and good execution of the bank's strategy, which is delivering underlying profit growth.
Nevertheless, the broker acknowledges Bank of Queensland is still likely to struggle to achieve double-digit returns on equity in the near term. Target increases to $7.60 from $5.50 and given the limited downside risk the rating is upgraded to Outperform from Neutral.
Bank of Queensland has reported FY20 cash earnings of $225m, which is 4% better than Morgans expected. The beat is largely the result of net interest income being stronger than the broker expected.
The bank will pay a 12cps fully franked dividend.
Despite Morgans forecasts being above consensus, they are starting to look conservative in light of this new data, explains the broker.
Morgans adjusts EPS forecasts up by 3.5% for FY21 and reduces FY22 by -1.25%.
The rating is increased to Add from Hold and the target price is increased to $7.20 from $5.50.
See also BOQ downgrade.