Weekly Reports | Oct 26 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 19 to Friday October 23, 2020
Total Upgrades: 7
Total Downgrades: 7
Net Ratings Breakdown: Buy 51.64%; Hold 38.00%; Sell 10.36%
For the week ending Friday, October 23, there were seven upgrades and seven downgrades for individual ASX-listed stocks. All of the seven upgrades by brokers in the FNArena database went to a Buy rating. Of the seven downgrades, two related to Star Entertainment Group.
The downgrades for Star arose from concerns the positive catalysts from the reopening of state borders are likely to be offset by increased competition and the regulatory focus shifting to the broader VIP market. However, even the brokers who downgraded the group saw their way clear to raise the target price. When two other brokers also raised the target price, the net result was the third largest percentage change to a target price for the week. One broker projected easing of social distancing could double capacity at the group’s casinos.
Appearing above Star Entertainment on the table for largest percentage rise in price target were both Eagers Automotive and Xero. Eagers topped the table as sales were up strongly in a quarterly update and the company’s margins are benefiting from an ongoing cost-out program. Xero received a downgrade in rating to Neutral from Outperform, after Credit Suisse was satisfied the current share price factors in the macro environment and the valuation relative to peers seems appropriate. This didn’t prevent a substantial lift in target price (valuation) by the same broker, thereby helping to close the gap with the prevailing share price.
For the second week in a row, there were immaterial percentage decreases in target prices for companies in the database during the week and thus no commentary is necessary.
Eagers Automotive also topped the table for the largest percentage increase in earnings for the week, for the reasons advanced above. Next was Oz Minerals as strong gold and copper prices are expected to drive earnings momentum over 2021-22. September quarter gold production beat some brokers’ forecasts, thereby leading the miner to reduce its gold cost guidance and increase its gold production guidance. The backdrop for copper is also considered promising.
Favourable retail conditions have led to a sizeable percentage earnings upgrade by brokers for Michael Hill International. This occurred as first quarter gross margins improved by 100 basis points. Consequently, Citi forecasts the first half retail gross margin to increase to 60.6%. Not far behind in terms of an earnings upgrade was The Reject Shop, with catalysts including opportunities from a stay-at-home Christmas, a better staples offer and rental cost efficiency. Healius also posted a 151% increase in earnings in the September quarter on a 16.5% increase in margins. While pathology was helped by covid-19 testing one broker (of the seven covering the stock in the FNArena database) highlighted non-covid revenues were ahead of what they were last year.
Crown Resorts led the negative percentage earnings changes for the week. The regulatory focus has stepped up as AUSTRAC commences a formal enforcement investigation. While this is currently centred on the Melbourne VIP business, it’s considered the broader company may come under scrutiny as well. The fact that Melbourne is closed, and a Sydney launch is up in the air is not assisting matters.
As mentioned last week, the opinions of six brokers varied when 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.
Atlas Arteria received an upgrade in rating by Morgans as third quarter traffic and revenue were ahead of the broker’s forecast. However, the analyst also alluded to some concerning trends regarding the Atlantia’s Abertis (French) toll road network. Overall, once the view of Macquarie is taken into account, the average percentage earnings outlook took a tumble.
Despite Tyro Payments’ acquisition of the Bendigo and Adelaide Bank portfolio of merchant acquirer customers, the earnings outlook was reigned in. This was due to caution surrounding the risk of elevated churn rates over coming months and concerns over what will happen to revenue growth rates post the pandemic.
Total Neutral/Hold recommendations take up 51.64% of the total, versus 38% on Neutral/Hold, while Sell ratings account for the remaining 10.36%.
ATLAS ARTERIA ((ALX)) Upgrade to Add from Hold by Morgans .B/H/S: 3/2/0
Third quarter traffic and revenue declined -2.7% and -1.9%, respectively, which was 2% ahead of Morgans forecast. Traffic is considered to have benefited from the relaxation of covid-19 restrictions from May-July. Also the start of the summer holiday season assisted.
However, signs for a continuing recovery into the fourth quarter are not good, according to the broker. Atlantia’s Abertis French toll road network, which releases weekly data that has correlated closely with the APRR’s performance (in Eastern France), has seen traffic deteriorate since peaking in August.
Traffic was down around -10% in the first week of October and the analyst is concerned that daily new cases of covid-19 in France have been growing rapidly.
Morgans base case assumes the APRR’s traffic returns to trend growth by FY22, despite downgrades to short-term expectations.
At current prices, the broker estimates a 12-month potential total shareholder return of 19%. The rating is upgraded to Add from Hold and the target price is increased to $7.01 from $6.83.
AUSTRALIAN PHARMACEUTICAL INDUSTRIES ((API)) Upgrade to Buy from Neutral by Citi .B/H/S: 1/1/1
Australian Pharmaceutical Industries' FY20 result showed a net loss of -$8m. The company declared a dividend of 2c (which had been suspended at its first-half result)
Citi notes the major highlight of Australian Pharmaceutical Industries' FY20 result was an extraordinary reduction in its working capital and net debt. The company did not provide any FY21 guidance and the broker has lowered its operating income forecast by -5%
Rating is upgraded to Buy from Neutral with the target price rising to $1.40 from $1.25.
COCA-COLA AMATIL LIMITED ((CCL)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/3/0
Ord Minnett assesses Coca-Cola Amatil is positioned for leverage from a recovery in activity in Australasia. Cost savings should support earnings and mitigate the negative impact of volume reductions.
The broker increases forecasts by 2.6% for 2020 and 6.4% for 2021 amid greater confidence in a recovery. Rating is upgraded to Accumulate from Hold and the target raised to $11 from $9.
LOVISA HOLDINGS LIMITED ((LOV)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/1/1
Like-for-like sales in the first 16 weeks of the first half were down -10.2%. Macquarie interprets this implying flat sales across those stores that were opened in the most recent eight-week period.
The broker assesses a recovery, ex Asia, does not require a reopening of borders but rather a return to fewer restrictions and normal behaviour within geographic zones.
Macquarie is now more positive about the profile of recovery and expects store roll-outs to return to previous run rates in FY22. Rating is upgraded to Outperform from Neutral and the target raised to $9.57 from $7.50.