Weekly Ratings, Targets, Forecast Changes – 20-11-20

Weekly Reports | Nov 23 2020

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 November 16 to Friday November 20, 2020
Total Upgrades: 8
Total Downgrades: 20
Net Ratings Breakdown: Buy 51.43%; Hold 38.26%; Sell 10.31%

After a near three month hiatus, there have now been two consecutive weeks of broker downgrades (twenty this week) exceeding upgrades (eight) for ASX-listed stocks on the FNArena database. For the week ending Friday November 20, this was assisted by multiple downgrades for Oil Search (five) and Vocus Group (two).

While the Oil Search share price had already rallied by 49% during the month on vaccine news, brokers still fear risks may be skewed to the downside. This fear is driven by the disappointing progress on the Alaska sell-down along with shifting political winds in Papua New Guinea. By contrast, brokers were broadly positive on the earnings and growth path for Vocus Group and downgrades were largely due to recent share price outperformance. 

There were immaterial percentage decreases in target prices for companies in the database during the week and thus no commentary is necessary. Meanwhile, Seven West Media had the largest percentage increase as one broker highlights leverage to a recovery in ad markets. This is consistent with last week, when the company earned an upgrade in rating due for the same reason as well as impressive broadcaster video on demand (BVOD).

Lovisa Holdings was second on the table for the highest percentage increase in target price for the week, and received an upgrade to Neutral from Sell by one broker. The recent beeline acquisition is expected to diversify the global roll-out and boost growth in Europe.

Next on the table was Seek, as year-to-date revenue was well above expectations within the Australia and New Zealand region. Online education services (OES) and Zhaopin businesses are considered to be performing above expectations.

GrainCorp had the week’s largest percentage increase in earnings estimates by brokers in the FNArena database. As per last week’s commentary, this is the result of a positive outlook by management and strong leverage to an expected bumper harvest.

Seven West Media also had a lift in earnings expectations for the reasons detailed above. Next in terms of percentage increase was Aristocrat Leisure, as brokers gain confidence in the revenue momentum within the digital and gaming operations.

Xero’s earnings expectations jumped after the first half slowdown in growth was less than feared. Sales and marketing expenses fell sharply, resulting in a strong boost to profits and cash.

A week wouldn’t be complete without more commentary (and earnings forecast upgrades) surrounding Afterpay. At the company AGM, management noted while October was a record month for underlying sales globally, November is turning out to be even better.

Earnings forecasts were down in percentage terms for Nearmap. As mentioned last week, one broker was expecting slightly higher revenue guidance from management and was averse to the company’s use of constant currency (which implies a -6% foreign exchange headwind).

Finally, Karoon Energy received the second largest downgrade in forecast earnings for the week. Not to fear, as Morgans maintained the company’s Add rating in the wake of the ‘transformational’ Bauna acquisition. In addition, the broker was effusive on the solid prospects for a healthy share price performance, even in the absence of a recovering oil price.

Total Neutral/Hold recommendations take up 51.43% of the total, versus 38.26% on Neutral/Hold, while Sell ratings account for the remaining 10.31%.

Upgrade

ESTIA HEALTH LIMITED ((EHE)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/3/0

Ord Minnett notes Washington H Soul Pattinson's ((SOL)) bid to acquire Regis Healthcare ((REG)) highlights the rising investor interest in the aged care sector. The broker believes investors should consider building a position in the sector now despite the continuing uncertainty.

Ord Minnett upgrades its rating on Estia Health to Accumulate from Hold. The target rises to $1.85 from $1.40.

FLEXIGROUP LIMITED ((FXL)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/1/0

Shareholders have approved FlexiGroup's name change to Humm.

FlexiGroup's first-quarter update shows a material upgrade to its FY21 numbers led by improvements in the credit quality.

Macquarie has increased its first-half cash net profit estimate to $36.1m from $28.8m primarily led by reduced impairment expenses. The broker also expects receivables growth to return as repayment activity normalises.

Rating is upgraded to Outperform from Neutral. Target is raised to $1.40 from $1.33.

G.U.D. HOLDINGS LIMITED ((GUD)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/2/0

Credit Suisse notes via the Automotive Components and Accessories division (ACAD) deal, GUD Holdings has diversified into a growing component of the car park while managing to purchase this exposure at a lower multiple from a distressed vendor.

Furthermore, the company can add material value to the acquired business in terms of distribution and manufacturing know-how. Incorporating the acquisition drives about 4-5% earnings accretion across FY22-23, adds the broker.

Rating is upgraded to Outperform from Neutral with the target unchanged at $13.

JAPARA HEALTHCARE LIMITED ((JHC)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 1/3/0

Ord Minnett notes Washington H Soul Pattinson's ((SOL)) bid to acquire Regis Healthcare ((REG)) highlights the rising investor interest in the aged care sector. The broker believes investors should consider building a position in the sector now despite continuing uncertainty.

Ord Minnett upgrades its rating for Japara Healthcare to Buy from Hold. The target rises to $0.75 from $0.55.

LOVISA HOLDINGS LIMITED ((LOV)) Upgrade to Neutral from Sell by Citi .B/H/S: 2/2/0

Citi upgrades to Neutral from Sell as the Beeline acquisition will diversify the global roll-out and boost growth in Europe.

To become more positive from this point, the broker would require evidence of just how the company is navigating the reduced shopping centre traffic post the pandemic, and the structural shift to online.

Strategically, Citi finds the Beeline acquisition sound as it provides instant access to six new markets. Nevertheless, downside risk could exist to investor expectations as the "next to nothing consideration" signals the network was underperforming.

Citi suspects this could be a function of sub-optimal locations that may be difficult to change and integration risks may be elevated. Target is raised to $11.60 from $6.70 as FY21-23 estimates are raised by 32-55% to reflect the acquisition.

MIRVAC GROUP ((MGR)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 5/1/0

Macquarie believes the next leg of the residential recovery will favour multi-residential developers with key drivers including limited high-density supply pipeline, a vaccine for covid-19 helping kickstart overseas immigration and the recent rate cuts by the RBA with the subsequent reduction in mortgage rates.

Mirvac Group also provides exposure to office markets where the broker expects downside will be limited by the long weighted average lease expiry (WALE) and a less demanding cap rate. 

The broker upgrades its rating to Outperform from Neutral. Target rises to $2.91 from $2.22.


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