Weekly Reports | Sep 09 2019
This story features INCITEC PIVOT LIMITED, and other companies. For more info SHARE ANALYSIS: IPL
By Rudi Filapek-Vandyck, Editor FNArena
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 September 2 to Friday September 6, 2019
Total Upgrades: 6
Total Downgrades: 6
Net Ratings Breakdown: Buy 37.02%; Hold 46.09%; Sell 16.90%
The August reporting season is done and dusted and overall activity among securities analysts as measured by upgrades and downgrades for individual ASX-listed entities has fallen to single digits for each for the week ending Friday, 6th Septrember 2019. No surprises here.
Fittingly, FNArena registered six upgrades and six downgrades. Five of the upgrades moved to Buy, while three of the downgrades became a fresh Sell rating. The unlucky receivers of the latter are Collection House (disappointing result), CSR (still no improvement for building materials) and Harvey Norman (disappointing result).
The news becomes increasingly more positive as we zoom in on positive changes for broker's price targets with eternal phoenix Myer claiming top spot for the week, enjoying a target increase of no less than 32.6% after a positively received results report. At a distance follow the likes of Western Areas, FlexiGroup, Appen, and Woolworths.
On the negative side, the largest reduction was for the two gold producers St Barbara and Northern Star, followed by Orocobre (lithium), Incitec Pivot (profit warning) and another gold producer, Regis Resources.
The real fireworks was reserved for changes to earnings forecasts which are, on both sides, considerable. On the positive side sits Myer on top, followed by Freedom Foods Group, Western Areas, Austal, and Village Roadshow.
On the negative side, where reductions on average are larger, we find NextDC, Orocobre, TPG Telecom (results release), Incitec Pivot, and Senex Energy.
Things should quieten down significantly post August and with out-of-season results releases few and far between, but this assumes the absence of further profit warnings a la CYBG on Thursday last week, which followed a profit warning from Incitec Pivot 48 hours earlier.
Upgrade
CLASS LIMITED ((CL1)) Upgrade to Add from Reduce by Morgans .B/H/S: 2/1/0
Class has decided to reduce its single-product reliance on Class Super, its SMSF management software system. Expanding the product range will require higher investment capex in the shorter term, Morgans notes, weighing on earnings.
The move is not without risk but if successful, Class should become a more attractive growth investment, Morgans believes. The broker has made multiple changes to its forecasting and valuation models, which lead to a target price increase to $1.41 from $1.34, and a double-upgrade to Add from Reduce.
INCITEC PIVOT LIMITED ((IPL)) Upgrade to Buy from Neutral by Citi .B/H/S: 4/3/0
Citi analysts had already warned investors about the apparent downside risk to the company's guidance for FY19 so yesterday's profit warning from the company did not come as a surprise. What did surprise was the magnitude of the downgrade.
Citi analysts now note management has announced a strategic review of the fertiliser business. Citi analysts think finding a buyer for the whole operation might prove a challenge, but the distribution business with circa 50% market share in Australia's East will definitely attract interest, in their view.
Market forecasts are poised to reset lower, but Citi also finds that, with the share price at a three year low, the risk reward proposition for owning this stock has turned favourably again, hence the upgrade to Buy from Neutral. Target price remains unchanged at $3.45.
MYER HOLDINGS LIMITED ((MYR)) Upgrade to Accumulate from Lighten by Ord Minnett .B/H/S: 2/2/1
The company will report its FY19 result on September 5. Ord Minnett expects underlying net profit of $35.6m, up 9.5% with sales down -2.5%. The broker upgrades to Accumulate from Lighten and raises the target to $0.70 from $0.42.
Ord Minnett notes the range is being optimised to drive gross margins as the company turns its range towards new and exclusive brands that should support sales. Myer is also addressing costs while improving its supply chain.
PUSHPAY HOLDINGS LIMITED ((PPH)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/1/0
Ord Minnett observes the stock price has retraced -25% since the FY19 result. The broker believes expectations now reflect a more realistic view of the company's addressable market and earnings potential.
While the fundamental view is of an increasingly competitive market, the broker acknowledges a Lighten rating is no longer valid and upgrades to Hold. Target is raised to $3.08 from $2.92.
WESTPAC BANKING CORPORATION ((WBC)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/1
Credit Suisse upgrades to Outperform from Neutral as the stock is trading at a 10-year low in terms of sector-relative valuation. The broker expects two of the three items weighing on the stock should be resolved in the coming quarter i.e. capital and dividend sustainability.
The broker believes this could be dealt with at the upcoming result with a capital raising in the order of $1.5-2bn and a -10-15c per security reduction in the semi-annual dividend.
While asset sales are possible, Credit Suisse believes the timing of completion means more urgent action on capital is required.
The broker does not suggest Westpac will completely abandon the multi-brand strategy but a consolidation of some of the brands would provide a cost opportunity. Target is raised to $30.55 from $28.60.
WESTERN AREAS NL ((WSA)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/3/0
News reports suggest Indonesia is moving ahead with new regulations and bringing forward an export ban for nickel with grade less than 1.7%.
Morgan Stanley estimates around 218,000t of Indonesian nickel-in-ore, or 9% of global mined supply, is exposed to the ban. If this nickel ore is left stranded the market would move into substantial deficit.
The broker envisages high upside risk for nickel versus forecasts and Western Areas becomes the preferred nickel exposure.
Rating is upgraded to Overweight from Equal-weight. Industry view is Attractive. Target is raised to $3.30 from $2.25.
Downgrade
3P LEARNING LIMITED ((3PL)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/2/0
3P Learning's result missed Macquarie's Forecast by -13%, with the core A&NZ business impacted by execution issues and competition. Europe et al saw earnings declines due to Brexit and contract losses, while the Americas did okay, albeit assisted by the currency.
Recent licence trends have tempered FY20 growth expectations, the broker notes, with concerns raised as to whether A&NZ has “peaked”. Management is confident of improvement, but the broker expects the market will require evidence of this to provide for any re-rating. In the meantime Macquarie downgrades to Neutral. Target falls to 90c from $1.50.
COLLECTION HOUSE LIMITED ((CLH)) Downgrade to Reduce from Hold by Morgans .B/H/S: 0/0/1
Underlying net profit in FY19 was up 7.4%, largely driven by a lower implied amortisation rate. Morgans assesses, if it were not for this and applying the same amortisation rate as FY18, underlying net profit would have been down -39%.
The broker was looking for improved cash generation and this was absent in FY19. If operating performance improves there is upside in the longer term but the broker also assesses the downside risk is significant.
Rating is downgraded to Reduce from Hold and the target lowered to $1.09 from $1.42.
CSR LIMITED ((CSR)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/0/4
Ord Minnett reduces forecasts for the building products division in FY20 and FY21 to better capture the economics of the company's key business units during a downturn.
The main positive is the balance sheet, which places CSR in a strong position whereby it can potentially pick up assets along the way if the opportunity arises.
Ord Minnett reduces estimates for earnings per share by an average of -4% over the forecast period. The impact from lower building product margins and property earnings is partially offset by upward revisions to the aluminium division.
Rating is downgraded to Lighten from Hold and the target reduced to $3.50 from $3.80.
GTN LIMITED ((GTN)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/0
GTN's -37% drop in profit had been pre-released. The Australian Traffic Network was the key driver of weakness, Macquarie notes, and with earnings visibility clouded there is no end in sight at present.
Management appears to be taking the right steps but clear evidence of sustained stability is required to restore investor confidence. Macquarie downgrades to Neutral from Outperform. Target falls to 85c from $1.35.
HARVEY NORMAN HOLDINGS LIMITED ((HVN)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 0/4/1
FY19 results, which were below forecasts, indicate an investment phase has commenced for the company's franchisees. Lower sales drove higher levels of tactical support. This meant franchising pre-tax profit was reduced in the second half.
Ord Minnett notes the external environment in some locations internationally is challenging, while tough comparables are an issue in the NZ division.
Given the challenges, valuation support is reduced in the broker's view. While the final dividend was well above forecasts, Harvey Norman announced another entitlement offer, which Ord Minnett suspects reflects a desire to retain low levels of gearing.
Rating is downgraded to Lighten from Hold and the target is $4.
METALS X LIMITED ((MLX)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/0
Macquarie believes declining tin prices will force a funding squeeze for Metals X and the broker is now assuming a $20m capital raising. Updated reserve estimates have led to a cut in earnings forecasts.
Cuts to production, and the dilution of a raising, lead the broker to cut its target to 16c from 30c. Downgrade to Neutral from Outperform.
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Negative Change Covered by > 2 Brokers
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Technical limitations
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CHARTS
For more info SHARE ANALYSIS: 3PL - 3P LEARNING LIMITED
For more info SHARE ANALYSIS: CSR - CSR LIMITED
For more info SHARE ANALYSIS: GTN - GTN LIMITED
For more info SHARE ANALYSIS: HVN - HARVEY NORMAN HOLDINGS LIMITED
For more info SHARE ANALYSIS: IPL - INCITEC PIVOT LIMITED
For more info SHARE ANALYSIS: MLX - METALS X LIMITED
For more info SHARE ANALYSIS: MYR - MYER HOLDINGS LIMITED
For more info SHARE ANALYSIS: PPH - PUSHPAY HOLDINGS LIMITED
For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION