Weekly Ratings, Targets, Forecast Changes

This story features A2 MILK COMPANY LIMITED, and other companies. For more info SHARE ANALYSIS: A2M

By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, 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 19 to Friday November 23, 2018
Total Upgrades: 16
Total Downgrades: 2
Net Ratings Breakdown: Buy 45.56%; Hold 41.20%; Sell 13.24%

Last week's attempt to find a bottom in the Australian share market was solidly supported by stockbroking analysts issuing a tsunami of recommendation upgrades for beaten down ASX-listed stocks.

For the week ending Friday, 23 November 2018, FNArena registered no less than 16 upgrades, of which four only went up to Neutral/Hold, against two lonely downgrades for Collins Foods and Wesfarmers. The latter was the sole recipient of a fresh Sell rating during the week, post Coles de-merger. The pain is compensated by the fact Wesfarmers also received one upgrade to Buy.

G8 Education was the only stock to receive two upgrades for the week; both went to Buy. Other recipients of new Buy ratings include ARB Corp, Carsales, Cochlear, Costa Group, Iluka Resources, Mineral Resources, and a2 Milk.

Amendments to valuations & price targets, and to earnings forecasts have become more equally balanced compared with the week prior when the balance was firmly in favour of negative adjustments, but the week's balance remains weighted towards falling targets and reduced earnings estimates nonetheless.

The top three in the table for positive revisions to price targets consists of G8 Education, Mineral Resources and Blackmores, which all enjoyed large increases. But the numbers are larger and broader based on the negative side where CYBG suffers the largest reduction (-23.7%), followed by Mayne Pharma, Xero, ARB Corp, and Stockland.

It's not quite that lopsided a picture for changes to earnings forecasts. On the positive side, we see large increases for Mineral Resources, TechnologyOne, Sydney Airport, NRW Holdings, and (surprise, surprise) CYBG. But there are equally large reductions on the flipside with Graincorp's forecasts falling by -78%, followed by Viva Energy, Mayne Pharma, Baby Bunting, Ardent Leisure, and others.

The local out-of-season reporting season continues, while others are issuing shorter-term trading updates. Luckily, for Australian investors, not every market update implies the need for a downward correction, though it has to be pointed out, the underlying trend remains for weaker earnings estimates and lower valuations and stockbroker price targets.

The large gap between recommendation upgrades and downgrades by stockbroking analysts suggests many a share price might already be reflecting more than what seems justified at this stage.

Upgrade

THE A2 MILK COMPANY LIMITED ((A2M)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/2/0

The company has indicated a solid start to the year, with revenue for the four months to October up 40.5%. Credit Suisse observes this is been driven by steady Australasian market share and progress on the Chinese infant formula business.

The company has also reaffirmed FY19 expectations. While the company's execution impresses the broker, risks remain with Chinese regulation. However, with the stock having sold off -20% from late August, Credit Suisse believes investors are being more than appropriately compensated.

Rating is upgraded to Outperform from Neutral. Target is raised to NZ$12.25 from NZ$12.20.

ARB CORPORATION LIMITED ((ARB)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/1/0

Last July saw the federal government ban gross combination mass (GCM) upgrades for new vehicles, meaning upgrades to vehicle weight/towing capacity, which ARB provides. Queensland has extended that ban to all vehicles. Citi believes the negative impact on ARB has been overdone by the market, given gross vehicle mass (GVM) upgrades on new vehicles are still permitted and GCM upgrades on used vehicles are still permitted in most states.

Share price weakness has taken ARB to a below average premium to the small industrials hence Citi upgrades to Buy from Neutral. Because ARB did not have products available in a timely manner for the new Hilux and Ranger releases, earnings trimmed and target falls to $19.58 from $22.35.

CARSALES.COM LIMITED ((CAR)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 7/0/0

While several areas of the company's business are experiencing challenges, Ord Minnett believes the core is solid and the long-term opportunity internationally is significant. The stock is now trading at a discount to peers and its long-term average forward PE.

The broker suggests the display advertising division has shown resilience in a changing market, while dealers continue to rely on carsales.com to sell their product, particularly the premium end of the market.

Ord Minnett upgrades to Buy from Hold. Target is lowered to $14.84 from $15.77.

COSTA GROUP HOLDINGS LIMITED ((CGC)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/2/0

Macquarie believes the company is off to a solid start in FY19, as it has reiterated guidance for low double-digit growth. There is a significant 84% skew to the second half for net profit, the broker calculates.

Regardless, the company has a strong market position in attractive categories and a good track record of execution on growth projects.

Macquarie upgrades to Outperform from Neutral. Target is reduced to $7.60 from $8.15 because of changes on the back of higher long-term capital expenditure assumptions.

COCHLEAR LIMITED ((COH)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 2/3/2

Morgan Stanley estimates the current developed market penetration for Cochlear is around 5% and the capture of the annual incidence of severe hearing impairment is only 7%. The low penetration is explained by the weak relationship between hearing aid and cochlear implant audiology channels.

The broker believes Sycle will bridge this channel and sustain long-term market growth. Sycle is audiology practice management software used by around 7000 hearing aid clinics across the US, UK and Canada. This should increase the awareness of cochlear implants in retail channels by facilitating diagnosis of candidates.

Morgan Stanley suggests the valuation of this market-leading stock with life changing technologies has become more attractive. Rating is upgraded to Overweight from Equal-weight. In-Line industry view. Target is $175.

CLEANAWAY WASTE MANAGEMENT LIMITED ((CWY)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/2/0

Ahead of the company's investor day on 22 November, Credit Suisse upgrades to Outperform from Neutral and raises the target price to $2.05 from $1.90. The broker expects an upbeat presentation on the growth potential, operational gearing and Toxfree integration progress.

The broker has trimmed its FY19 earnings estimate by -2% on a higher D&A forecast and raised FY21 forecast by 13% on higher medium-term revenue growth and the benefit of operational gearing.

FLETCHER BUILDING LIMITED ((FBU)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/5/0

Credit Suisse suspects there is a risk the company's guidance for FY19 earnings of $630-680m will be de-railed, because a gradually softening core NZ business needs to be offset by a turnaround in Australia.

The broker further notes, while the company is positioning guidance as conservative regarding the Australian cycle, there is also margin pressure and investors will be looking for assurances there are no further structural pressures in FY19.

Credit Suisse takes the opportunity to pull back Australian forecasts. Rating is upgraded to Neutral from Underperform on valuation. Target is reduced to NZ$5.43 from NZ$6.01.

G8 EDUCATION LIMITED ((GEM)) Upgrade to Overweight from Equal-weight by Morgan Stanley and Upgrade to Outperform from Neutral by Macquarie .B/H/S: 5/1/0

It increasingly appears occupancy across the sector has bottomed sooner than anticipated. This, argue the analysts at Morgan Stanley, means earnings are picking up quicker. This, again, diminishes the risk of a further leg down.

Morgan Stanley upgrades to Overweight from Equal-weight. Price target jumps to $3.25 from $2.30. Industry view is In-Line. Earnings estimates have been slightly reduced for 2018, but increased for 2019.

Macquarie found the trading update slightly behind prior guidance, but the good news came through via improving occupancy trends. The analysts believe industry conditions are to remain tough, predominantly because of surplus supply, but they fully acknowledge there appears now mounting evidence of stabilising occupancy.

The latter suggests earnings may have bottomed across the industry. Macquarie upgrades to Outperform from Neutral, seeing further re-rating potential. Price target jumps to $3.15 from $2.08.

GROWTHPOINT PROPERTIES AUSTRALIA ((GOZ)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 0/1/2

The company has acquired 100 Skyring Terrace, Newstead, Brisbane. The purchase price of $250m reflects a 6.1% pre-cost yield.

Ord Minnett notes the share price has declined -4% since August, which leads to an upgrade to Hold from Lighten. Distribution guidance for FY19 remains unchanged at $0.23 per share.

ILUKA RESOURCES LIMITED ((ILU)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 5/1/0

While the share price has fallen more than -30% over recent months, Ord Minnett is focused on the valuation support and the options around Jacinth-Ambrosia. The broker believes the company has a number of levers that can be pulled if mineral sands markets remain tight.

If expansions at Sierra Rutile do not deliver sufficient return, investors should be able to participate in a cash flow windfall from controlling the world's best mineral sands assets in a tight market.

Rating is upgraded to Accumulate from Hold. Target is reduced to $9.80 from $10.80.

MINERAL RESOURCES LIMITED ((MIN)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 3/0/0

Albemarle will pay US$1.15bn to buy a 50% stake in a joint venture in the Wodgina hard rock lithium mine. Deutsche Bank notes Mineral Resources initially wanted to sell just 49% in order to have control of the asset.

Albemarle has stated it aims to produce at least 100,000tpa which suggests it may desire to replicate the design of its Kemerton facility. Either way, Deutsche Bank believes the company's experience in the industry will help develop and market the product.

The broker takes a conservative stance on the downstream asset potential, which is new for Australia, and believes there are implications for spodumene, hydroxide and the lithium market structure with this deal. Rating is upgraded to Buy from Hold. Target is $18.50.

STOCKLAND ((SGP)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/4/1

UBS remains cautious about the business, as residential conditions continue to deteriorate and there is a lack of liquidity in the retail portfolio. Still, increasingly, these themes appear to be reflected in the stock price.

The broker adjusts estimates to reflect a large second half skew but still forecasts growth in free funds of 5.8%. Rating is upgraded to Neutral from Sell and the target is reduced to $3.73 from $4.08.

SONIC HEALTHCARE LIMITED ((SHL)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 3/5/0

Credit Suisse observes, since the FY18 result, the stock has underperformed the market. Guidance has been reaffirmed for 3-5% growth in operating earnings, weighted to the second half.

While remaining cautious on the operating environment, particularly given softer Australian pathology volumes and regulatory headwinds in the US and Germany, the broker believes risks are now factored in.

Rating is upgraded to Neutral from Underperform. Target is reduced to $23.00 from $23.50.

WEBJET LIMITED ((WEB)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/2/0

After the strong FY18 result and even stronger run up in the share price, Credit Suisse believed Webjet was fully priced and downgraded to Neutral. Since then, the stock has materially underperformed and Webjet has also acquired Destinations of the World.

The trading update for FY19 has confirmed momentum is strong and the growth outlook attractive, hence Credit Suisse moves the rating back to Outperform. Target is reduced to $14.40 from $16.00.

WESFARMERS LIMITED ((WES)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/3/2

Credit Suisse is well aware of the slowdown in housing-related demand but believes the market is underestimating the opportunity for of value creation in the company's industrials business.

The recent contract between Woodside ((WPL)) and Perdaman highlights WA gas pricing is at a level where domestic downstream investment can be supported. Given existing infrastructure at Kwinana and a site at Burrup, Credit Suisse is surprised Wesfarmers was not party to that deal.

As for Bunnings, the broker expects growth from expanded ranges and online penetration and there is some buffer given the high exposure to the do-it-yourself market.

The broker also sticks its neck out, suggesting that over the next two years there will be significant expansion of Wesfarmers' ammonia manufacturing, while Blackwood's earnings should double over the next five years.

Rating is upgraded to Outperform from Neutral. Target is reduced to $34.07 from $49.47.

See also WES downgrade.

Downgrade

COLLINS FOODS LIMITED ((CKF)) Downgrade to Hold from Add by Morgans .B/H/S: 2/1/0

The company will report its first half result on November 28. Morgans expects a solid result, primarily driven by the annualisation of recent acquisitions in addition to underlying growth in the base business.

Morgans remains attracted to the growth prospects, including continued growth in KFC Australia and the ramp up of KFC in Europe as well as margin improvement.

Following the recent rally in the share price, the broker notes the stock is trading at a meaningful premium to the long-term average and downgrades to Hold from Add. Target is raised to $6.92 from $6.84.

WESFARMERS LIMITED ((WES)) Downgrade to Sell from Neutral by Citi .B/H/S: 2/3/2

In the wake of the Coles ((COL)) de-merger and the prior divestment of loss-making and/or capital intensive businesses, Wesfarmers is now around 60% exposed to Australian housing, via Bunnings and Kmart, Citi notes. There is little in the way of organic growth in the offing so the challenge will be to use the now well-stuffed balance sheet for diversification acquisitions.

If none present, a capital return might be the option. Until more is clear, Citi prefers the two supermarkets. Downgrade to Sell from Neutral. Target falls to $29.20 from $45.30 ex-Coles.

See also WES upgrade.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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