Weekly Ratings, Targets, Forecast Changes – 13-12-19

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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 December 9 to Friday December 13, 2019
Total Upgrades: 4
Total Downgrades: 7
Net Ratings Breakdown: Buy 37.88%; Hold 45.22%; Sell 16.90%

As corporate activity begins to wind down for 2019, the week ending Friday the Thirteenth of December brought four upgrades and seven downgrades from FNArena database brokers. Of the upgrades, two went to Buy and two to Hold, while three downgrades went to Sell and four to Hold.

Evolution Mining and Magellan Financial were both upgraded to Hold on valuation, while Iluka Resources, Rio Tinto and Sydney Airport were all downgraded to Hold on valuation.

Brokers are squaring up for the holidays.

Target price changes were relatively modest last week. Caltex ((CTX)) topped the list with a 5.0% increase on upgraded guidance and thereafter moves were un-noteworthy.

Downgraded guidance from Whitehaven Coal led to an -11.3% target cut, with Metcash ((MTS)) in second spot on -2.1%.

Yet Metcash managed to top the earnings increase table with 26.5% after delivering an earnings result that was not as bad as feared in the underlying business. OceanaGold ((OGC)) followed with 11.1%.

Whitehaven’s downgraded guidance resulted in a -27.9% forecast cut, while a run of broker resets of commodity price forecasts netted to an -18.3% cut for South32 ((S32)). Same story for Galaxy Resources ((GXY)), down -16.6%, while downgraded guidance hit Viva Energy ((VEA)) forecasts by -13.4%.

Upgrade

CHARTER HALL GROUP ((CHC)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/1/0

UBS is increasingly convinced of Charter Hall's ability to continue raising and deploying third-party equity/debt. The broker upgrades earnings estimates by 7-8% to reflect growth in assets under management and co-investments.

UBS also believes concerns regarding peak performance fees in FY20 and Sydney/Melbourne office fundamentals are unjustified. The broker upgrades to Buy from Neutral and raises the target to $12.50 from $12.10.

EVOLUTION MINING LIMITED ((EVN)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 2/4/1

Evolution Mining has fallen -28% from its August peak and is now near Morgan Stanley's valuation, prompting an upgrade to Equal-weight from Underweight. The broker sees costs and the relatively short lives of some of the company's mines as well priced versus the potential for operational and mine-life improvements.

Target falls to $3.80 from $4.00. Industry view: In-Line.

MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Upgrade to Hold from Sell by Ord Minnett .B/H/S: 0/3/4

All fund managers being reviewed by Ord Minnett generated solid absolute returns over the first half to the end of November. Flow momentum remains strong for Magellan Financial and the first half is on track to record the biggest retail inflow for a half year ever.

Ord Minnett upgrades to Hold from Sell and raises the target to $50.41 from $49.60.

NOVONIX LIMITED ((NVX)) Upgrade to Speculative Buy from Hold by Morgans .B/H/S: 1/0/0

Morgans upgrades to Speculative Buy from Hold. Target is raised to $0.90 from $0.65. The company has announced an initial deal for 500,000t of synthetic graphite with Samsung, which will take delivery of this order from October 2020 subject to required quality assurance processes and a supplier audit.

 Morgans assesses cash management will be an issue, as first delivery will not take place until the first quarter of FY21 , but the deal makes it easier for the company to raise funds with debt rather than tapping the equity market.

Downgrade

BORAL LIMITED ((BLD)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 0/4/0

Ord Minnett is increasingly concerned about the outlook for the North American division, including the fact that recent financial irregularities have been uncovered in the windows business.

The return on funds employed in North America now appear to be shy of 5% in FY19, which raises the risk of impairments at some point, the broker assesses.

Meanwhile, Boral Australia is a better quality business but the cycle is working against it and a full balance sheet increases the risk for shareholders. Hence, Ord Minnett downgrades to Lighten from Hold and lowers the target to $4.25 from $4.80.

ILUKA RESOURCES LIMITED ((ILU)) Downgrade to Sell from Neutral by Citi and Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 0/5/1

Citi downgrades Iluka to Sell from Neutral because of recent share price strength. Target is steady at $9. Citi estimates global growth will be modestly higher in 2020, which is bullish for commodities.

An improvement in market conditions for commodities is expected to attract investor flows. Most of the improvement is expected to come from emerging markets.

Nevertheless, the two largest economies, the US and China, still have the greatest potential to influence demand through policy decisions, in light of the US election holding promise for a breakthrough with China on trade.

Monetary and fiscal policies in both countries have potential for higher GDP, the broker notes as well.

After a 40% rally from its trough in August, Iluka Resources is now close to Morgan Stanley's valuation, hence a downgrade to Equal-weight from Overweight. A demerger of the MAC royalty would add upside but given the complexities the broker does not see this happening.

If the Sembuhan project is deemed commercial, this would provide for incremental upside. Target falls to $10.45 from $11.15 on a commodity price forecast review. Industry view: In-Line.

OIL SEARCH LIMITED ((OSH)) Downgrade to Hold from Add by Morgans .B/H/S: 2/4/1

Morgans downgrades to Hold from Add, concerned about the new risks associated with PNG growth. The broker recognises the new government may require a settling in period and may seek a higher share of value from P'nyang, which in turn could jeopardise the entire three-train development.

The broker is now less convinced about assumptions that an agreement on fiscal terms will be easily reached. Target is reduced to $7.82 from $8.68.

RIO TINTO LIMITED ((RIO)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/4/1

Citi estimates global growth will be modestly higher in 2020, which is bullish for commodities. The broker is positive about hard coking coal in the first quarter of 2020, expecting the price to average US$170/t over the year.

The alumina market is expected to move to a modest deficit in 2020. The broker remains cautious on iron ore and expects sizeable oversupply over the next two years will bring down benchmark prices to US$60/t by 2022.

Rio Tinto's rating is downgraded to Neutral from Buy, to reflect the outperformance in the stock over the past 12 months, and the target is reduced to $100 from $105.

SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 2/2/1

Ord Minnett notes Sydney Airport has been a strong performer, with a 36% total return in 2019 to date. The company has benefited from a low interest-rate environment as well as a positive report from the Productivity Commission.

The broker expects slow passenger numbers in both international and domestic segments will put pressure on operating earnings and dividend growth, as the business builds up a buffer ahead of becoming a tax-paying entity in 2021. The target is raised to $8.20 from $7.80.

WHITEHAVEN COAL LIMITED ((WHC)) Downgrade to Neutral from Buy by Citi .B/H/S: 4/2/0

Citi estimates global growth will be modestly higher in 2020, which is bullish for commodities. The broker is positive about hard coking coal in the first quarter of 2020, expecting the price to average US$170/t over the year.

Yet the broker downgrades Whitehaven Coal to Neutral from Buy because of the cuts to near-term earnings and the risk of ongoing weather-related constraints at Maules Creek. Target is reduced to $2.90 from $3.70.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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