Weekly Reports | Sep 19 2016
This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA
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 September 12 to Friday September 16, 2016
Total Upgrades: 11
Total Downgrades: 2
Net Ratings Breakdown: Buy 39.71%; Hold 44.50%; Sell 15.79%
Five weeks of declining index levels are making their mark in Australia. Stockbroking analysts are issuing significantly more upgrades for individual stocks than downgrades.
For the week ending Friday, 16th September 2016, FNArena registered eleven recommendation upgrades and only two downgrades. Myer copped one downgrade to Neutral post its FY16 report while regulatory concerns added one Sell rating for APA Group.
Electronics and homeware retailer JB Hi-Fi proved the stand-out performer for the week receiving three upgrades after it sealed the deal to absorb The Good Guys. CommBank received one upgrade, as did Rio Tinto.
JB Hi-Fi is also leading the table for positive revisions to price targets (+7.30%), followed by Karoon Gas, Aurizon and Qube. Virgin Australia's -10% plunge was good for the week's wooden spoon, beating Cimic, Platinum Asset Management and APA Group. Neither of both tables managed to get to ten by week's end.
There was a bit more action in earnings forecasts, but only Mount Gibson made a ginormous leap (+86%). Number two for the week, Fortescue Metals, has been enjoying a mere 4% boost, as did BHP Billiton.
Share price weakness in Myer shares clearly did not come out of nowhere with estimates declining -11%. Myer was still beaten to the downside by graphite hopeful Syrah Resources who copped a -17% fall in projected earnnings. Other reductions remained rather small. Qube, the next one on the table, saw analysts reducing forecasts by -2%.
Morgan Stanley and Morgans are still the only two stockbrokers, out of eight, in the FNArena universe carrying more Buy than Neutral ratings for total stocks under coverage. Total Buy ratings for all eight have risen to 39.71% against 44.50% Neutral ratings and 15.79% Sell ratings. These numbers suggest more value opportunities are opening up, in the eyes of stockbroking analysts, as share prices have fallen since and throughout the August reporting season.
Upgrade
COMMONWEALTH BANK OF AUSTRALIA ((CBA)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/6/1
Macquarie upgrades to Neutral from Underperform, given the stock's recent de-rating and the fact the bank has greater cost management flexibility compared with peers.
The broker continues to envisage and acknowledge risks around the bank's overweight exposure to Western Australia and further return-on-equity convergence with peers. Yet, at current levels, the stock offers a 6% dividend yield. Target is raised to $76.50 from $75.50.
JB HI-FI LIMITED ((JBH)) Upgrade to Add from Hold by Morgans and Upgrade to Buy from Neutral by UBS and Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/2/2
JB Hi-Fi will acquire The Good Guys for $870m. Morgans likes the deal and expects the power of the combined group's increased scale will become evident in coming years.
The broker acknowledges the risks in the transaction, particularly in the case of the joint venture stores which were dissolved ahead of the merger, with 30 retiring and the remaining 25 staying on as store managers.
Morgans assumes the company's synergy target of $15-20m is achieved progressively over three years. Rating is upgraded to Add from Hold. Target increases to $32.55 from $28.70.
The company will acquire The Good Guys for $870m and expects the deal to be around 12% accretive, funded by equity and debt. UBS upgrades estimates to incorporate the acquisition and assumes a 3-year sales compound growth rate of 3%.
UBS expects the acquisition will provide upside risk to forecasts in coming years via upside to synergies and a more rational market. Rating is upgraded to Buy from Neutral. Target rises to $31.60 from $28.60.
JB Hi-Fi will acquire The Good Guys for $870m. Ord Minnett believes the acquisition provides valuation support with forecast earnings growth to be strong in the medium term as synergies are realised.
The broker acknowledges execution risks, especially with the significant number of joint venture partners that are leaving. The broker, nevertheless, considers the operating performance has been strong and, given the retention of senior management from The Good Guys, suggests a return to Accumulate rating from Hold is justified.
Target price rises to $32 from $28.
MACQUARIE ATLAS ROADS GROUP ((MQA)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/2/0
The Supreme Court of Virginia's positive ruling on toll increases clears the way for Macquarie Atlas' 50% partner in the Dulles Greenway asset to start a sale process.
Credit Suisse suspects MQA will probably sell its stake as well but may keep the proceeds to finance an additional 10% stake in APRR which could become available next year.
As the shares have fallen 13% since late August, the broker upgrades to Outperform from Neutral on valuation grounds. Target rises to $6.00 from $5.90.
ORICA LIMITED ((ORI)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 2/4/2
The company is guiding to flat second half ammonium nitrate volumes which implies for Macquarie a 9% reduction over the FY16 year.
The broker continues to highlight a range of structural pressures and competitive pressures from new entrants. Still the risk/return is considered more balanced now with the business stabilising. Global commodity prices have rallied and the rate of decline in US coal has eased.
Rating is upgraded to Neutral from Underperform and the target reduced to $15.00 from $15.21.
PLATINUM ASSET MANAGEMENT LIMITED ((PTM)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/2/1
The company has announced a buy-back of 10% of equity, funded out of existing cash flow. Following a period of underperformance Credit Suisse upgrades to Neutral from Underperform. Target is lowered to $5.25 from $5.65.
Credit Suisse assumes the company completes only half of the buy-back and the buy-back has a minimal impact on valuation, given excess cash was already valued. Fund performance remains weak over the medium term and the broker expects outflows to continue.
REA GROUP LIMITED ((REA)) Upgrade to Add from Hold by Morgans .B/H/S: 2/3/2
The recent share price decline has meant the stock is now trading at a substantial discount to valuation and Morgans upgrades to Add from Hold.
While there may be a risk that paid depth ad volumes fail to grow at the 3% rate that is assumed, the broker envisages further volume downside is limited as sale listings are now at 15-year lows.
Morgans expects online share of total real estate marketing expenditure will continue to grow and as market leader REA will take a substantial share. Target is $60.97.
RIO TINTO LIMITED ((RIO)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 5/3/0
Ord Minnett has revised its iron ore supply and demand outlook, which suggests the market will only be modestly over supplied in the near term.
On this basis the broker's forecasts are upgraded for 2017 and 2018 by 26% and 21% respectively for Rio Tinto's earnings per share.
Ord Minnett upgrades to Accumulate from a Hold rating. Price target is raised to $54 from $51. The broker acknowledges there are no stock-specific catalysts but expects Rio Tinto to re-rate over time as the upgrade cycle plays out.
SYRAH RESOURCES LIMITED ((SYR)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/0/1
The company has advised that construction of the Balama project is on schedule and on budget. Macquarie analysts point out the project is now 43% completed.
Post the recent raising, the analysts believe the company is now sufficiently cashed up until revenues start flowing in, not expected before FY18. The analysts remind investors commercial production is expected towards the end of CY17.
Target price (unchanged) at $6.60. Upgrade to Outperform from Neutral following share price weakness.
THE REJECT SHOP LIMITED ((TRS)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 2/1/0
The stock has fallen 32% since the FY16 result, which was in line with Morgan Stanley's estimates but below the market's "lofty" expectations.
The broker believes the turnaround in the business is continuing and, despite tough comparables in the first quarter, considers the stock a buying opportunity.
The stock has been oversold, in the broker's view, and margin improvement and sustainable revenue growth are forecast over the next two to three years.
Hence, rating is upgraded to Overweight from Equal-Weight. Target is $12.80. Industry view is In-Line.
Downgrade
APA GROUP ((APA)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/4/1
Credit Suisse believes the Council Of Australian Governments' meeting in December is looming as a negative catalyst. The group is considering replacing the coverage test that determines whether pipelines qualify for full regulation.
Credit Suisse believes it is now probable that COAG adopts ACCC findings and lowers the threshold for full regulation of APA's pipelines, calculating the company is over-earning the theoretical regulated revenue level by 1.8 times.
The broker downgrades to Underperform from Neutral. Target falls to $7.95 from $9.15.
MYER HOLDINGS LIMITED ((MYR)) Downgrade to Neutral from Buy by UBS .B/H/S: 2/5/0
FY16 was Myer's fourth transition year and UBS observes it appears to be the last. Profit was in line with guidance and consensus and the broker observes some positive signs such as improving cash flow and positive like-for-like sales.
Refurbishments, space rationalisation and new brands all provide scope to grow sales and EBIT into FY17 and beyond, UBS believes.
The rating is downgraded to Neutral from Buy, following the lift in the share price since May. Target is raised to $1.30 from $1.25.
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CHARTS
For more info SHARE ANALYSIS: APA - APA GROUP
For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA
For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED
For more info SHARE ANALYSIS: MYR - MYER HOLDINGS LIMITED
For more info SHARE ANALYSIS: ORI - ORICA LIMITED
For more info SHARE ANALYSIS: PTM - PLATINUM ASSET MANAGEMENT LIMITED
For more info SHARE ANALYSIS: REA - REA GROUP LIMITED
For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED
For more info SHARE ANALYSIS: SYR - SYRAH RESOURCES LIMITED
For more info SHARE ANALYSIS: TRS - REJECT SHOP LIMITED