Weekly Ratings, Targets, Forecast Changes

This story features G.U.D. HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: GUD

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 February 4 to Friday February 8, 2019
Total Upgrades: 6
Total Downgrades: 19
Net Ratings Breakdown: Buy 45.44%; Hold 40.85%; Sell 13.71%

The faster than anyone expected swift recovery in Aussie equities is triggering a deluge in recommendation downgrades from whiplash-affected stockbroking analysts while the February reporting season continues to gather substance in Australia.

For the week ending February 8, 2019 FNArena counted six recommendation upgrades by the eight stockbrokers monitored daily and all went to Buy from Neutral. Three of the upgrades (50%) followed the release of financial results, with GUD Holdings the only one to see its share price punished at first, then recover steadily.

There was a lot more action on the downgrades side of the week's ledger with 19 downgrades recorded, of which only three ratings moving to Sell. Those three unlucky ones are Sydney Airport, IDP Education, and Evolution Mining. Large cap stocks including CSL, AGL Energy, Fortescue Mining, Insurance Australia Group, Transurban, and banks National Australia Bank and Westpac all received one downgrade each.

Meanwhile, and this potentially comes as a surprise: upward adjustments to consensus price targets remain few and far in between. On top of the week's table sits IDP Education (+39%), but any other increases reduce to rather small numbers quickly, with Telstra and Insurance Australia Group still worth mentioning.

Again, the opening week of the February reporting season triggered a lot more action on the negative side with SG Fleet's consensus target diving in excess of -9% ahead of its financial result, followed by sector-colleagues Smartgroup (-5.4%) and EclipX (-5.4%), followed by Platinum Asset Management (-5%), and others.

In terms of changes made to earnings estimates, Alacer Gold commanded top spot for the week with an increase of no less than 229%, followed by AGL Energy (+18%), IDP Education, Cimic Group, Syrah Resources, and others. The flipside has Independence Group at the bottom with a -50% reduction, followed by Orocobre, FlexiGroup (profit warning), Galaxy Resources, and Janus Henderson, now without bond guru Bill Gross.

The local reporting season is getting up to speed this week, while macro influences won't be too far away.

Upgrade

ASALEO CARE LIMITED ((AHY)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/0/0

Pulp prices are falling and Credit Suisse now expects a -30% reduction in pulp costs for Asaleo in 2020, with 2019 supply already hedged. Now that local tissue business has been divested, the broker sees more stable revenue and margins ahead.

Forecast cost relief leads to a forecast earnings increase of 18% in 2020. Target rises to $1.25 from 95c. Upgrade to Outperform from Neutral, noting a 5% yield.

G.U.D. HOLDINGS LIMITED ((GUD)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/1/0

Ord Minnett believes, while some dynamics will remain structural, such as weak first half cash flow, the medium-term growth prospects for the business remain intact.

The share price has de-rated and the broker upgrades to Accumulate from Hold. Ord Minnett believes the company can consistently generate more than 6% growth in organic earnings over the medium term.

Market concerns about customer concentration in the automotive division are considered to be overstated. Target is raised to $12.70 from $12.00.

HT&E LIMITED ((HT1)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/2/1

While reducing earnings estimates to reflect lower audience share in the second half of 2018, Credit Suisse believes the stock has fallen too far, given the underlying radio market is growing.

The stock is considered to be offering value at current levels. Rating is upgraded to Outperform from Neutral and the target reduced to $1.95 from $2.23.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/4/1

Ord Minnett notes a strong outlook for domestic commercial insurance rates, leading to an upgrade to Accumulate from Hold for Insurance Australia Group.

The broker finds a favourable insurance cycle, little risk from the Royal Commission and stronger reinsurance protections are underpinning the stock. Target is raised to $8.00 from $7.10.

See also IAG downgrade.

IDP EDUCATION LIMITED ((IEL)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/1/1

Ord Minnett was impressed with the first half result, which beat estimates by 13.4%. Strong revenue growth was demonstrated across-the-board and student placement was up 40%.

The broker observes there are few companies listed on the ASX that provide the same kind of exposure to the Indian growth story and there are few reasons why the company cannot capitalise on the opportunities ahead.

The broker considers the valuation lofty but "irresistible" and upgrades to Accumulate from Hold. Target is raised to $14.16 from $8.41.

See also IEL downgrade.

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

The company has exercised its option to increase its stake in PUREgraphite JV. Novonix now hold 75% of the joint venture and has rights to 100% of synthetic graphite above 1000tpa.

Morgans considers this a positive step for the company to maximise super potential value of its synthetic graphite intellectual property.

The broker reduces its risk factor on the JV in line with the milestones identified and upgrades to Add from Hold. Target is raised to $0.54 from $0.40.

While more positive on the stock than previously, the broker cautions investors that the company still has a long way to go to build a profitable battery anode business at scale.

Downgrade

AUSTRALIAN FINANCE GROUP LTD ((AFG)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/0

Macquarie has downgraded Australian Finance Group to Neutral from Outperform in the wake of the Hayne report, which recommends banning trailing commissions and switching to a borrower pays model for mortgage brokers.

The downgrade reflects caution ahead of more clarity on regulation along with the weakening housing market. The broker has applied a -40% risk discount to valuation given uncertainty. Target falls to $1.17 from $1.95.

AGL ENERGY LIMITED ((AGL)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/4/3

Citi analysts have been among the market optimists when it comes to AGL Energy, but they now see multiple reasons to become more cautious. One of the reasons includes the current share price. A second reason is that investors will find it hard to accurately value new growth projects, including grid scale batteries.

Equally noteworthy is Citi's suggestion AGL Energy might be venturing onto the acquisition path, having plenty of balance sheet capabilities, including the option of expanding overseas or in new areas such as broadband.

The removal of buybacks has triggered a -6%-10% cut to forecasts, also including lower electricity portfolio margins as well as lower cost-out projections. Price target drops to $22.48 from $23.79 and rating downgraded to Neutral from Buy.

ALLIANCE AVIATION SERVICES LIMITED ((AQZ)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/1/0

Credit Suisse observes the share price had risen 29% since the August 2018 result, on continued positive news flow, while the rest of the share market went through a difficult period. Qantas ((QAN)) entering the shareholders' register, with the intention of building a majority stake, has fundamentally complicated matters.

Credit Suisse professes not to have any idea how the competition law sits in between Qantas and Virgin Australia ((VAH)) and Alliance Aviation. The analysts think it's best to take a more cautious stance, hence the downgrade to Neutral from Outperform. Target price increases to $2.50 from $2.45.

Earnings estimates have been reduced, but DPS forecasts have gone up, as the financial report itself seems to have missed expectations on several items, but never in a big way (the analysts talk about favourable operating conditions, but with an adverse mix)

CSL LIMITED ((CSL)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 4/4/0

Credit Suisse observes US immunoglobulin growth is starting to soften. This likely reflects supply constraints rather than a slowing in demand.

The broker does not expect guidance to be raised at the results on February 13, given a weaker northern hemisphere flu season, which could affect volume returns in the second half.

Rating is downgraded to Neutral from Outperform and the target lowered to $210 from $230 as the broker believes the stock is fairly valued.

CALTEX AUSTRALIA LIMITED ((CTX)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 5/1/1

Following a review of the investment thesis and the modest share price recovery, as well as a new alliance between Coles ((COL)) and Viva Energy ((VEA)), Ord Minnett downgrades to Hold from Buy and lowers the target to $27.50 from $30.00.

The broker believes the new alliance between the latter two makes gross margin expansion more difficult and market share losses are expected for Caltex customer Woolworths ((WOW)) and, to a lesser extent, Caltex itself.

CLEARVIEW WEALTH LIMITED ((CVW)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/0

Macquarie has downgraded Clearview to Neutral from Outperform in the wake of the Hayne report, the recommendations of which may add to the operational cost of the Life/Wealth Management/Advice model. Life remuneration faces more years of uncertainty, the broker suggests, while Wealth and Advice may be impacted by annual fee arrangement renewals.

The broker has applied a -20% risk discount to valuation given uncertainty. Target falls to 91c from $1.14.

EVOLUTION MINING LIMITED ((EVN)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 1/4/3

After strong price appreciation and some disappointments in the second quarter, amid lower gold grades, Morgan Stanley downgrades to Underweight from Equal-weight.

The broker acknowledges Evolution Mining is a quality gold company, with diversified production, but the sharp increase in the share price since September has meant it is overvalued.

Target is raised to $2.90 from $2.80. Industry view is Attractive.

FORTESCUE METALS GROUP LTD ((FMG)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 2/4/2

Rapidly improving price realisations have driven Morgan Stanley to take profits and downgrade to Equal-weight from Overweight.

The broker calculates the stock is implying an iron ore price of US$66/t and is increasingly now a headline play in the sector.

Target is raised to $6.30 from $5.05. Industry view is Attractive.

INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/4/1

First half results beat Credit Suisse estimates. The broker is cautious about whether the business will still hit the upper end of its guidance range for the full year.

This requires an allowance for expense savings in the second half and steady assumptions of peril and investment income. The broker increases FY19 net profit estimates by 11% to incorporate the beat to forecasts.

As the stock has outperformed the market in the last four months and there is some earnings risk emerging into the second half, the broker downgrades to Neutral from Outperform. Target is raised to $7.80 from $7.65.

See also IAG upgrade.

IDP EDUCATION LIMITED ((IEL)) Downgrade to Sell from Neutral by UBS .B/H/S: 3/1/1

UBS observes almost every section of the company's business is delivering growth and the digital strategy is progressing well. This presents a real opportunity to take market share. First half results were ahead of expectations.

UBS believes valuation at current levels is stretched and downgrades to Sell from Neutral. Target is raised to $12.90 from $11.30.

See also IEL upgrade.

NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Downgrade to Hold from Add by Morgans .B/H/S: 3/4/1

Morgans considers the leadership changes a negative development, amid increased risk of a cut to dividends, disruption to the transformation strategy and more remediation charges.

First quarter cash earnings were slightly lower than the broker expected with revenue the main area of softness.

Going forward, the run rate is expected to improve as increases to standard variable rates become effective.

Morgans downgrades to Hold from Add and reduces the target to $25.00 from $31.50.

OCEANAGOLD CORPORATION ((OGC)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/3/1

2019 production and cost guidance are weaker than Macquarie expected. The focus in 2019 is on exploration, with a US$40-50m program scheduled for multiple prospects.

Macquarie is maintaining an eye on the Didipio underground and ramp up at Haile. The broker downgrades to Neutral from Outperform. Target is $5.00.

PUSHPAY HOLDINGS LIMITED ((PPH)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/1/0

The company's third quarter update appeared solid to Ord Minnett at first glance, although management has indicated that revenue in FY19 will be at the lower end of guidance.

With respect to FY20, 30% growth off the FY19 base is considered a reasonable target. Nevertheless, the broker's confidence in stated targets is low, suspecting that increasing online penetration with existing customers is getting harder to obtain.

Rating is downgraded to Hold from Buy. Target is reduced to $3.47 from $3.89.

RIO TINTO LIMITED ((RIO)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/4/0

Ord Minnett notes iron ore prices have rallied in response to supply uncertainty as a result of the tailings dam failure at the Vale mine in Brazil. The broker concludes supply disruption from the tragedy is likely to be modest.

Still, the better iron ore price improves the outlook for Australian iron ore miners, although the recent rally in share prices has accounted for this.

The broker downgrades Rio Tinto to Hold from Accumulate, although maintains a preference for RIO over BHP ((BHP)) based on cheaper metrics. Target is raised to $92 from $90.

SMARTGROUP CORPORATION LTD ((SIQ)) Downgrade to Hold from Add by Morgans .B/H/S: 4/2/0

While the company has a strong track record, Morgans takes a slightly more cautious stance heading into the results on February 18. No formal earnings guidance has been provided.

The broker believes an acquisition is a realistic proposition in 2019, which represents the primary upside risk to forecasts.

However, the stock is trading at a fair multiple, with the prospect of softer organic growth in the near term, and the broker downgrades to Hold from Add. Target is reduced to $11.20 from $11.65.

SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 4/1/3

In anticipation of lower air travel demand in 2019, international airlines are cutting their capacity plans, Credit Suisse notes. To that end, the broker lowers its international passenger growth forecast to 0% from 5% previously and domestic to 0% from 2%.

The broker's dividend forecasts fall -4% in 2019 and -9% in 2020. Target falls to $6.40 from $6.80. Downgrade to Underperform from Neutral.

TRANSURBAN GROUP ((TCL)) Downgrade to Hold from Add by Morgans .B/H/S: 4/3/1

Morgans expects the first half earnings growth will be principally driven by acquisitions. The broker expects around 13% growth in operating earnings (EBITDA) with a relatively flat margin.

No change is expected to FY19 distribution guidance of $0.59 per security. The company will report its first half result on February 12.

Morgans downgrades to Hold from Add, given recent strength in the share price. Target is raised to $12.29 from $12.03.

TECHNOLOGYONE LIMITED ((TNE)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/4/0

The share price has increased over 65% since Ord Minnett initiated coverage in July 2018. The broker believes growth has now been captured in the valuation and downgrades to Hold from Buy.

While there is potential for earnings upgrades over the medium term, the broker would like to have a more evidence of accelerating back book cloud adoption before upgrading forecasts. Target is raised to $6.10 from $6.00.

WESTPAC BANKING CORPORATION ((WBC)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/4/2

Ord Minnett downgrades to Hold from Accumulate, following the first half result from Commonwealth Bank ((CBA)) which provides further evidence of a very challenging retail banking environment.

Retail banking accounts for 38% of Westpac's revenue and Australian home loans are 62% of its group loans. The broker reduces the target to $28.90 from $30.90.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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