In the good books
Macquarie has upgraded Flexigroup (FXL) to Outperform from Neutral. Flexigroup will acquire Fisher & Paykel’s NZ finance business for NZ$315m. F&P is a leading non-bank consumer financier in NZ, Macquarie notes, making it a complementary acquisition. The price looks a bit full but the broker acknowledges earnings accretion, reasonable synergies and strategic justification. With no organic growth in sight, it is an acquisition Flexigroup needed to make. On current valuation and earnings upside from the acquisition Macquarie upgrades to Outperform, but the broker still prefers Pepper Group (PEP) in the space.
JP Morgan has upgraded Incitec Pivot (IPL) to Overweight from Neutral. JP Morgan expects the coming year will transform the company, with the commissioning of the ammonia plant in the US marking the end of a period of elevated capital expenditure. Earnings from the project should generate a significant step up in cash flow, the broker maintains. JP Morgan upgrades to Overweight from Neutral.
Macquarie has upgraded Mount Gibson Iron to Outperform from Neutral. Mt Gibson’s Sep Q report featured much lower than forecast costs at Koolan Island, allowing a Stage 3 mining campaign to go ahead at Acacia East. Shipments were impacted by bad weather at Geraldton but this will be picked up in the Dec Q, Macquarie notes. While Acacia East increases Macquarie’s production forecast the impact on earnings is minimal. The focus for the broker is on the company’s cash balance, which will be used to fund opportunities management is on the lookout for. As the stock is trading at a 35% discount to cash, Macquarie upgrades to Outperform.
JP Morgan has upgraded Oz Minerals (OZL) to Neutral from Underweight. September quarter production was strong and, after making favourable adjustments to the cost profile over the medium term, JP Morgan’s valuation is up significantly. Based on the attractive outlook for the balance sheet and potential for increased shareholder returns the broker upgrades to Neutral from Underweight.
UBS has upgraded Oz Minerals (OZL) to Buy from Neutral. September quarter production delivered on consistency, UBS observes. The broker expects the company to achieve the upper end of guidance for 2015 of 126-131,000 tonnes copper, or even beat that. The broker returns the rating to Buy from Neutral after the recent pull-back in the share price, noting its balance sheet strength, cash flow and liquidity.
In the not-so-good books
Credit Suisse has downgraded Air New Zealand (AIZ) to Underperform from Neutral. Credit Suisse updates forecasts following the release of September quarter passenger data. The airline’s trans Tasman performance has lagged that of the Pacific island network. Short haul yield was flat versus the previous corresponding quarter. With the stock trading at a premium to the broker’s assessment of fundamental value the rating is downgraded to Underperform from Neutral.
Macquarie has downgraded Alacer Gold (AQG) to Underperform from Neutral. Alacer’s Sep Q production was in line with Macquarie’s forecast. The broker has nevertheless cut its Dec Q forecast given lower grades at Copler, and it will also be a quarter in which capex is ramped up. Delivery of the sulphide project offers risk and Macquarie believes Alacer is being over-valued against its gold junior peer group. Downgrade to Underperform.
Morgans has downgraded APN Outdoor (APO) to Hold from Add. Morgans upgrades forecasts after feedback from industry players which indicates demand for both static and digital billboards is running near record levels. The broker upgrades 2015 and 2016 earnings estimates by 3.0% and 4.0% respectively and acknowledges there is potential for further upside in both yield and capacity utilisation. Yet, the rating is downgraded to Hold from Add after the recent strong share price performance.
UBS has downgraded Bluescope Steel (BSL) to Neutral from Buy. UBS is downgrading to Neutral from Buy as the stock has outperformed since it announced a review of its steel making operations and now factors in a potential turnaround in earnings from Port Kembla. Any further re-rating potential from an exit of raw steel production in Australia is unlikely in the near term, in the broker’s view, despite the challenges.
Morgans has downgraded Capitol Health (CAJ) Hold from Add. The company has signalled that recent changes in referral patterns means FY16 revenue will be 4-6% below previous expectations. A further update will be provided at the AGM in November. Morgans is not sure how widespread the issue is or how long the softness will last and remains cautious ahead of the Medicare review, expected in December. In other news, the company has entered into a MoU to commercialise artificial intelligence protocols in radiology, which the broker believes has longer-term positive implications.
Deutsche Bank has downgraded Dick Smith (DSH) to Hold from Buy. Deutsche Bank struggles to understand how weakness in one month, October, can explain the company’s sharp FY16 downgrade. Deeper issues must be prevailing. First quarter sales grew 1.3% in like-for-like but the company had to discount materially to get there and this weighed on margins. FY16 guidance is reduced by 14%. The broker suspects the format is struggling to deliver like-for-like growth from organic traffic without aggressive discounts and help from lower margin online sales. An inventory issue may also exist that requires deeper discounting to rectify.
Macquarie has downgraded Dick Smith (DSH) to Neutral from Outperform. Dick saw solid sales growth through the September quarter but suddenly in October, the wheels fell off, the AGM revealed. Management is blaming poor marketing decisions, Macquarie notes. Dick will quickly try to address the issues heading into Christmas but in the meantime has downgraded FY16 profit guidance by 15-20%. Macquarie has slashed earnings forecasts as a result and dropped its target to $1.00 from $2.10. A downgrade of such magnitude so close to Christmas is a worry, the broker suggests. Downgrade to Neutral. Dick’s PE is undemanding, but the market will stay away until Dick can deliver some more promising results.
Macquarie has downgraded Evolution Mining (EVN) to Neutral from Outperform. Evolution had already pre-released better than expected Sep Q production numbers, so no surprises from the official release. The company will review production guidance in January, at which point Macquarie believes cost forecasts will be lowered. Exploration continues to impress but given the stock’s 70% rally in two months on an unchanged A$ gold price, Macquarie is downgrading to Neutral.
Morgans has downgraded Evolution Mining (EVN) to Hold from Add. September quarter production was up 35%, largely because of the recently acquired Mungari and Cowal operations, Morgans observes. While the stock has performed well over the last year the broker suspects the share price is now looking stretched. Hence the rating is downgraded to Hold from Add. Morgans revises up FY16 production forecasts and suspects guidance may be revised for the second half.
Credit Suisse has downgraded G.U.D. Holdings (GUD) to Neutral from Outperform. Credit Suisse is of the view that the company’s initiatives to date have been impressive and there are further gains to be made. The broker is also positive about the fact the business, post the BWI acquisition, will have over 65% exposure in earnings to the automotive after-market but growth in this division will really only start to ramp up in late FY16. Credit Suisse consider the risk/reward balanced at this point and downgrades to Neutral from Outperform.
Macquarie has downgraded Medusa Mining (MML) to Underperform from Neutral. Medusa’s Sep Q production was in line with Macquarie’s forecast and FY16 guidance was maintained. Cash remains steady. The problem for the broker is Medusa’s strong share price run over the past couple of weeks despite an unmoved USD gold price. With the stock trading at a premium to valuation and peer group PE, Macquarie downgrades to Underperform.
Citi has downgraded Northern Star Resources (NST) to Sell from Neutral. It’s a valuation call. The share price has appreciated by some 40% and Citi analysts think it’s now too high for comfort. The September quarter saw lower production at a higher cost, but the analysts suggest this was as expected. The company is on track to meet the FY16 output guidance of 535-570koz, note the analysts. They also note Northern Star proposes increasing production to 700kozpa through FY18. Citi analysts stick to 570kozpa in FY16-19 for the time being.
Macquarie has downgraded Northern Star Resources (NST) to Underperform from Outperform. Northern Star’s Sep Q production, revenues and costs were all in line with Macquarie’s forecasts. The company is on track to meet guidance and exploration offers upside potential. But after a 60% share price rally in a couple of months, without any movement in the A$ gold price, Macquarie has downgraded to Underperform from Outperform.
Citi has downgraded Sandfire Resources (SFR) to Neutral from Buy. Citi analysts report DeGrussa’s operational performance in the September quarter proved better than expected. The analysts believe the company is on track to meeting its own guidance for the year. Equally important, Citi analysts see potential for “significant” additional copper-gold discoveries in the Doolgunna area. They have pulled back the rating to Neutral from Buy, but this is purely valuation-based, the analysts explain.
Credit Suisse has downgraded Ten Network Holdings (TEN) to Neutral from Outperform. The FY15 loss was larger than Credit Suisse expected as TV costs fell less than expected. The company expects first quarter advertising revenue to be up 10% but the broker suspects the upside could be offset by a material step up in costs. Credit Suisse reduces its rating to Neutral from Outperform.
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