In the good books
Ainsworth Game Technology (AGI) Upgraded to Neutral from Underperform by Macquarie B/H/S: 1/1/0
Subject to approval, Novomatic will acquire Len Ainsworth’s 53% stake in Ainsworth Gaming, helping to boost the company’s market share and making new pokie titles available, as well as enhancing R&D, Macquarie notes. The broker sees the benefits of the sale as outweighing the negatives. Having also adjusted for A$ moves, Macquarie has lifted its Ainsworth target to $2.63 from $2.10 and as a result, upgraded to Neutral.
AWE (AWE) Upgraded to Accumulate from Hold by Ord Minnett B/H/S: 4/2/1
AWE has rejected the bid from Lone Star Japan at 80c a share. This is the right decision in Ord Minnett’s view. As share prices of oil and gas companies are depressed, to offer anything other than a substantial premium is not expected to excite shareholders and boards.
Ord Minnett notes the balance sheet is in good shape and, short of an improved offer, believes the company should maintain its current strategy.
Beacon Lighting (BLX) Upgraded to Add from Hold by Morgans B/H/S: 1/0/0
Beacon Lighting has signalled softer trading over the past 10 weeks. Morgans suspects irrational competitor pricing contributed as well as consumers trading down in price points within the lighting category, which is related to sentiment.
FY16 earnings guidance is $28.2-29.2m, 11% below the broker’s forecasts, which are downgraded accordingly. Still, Morgans believes most of the drivers of weakness will be short lived and the current share price presents an attractive accumulation point for a quality retailer.
Cochlear (COH) Upgraded to Equal-weight from Underweight by Morgan Stanley B/H/S: 1/5/2
The company’s strategies to clear bottlenecks now gives Morgan Stanley more conviction that unit growth of 6.0% can be sustained.
The broker suspects it has been too cautious on the stock and an analysis of the installed bases and upgrade cycles has contributed to a valuation increase.
Integral Diagnostics (IDX) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 3/0/0
The company will purchase Western District Radiology and the 50% of South West MRI it does not own. Credit Suisse considers it a sensible deal, 2.5% accretive to FY17-18 forecasts.
Credit Suisse believes a short-term valuation gap emerged and upgrades to Outperform from Neutral.
Mirvac Group (MGR) Upgraded to Outperform from Neutral by Macquarie B/H/S: 3/2/1
On the back of the broker’s economics team’s reduced interest rates forecasts, Macquarie notes lower rates are a positive for the REIT sector and traditionally lead to sector outperformance against the market.
Sonic Healthcare (SHL) Upgraded to Neutral from Underperform by Credit Suisse B/H/S: 4/3/1
The Australian government has announced an agreement with Pathology Australia. Legislation will be enacted to improve collection centre rents to counter the removal of the bulk billing incentive.
Credit Suisse previously incorporated the cuts to the bulk billing from the MYEFO and now reduces the rental expense, reversing out the benefits from the patient co-payments. This results in FY18 earnings upgrades.
In the not-so-good books
Alacer Gold (AQG) Downgraded to Hold from Buy by Deutsche Bank, and to Equal-weight from Overweight by Morgan Stanley B/H/S: 2/2/1
The company has approved Copler sulphide project and the larger plant, while a simpler design, will take longer to ramp up. Better grade and recovery, however, lift Deutsche Bank’s output estimates over the life of the project.
Whilst Deutsche Bank likes the Copler mine it is wary of the company’s investment appeal, as near-term production is declining, and there is an intensive capital build approaching.
For Morgan Stanley, the lower 2017 output from the oxide development creates a larger earnings dip, in the broker’s view, but near-term exploration success may fill this. Attributable gold production was down 30% quarter on quarter in the March quarter, as expected.
Insurance Australia Group (IAG) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 1/7/0
The stock has been the best performer in the large cap insurers, Credit Suisse observes. Challenges remain but the broker considers the FY16 earnings margin remains attractive and IAG should meet, or exceed, its guidance.
While the positive theme continues and the broker does not consider the stock expensive this is now factored into the share price.
G.U.D. Holdings (GUD) Downgraded to Neutral from Buy by UBS B/H/S: 1/4/0
The stock has appreciated sharply since February as the company moves its focus to the automotive aftermarket. UBS is positive about the higher proportion of earnings coming from this division post the BWI acquisition and encouraged by the recent sale of Sunbeam. Margins may drift lower but positive industry dynamics should support volumes and prices, the broker maintains.
JB Hi-Fi (JBH) Downgraded to Hold from Accumulate by Ord Minnett, and to Neutral from Buy by UBS B/H/S: 2/6/0
Following the recent strong share price performance, Ord Minnett downgrades to Hold from Accumulate. The broker believes the upside from Dick Smith’s demise has been well incorporated and the medium-term growth drivers are riskier.
Ord Minnett does not believe the stock offers compelling valuation support at current levels but forecasts strong growth in the near term.
UBS observes the share price has risen 36% from its November lows when the market became concerned about risks associated with discounting at Dick Smith. Despite the pressure, UBS observes trading has been strong and JB Hi-Fi should benefit from industry consolidation and the continued roll out of Home.
National Australia Bank (NAB) Downgraded to Neutral from Outperform by Macquarie B/H/S: 2/5/1
Macquarie observes the historical valuation discount to peers has largely unwound in recent months and considers it justified based on the underlying earnings performance.
Earnings growth is expected to be affected by a reduction in insurance earnings and convergence in impairment charges. With limited upside envisaged from current levels the broker downgrades to Neutral from Outperform.
Pact Group (PGH) Downgraded to Hold from Buy by Deutsche Bank B/H/S: 1/3/1
Deutsche Bank considers the company’s crate washing and pooling services agreement a positive, as it extends the existing materials handling business and is underpinned by a long-term contract.
The broker estimates it should be 6.0% accretive in FY18. Deutsche Bank downgrades to Hold from Buy as the stock is trading at a 1.0% premium to its revised valuation.
Seven West Media (SWM) Downgraded to Sell from Hold by Ord Minnett B/H/S: 3/1/2
As a result of reducing metropolitan free-to-air TV advertising market forecasts Ord Minnett lowers FY16 and FY17 earnings estimates by 4.1% and 5.8% respectively.
While operationally Seven is considered the best in the business, with highest revenue share and earnings margin, the broker believes it is not immune to the industry and structural trends.
TEN (TEN) Downgraded to Sell from Lighten by Ord Minnett B/H/S: 1/3/1
Ord Minnett updates forecasts to reflect a reduction in metro free-to-air TV advertising forecasts. Ten Network’s revenue share estimates are increased to 24.5% from 24.0%.
FY16 earnings forecasts are unchanged but the broker increases the forecast FY17 loss to $33m from $24m.
Tox Free Solutions (TOX) Downgraded to Neutral from Outperform by Macquarie B/H/S: 2/3/0
Chevron has started a process for expressions of interest for provision of waste management services at its WA assets. Tox Free has an existing contract until 2020.
Macquarie expects the most likely outcome of the re-tendering is that Tox Free will eventually retain the business, but at lower margins. The broker adjusts FY17 estimates to account for this scenario.
Given the overhang of the contract on the stock Macquarie downgrades to Neutral from Outperform.
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