In the good books
Duet Group (DUE) Upgrade to Overweight from Underweight by Morgan Stanley B/H/S: 3/4/1
Morgan Stanley updates its regulated utilities to allow for the regulator’s determinations, recent M&A and lower bond yields. The broker expects company strategies and regulation will provide some tactical opportunities.
The final determination of the Australian Energy Regulator provides a valuation uplift of 1-2%, in the broker’s calculation.
Morgan Stanley upgrades Duet to Overweight from Underweight, as the stock becomes the top pick with its highest yield and lower exposure to low RAB indexation.
In the not-so-good books
ALS Limited (ALQ) Downgraded to Underweight from Equal-weight by Morgan Stanley B/H/S: 0/3/4
Morgan Stanley expects the company’s performance to continue to disappoint in the wake of the FY16 results. Revenue may be better diversified now but energy is loss making and minerals margins are under pressure.
At some point the stock is expected to turn around but the broker is increasingly concerned that the company has reached the limit of its ability to cut costs ahead of revenue declines to preserve margins.
The broker expects investors will also increasingly lose patience with the stock. Morgan Stanley acknowledges it has, and downgrades to Underweight from Equal-weight.
Ausnet Services (AST) Downgraded to Underweight from Overweight by Morgan Stanley B/H/S: 3/4/1
Morgan Stanley updates its regulated utilities to allow for the regulator’s determinations, recent M&A and lower bond yields. The broker expects company strategies and regulation will provide some tactical opportunities.
The final determination of the Australian Energy Regulator provides a valuation uplift of 1-2%, in the broker’s calculation. Ausnet Services has the highest relative regulatory re-set risk in the broker’s coverage and is targeting only modest expenditure reductions.
Morgan Stanley downgrades to Underweight from an Overweight rating. Cautious industry view.
CSL (CSL) Downgraded to Neutral from Buy by UBS B/H/S: 3/4/1
CSL will decide shortly whether to commit to a 4-year clinical trial for CSL112, a plasma-derived compound which cleans arteries.
UBS values the product at $4.56 per share, a material component of the R&D valuation. This contributes to an increase in the price target to $126 from $113.
With recent trading, the share price has attained fair value in the broker’s view and the rating is downgraded to Neutral from Buy.
Flexigroup (FXL) Downgraded to Neutral from Outperform by Macquarie B/H/S: 3/3/0
Flexigroup’s strategy day featured a slight downgrade to FY16 profit guidance and the announced intention to exit several loss-making and/or non-core businesses. The company’s longer-term growth target requires big steps up for Certegy and AU leasing, which Macquarie sees as a bit ambitious.
The broker has downgraded to Neutral. Another guidance downgrade highlights a third straight year of low or no organic growth. While a 7% yield may be attractive to some, Macquarie suggests new management has to win over investors with actual earnings growth, and this could take time.
Flexigroup (FXL) Downgraded to Hold from Add by Morgans B/H/S: 3/3/0
Flexigroup will exit three business units, either via divestment or running off the books. The discontinued operations previously contributed around $10-12m in cash profit per annum but have been defined as non-core.
Despite strong valuation and yield support, Morgans observes continued pressure on organic growth into FY17. The broker would prefer to obtain more confidence in the return of sustainable growth and downgrades to Hold from Add.
Sigma Pharmaceuticals (SIP) Downgraded to Neutral from Buy by UBS B/H/S: 0/5/0
UBS reviews its outlook for the stock, taking into account the inclusion of Hep C vaccine sales. A 50% rally in the stock over the past three months has closed the value gap that existed at the FY16 result.
Sonic Healthcare (SHL) Downgraded to Neutral from Buy by UBS B/H/S: 3/4/1
UBS expects FY16 results will be at the lower end of guidance. While the regulatory risk has eased it remains in the background, although the broker notes the company’s diversification mitigates the risk somewhat.
UBS flags upside from accretive M&A, given the established footprint in less consolidated markets.
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