In the good books

Aurizon Holdings (AZJ) Upgraded from Sell to Neutral by Citi. B/H/S: 1/7/0

Aurizon’s FY16 report proved in-line with a slightly better-than-expected dividend, but the guidance disappointed. Citi analysts see a management team doing the hard yakka, but a lot more is required, still.

The stockbroker suggests now the share market response to the result has reset the share price at a lower level, the share price seems closer to fair value. Hence the upgrade to Neutral from Sell.

See also downgrade below.

Bluescope Steel (BSL) Upgraded from equal-weight to overweight by Morgan Stanley. B/H/S: 4/3/0

Looking forward into the FY16 report release, Morgan Stanley analysts suggest investors focus will be on company’s guidance for H1 FY17. They now suspect the market might have to lift its estimates by circa 20%. Upgrade to Overweight from Equal-Weight.

The analysts acknowledge seasonally weaker steel prices are likely through Sep-Oct, but they still see near-term outperformance as likely. The broker’s target is stable at $8.60. In-Line industry view maintained. No changes made to forecasts.

BHP Billiton (BHP) Upgraded from Underperform by Neutral by Macquarie. B/H/S: 4/4/0

Earnings and cash flow metrics were strong and ahead of Macquarie’s forecasts for FY16. The recent recovery in commodity prices now presents upside risk to the base case valuation.

Cost reductions impressed the broker across the petroleum, copper and coal divisions and this has significantly improved the outlook.

Macquarie now expects around US$5.5bn per annum in free cash flow over the next four years. This should enable the company to comfortably develop its organic projects and continue to re-pay debt.

Downside at this point looks limited and the broker upgrades to Neutral from Underperform.

James Hardie (JHX) Upgraded from Sell to Neutral by Citi and upgraded from Neutral to Outperform by Credit Suisse. B/H/S: 4/3/0

The analysts at Citi point out James Hardie should be in a position to grow by double digits in both FY17 and FY18 and this is rather rare in the present environment. They also refer to the appeal of the US housing leverage story.

Credit Suisse is increasingly confident that growth is back on track. The stock may not be cheap, but the broker is attracted to the business model which underpins a longer-term valuation.

The company has made material investments in new capacity which Credit Suisse expects will extract maximum value from the cycle.

The broker finds merit in becoming more constructive and upgrades to Outperform from Neutral.

WPP AUNZ (WPP) Upgraded from neutral to outperform by Macquarie. B/H/S: 2/1/0

Macquarie adjusts its earnings estimates for the merger with WPP’s Australasian business, with STW Communications now known as WPP AUNZ. The broker considers the transaction a game changer in terms of size and revenue potential.

Until recently, the company’s balance sheet was considered stretched and struggling to generate growth. The broker believes the stock is now, in an increasingly expensive small cap market, able to offer investors earnings growth at a reasonable valuation.

In the not so good books

Ansell (ANN) Downgraded from Outperform to Neutral by Macquarie. B/H/S: 2/5/1

Top line growth was in-line, but Ansell’s FY16 report surprised at the bottom line. Plus guidance for FY17 was better than expected too.

Citi notes the company is ready to wave goodbye to the sexual wellness business unit. The analysts seem to be unconvinced the apparent turnaround is for real.

Citi analysts base their scepticism on feedback from key industrial customers. They continue to see downside risk, while acknowledging consensus estimates will rise post the release.

Aurizon Holdings (AZJ) Downgraded from Overweight to Equal-weight by Morgan Stanley. B/H/S: 1/7/0

With iron ore contracts being re-priced lower and underlying freight revenue growth still negative, Morgan Stanley believes small operating downgrades remain a risk. That said, coal operating conditions have improved and the broker notes only 2% of customers are uneconomic at spot prices.

FY17 guidance is better than expected but the valuation appears increasingly full. Morgan Stanley finds better quality yield and cash flow exposure elsewhere in Australia infrastructure/utilities sector.

Rating is downgraded to Equal-weight from Overweight.

See also upgrade above.

CSL (CSL) Downgraded from Accumulate to Hold by Ord Minnett. B/H/S: 2/5/1

CSL delivered yet another solid underlying profit result, comment the analysts, but the turnaround at acquired Seqirus is not going smoothly and this means a disappointing year ahead. All should be well from FY18 onwards, but a taste of disappointment lingers, regardless.

Ord Minnett sees no reason to doubt the longer term growth story that remains at CSL, but for now uncertainty about Seqirus, on top of competitive threats in the plasma business and reduced buy-back support imply there’s no need to buy the stock at current level.

Dexus Property (DXS) Downgraded from outperform to neutral by Macquarie. B/H/S: 1/2/3

The composition of Dexus’ result was better than Macquarie was expecting. The outlook for trading profits has again improved, which is no surprise given asset prices are rising, the broker notes. FY17 guidance suggests flat on FY16, which is a positive.

The only issue is Dexus’ 26% year to date share price rise. Macquarie remains attracted to a strengthening Sydney office market but the stock is now trading at a premium to valuation.

Fletcher Building (FBU) Downgraded from Outperform to Neutral by Credit Suisse and downgraded from Neutral to Underperform by Macquarie. B/H/S: 4/1/1

Prospects, particularly in New Zealand, are positive, Credit Suisse maintains. Yet momentum appears to be priced into the stock.

A further expansion of the trading multiple in the next 6-12 months would require a stronger conviction on the benefits and timing of Project Accelerate and the turnaround in underperforming units.

The broker reduces earnings forecasts for FY17 and FY18 by 8%. Rating is downgraded to Neutral from Outperform.

Fletcher’s result and dividend beat Macquarie. The market was encouraged by stabilisation in the company’s four main problem assets and savings promised from the new conglomerate structure. But gains will be hard to achieve with Australia going backwards and elsewhere flat, the broker warns.

Pricing in NZ is yet to reflect new cost realities, Macquarie suggests. The broker sees a greater risk of negative earnings revisions than positive. Downgrade to Underperform.

GPT (GPT) Downgraded from neutral to sell by Citi and downgraded from neutral to underperform by Macquarie. B/H/S: 4/1/1

Citi analysts saw nothing in GPT’s interim report to materially change their view, despite the company slightly lifting its guidance. The company is enjoying tailwinds while headwinds are building, but it is the valuation that puts Citi analysts off.

First-half results were slightly ahead of Macquarie’s forecasts. The broker notes significant one-off benefits to 2016 earnings which will have to be cycled in 2017. While earnings are still expected to grow, Macquarie believes the trajectory will be lower.

2016 forecasts are increased by 1.1% and 2017 decreased by 1.5%. The stock remains the broker’s preferred defensive exposure in the predominantly retail A-REIT sector but with more headwinds than tailwinds downgrades the rating to Underperform from Neutral.

G8 Education (GEM) Downgraded from buy to hold by Ord Minnett. B/H/S: 2/2/0

First half results disappointed Ord Minnett because of the substantial increase in operating costs. The broker notes no real outlook was presented but the target of a first/second half earnings split of 35/65 was mentioned.

On face value, this appears to be a stretch given plans for only modest acquisition activity, although the broker understands the company could dispose of up to 20 loss-making centres in the second half which would clearly help margins and earnings.

Rating is downgraded to Hold from Buy as the broker awaits evidence of greater control on costs.

Invocare (IVC) Downgraded from Hold to Sell by Deutsche Bank and downgraded from Hold to Lighten by Ord Minnett. B/H/S: 2/1/3

First-half results were slightly ahead of Deutsche Bank’s estimates. The company is intent on reducing costs but the broker observes prior attempts at limiting wages growth have been difficult to achieve.

The broker is concerned that the consistent trend of modest average case growth points to customers trading down and price competition.

The stock has attractive characteristics but the upside seems limited in the absence of an earnings surprise. Deutsche Bank downgrades to Sell from Hold.

First half results were slightly behind Ord Minnett’s estimates. Given the challenges from lower volumes the result was considered solid but the rally in the share price means a gap to the valuation has emerged.

The broker observes the business enjoys long-term structural growth prospects but reduces the rating to Lighten from Hold given the recent share price appreciation and increasing capital intensity.

JB Hi-FI (JBH) Downgraded from Outperform to Underperform by Credit Suisse, downgraded from Overweight to Equal-weight by Morgan Stanley and downgraded from Buy to Hold by Deutsche Bank. B/H/S: 0/5/2

FY16 results were better than Credit Suisse expected. The outlook is for above-trend growth in FY17 but the broker reduces its FY17 forecast from a high base, by 2%.

The broker notes, if the company does not make an acquisition, it has capacity to fund a $100m buy-back in FY17.

The valuation takes into account the downgrade to forecasts and, given the strong share price performance, Credit Suisse downgrades to Underperform from Outperform.

FY16 results were better than Deutsche Bank expected. Results were supported by the consumer sector, underpinned by housing strength, and Dick Smith’s demise.

The broker expects momentum to continue but the benefits of the Dick Smith fall out commenced as early as 2015 and this will be cycled soon.

Deutsche Bank considers the stock is pricing in a high probability of an acquisition of The Good Guys.

FY16 earnings were stronger than expected and the re-rating of the price/earnings ratio leads Morgan Stanley to downgrade to Equal-weight from Overweight.

The broker expects the impact from the Dick Smith closures will now begin to fade and envisages potential for the company to participate in further industry consolidation that could improve its market position.

Mayne Pharma Group (MYX) Downgraded from Buy to Neutral by UBS. B/H/S: 1/1/0

UBS has reviewed Mayne Pharma and bumped up the target price to $2.20 from $1.78, taking the midpoint of a sum-of-the-parts valuation of $2.40 and a discounted cash flow valuation of $2.

Mayne’s strong pipeline and acquired portfolio drove the valuation.

National Australia Bank (NAB) Downgraded from Add to Hold by Morgans. B/H/S: 3/4/1

Following the third quarter trading update Credit Suisse reduces FY16 earnings estimates by -1%.

The broker likes the cost discipline and modest bad debt charges, but is not so keen on the soft revenue and asset quality deterioration.

Orora (ORA) Downgraded from Buy to Accumulate by Ord Minnett. B/H/S: 5/3/0

Orora’s full-year earnings outpaced the broker by 3.9% (net profit by 5.7%).

Ord Minnett is positive on the stock, spying value and growth from the North American acquisitions, and incremental growth and capital projects in Australia.

But the broker downgrades to Accumulate from Buy after Monday’s share-price rally.

Tox Free Solutions (TOX) Downgraded from Overweight to Equal-weight by Morgan Stanley. B/H/S: 1/4/0

While the company is able to offset the activity slowdown and re-tendering through new business wins, Morgan Stanley expects lower growth going forward.

The broker reduces earnings estimates by 28% for FY17 and 25% for FY18. Given the widespread softness in the customer base the broker expects activity and pricing to be affected.

QBE Insurance (QBE) Downgraded from Buy to Hold by Deutsche bank, downgraded from Add to Hold by Morgans and downgraded from Hold to Lighten by Ord Minnett. B/H/S: 4/4/0

Deutsche Bank found the half year results disappointing. The company expects the spike in Australasian loss ratios can be fixed but the broker suspects this may only apply to 50%, given challenging commercial conditions still exist.

With management’s credibility taking a hit the broker believes the company will need to get runs on the board in terms of positive earnings to drive valuation upside.

QBE’s first half result fell 10% short of consensus, thanks largely to a 3% deterioration in underlying attritional claims ratio to 51%, compared with 48% in the previous half.

Morgans sees no quick fix and says margin improvements will be difficult to call in the meantime. The on-off discount rate from falling bond yields of US$283 million was higher than the broker’s estimate of $200 million but was mitigated by positive prior year reserve releases of US$218 million.

BE’s interim report proved yet another disappointment, showcasing the operational environment remains tough and margin pressure continues. Ord Minnett thinks this justifies a downgrade to Lighten from Hold while dropping the price target to $8.83 from $11.

The analysts retain their confidence that, eventually, management will righten this ship, but weakness might prevail first and they do believe there is risk to the downside. All in all, this is a story about margin and Ord Minnett takes the view the global soft market conditions will make it hard to rectify margins quickly. Estimates have been reduced.

Stockland (SGP) Downgraded from Outperform to Neutral by Credit Suisse and downgraded from buy to neutral by Citi. B/H/S: 3/2/1

Ahead of Stockland’s result release today, Credit Suisse has rolled forward its valuation to set calendar 2017 as the base year as opposed to FY17. This leads to a target price increase to $4.80 from $4.68.

The broker’s result forecast exceeds guidance and while believing Stockland continues to offer relative value in an A-REIT market featuring stretched valuations, on the full price Credit Suisse has pulled back to Neutral.

FY16 results were in line with Citi’s estimates. Residential earnings were up strongly and guidance for FY17 suggests to the broker the strength will be maintained.

Citi observes the move into medium density housing, completed homes and apartments still offers a fresh path for growth if the housing market slows.

Despite this outlook, the broker downgrades to Neutral from Buy as the stock has re-rated to reflect a better appreciation by the market of the business.

Wellard (WLD) Downgraded from Hold to Reduce by Morgans. B/H/S: 5/3/0

Morgans has downgraded Wellard to Reduce from Hold after the company announced its fourth downgrade since listing in December 2015.

The broker says the company failed to deliver on its prospectus targets and has lost confidence in management. Operations continue to decline to date in FY17 so Morgans finds forecasting difficult, but notes industry conditions may improve in FY18.

Morgans pegs the stock as a high-risk investment as earnings uncertainty combines with rising debt and potential asset impairments. Target price sliced to 34.5c – a discount to FY16 net tangible assets of 57.5c.

The broker also forecasts FY17 as the trough year for margins, with a steady improvement in FY18 and FY19 amid scope for further accretive M&A providing a catalyst.

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