In the good books
The A2 Milk Co (A2M) Upgraded to Buy from Hold by Deutsche Bank B/H/S: 2/2/0
Deutsche Bank analysts have dug deep into what makes A2 Milk tick, and what should potentially still lay ahead. The end result is they have “materially” increased their revenue growth outlook. This has pushed up the price target to NZ$5 (up 52% from prior target).
The broker’s optimism is partially based upon the observation that brand interest in key end market China remains strong and the fact it remains materially higher than key brand peers Wyeth and FrieslandCampina.
In addition, states the broker, there’s ongoing support from macro factors, such as the relaxation of China’s single child policy. Upgrade to Buy from Hold.
AGL Energy (AGL) Upgraded to Neutral from Underperform by Macquarie B/H/S: 3/3/1
The recent fall in AGL’s share price, following underlying electricity forward pricing, has taken the stock back to meet Macquarie’s valuation. Hence the broker has upgraded to Neutral.
Macquarie notes a lack of wind has impacted on AGL’s renewable generation and forced the company to source higher priced gas energy. While this will drag on earnings, the offset is better pricing outcomes from electricity generation on normalised volumes.
Target rises to $24.50 from $24.30.
Astro Japan (AJA) Upgraded to Buy from Hold by Ord Minnett B/H/S: 1/0/0
It’s a two-step upgrade from Ord Minnett on the back of the broker’s observation, the transaction market has strengthened in Japan, resulting in yields firming marginally over the past six months for the type of assets Astra Japan Property Group owns.
Ord Minnett has pushed up FY18 realisable NTA estimate to $7.20 (up 7% from $6.75 prior). FY18 DPS forecast moves higher by 2% to $0.47. The latter is linked to AJA’s recent shopping centre acquisitions, explains the broker.
Bank of Queensland (BOQ) Upgraded to Outperform from Neutral by Macquarie B/H/S: 2/5/1
Given regional banks have a greater proportional exposure to mortgages in their lending than the majors and are not subject to the government levy, Macquarie calculates the belated move to reprice investor/interest-only mortgages will provide a significant near term earnings tailwind.
To that end the broker upgrades Bank of Qld to Outperform. Target unchanged at $12.50.
Bendigo and Adelaide Bank (BEN) Upgraded to Neutral from Underperform by Macquarie B/H/S: 0/3/4
Given regional banks have a greater proportional exposure to mortgages in their lending than the majors and are not subject to the government levy, Macquarie calculates the belated move to reprice investor/interest-only mortgages will provide a significant near-term earnings tailwind.
To that end, the broker upgrades Bendelaide to Neutral. Target rises to $11.50 from $11.00.
BT Investment Management (BTT) Upgraded to Outperform from Neutral by Macquarie B/H/S: 2/3/1
BT saw 3.1% funds inflows in June for 9.4% year on year, exceeding Macquarie’s 5% plus performance benchmark. The manager’s new strategies are approaching a three-year track record and funds are attracting new flows and generating performance fees.
BT’s share price is nevertheless down -16% since the May numbers with the index down only -3%, making the fund manager attractively priced in Macquarie’s view. Upgrade to Outperform. Target rises to $12.05 from $11.70.
Charter Hall (CQR) Upgraded to Neutral from Underperform by Credit Suisse B/H/S: 0/5/1
Charter Hall Retail is scheduled to report FY17 numbers on August 15. Credit Suisse is anticipating funds from operations (FFO) of $124.2m (30.6cps), slightly (0.6%) above guidance of 30.4cps and 0.6% higher than FY16.
The analysts do highlight they continue to view earnings guidance for zero growth as conservative in the context of the quantum of asset sales executed to date. For FY18, the broker has penciled in 31.9c while suggesting a buy-back at current levels looks attractive.
Combining all of the above, and recent share price weakness, the decision was made to upgrade to Neutral from Underperform. Rolling forward the modelling has resulted in target price increase to $4.13 from $4.00.
Flight Centre (FLT) Upgraded to Buy from Hold B/H/S: 1/3/4
Ord Minnett has changed its Flight Centre analyst, resulting in an upgrade to Buy and a target price increase to $48.17 from $31.06.
Flight Centre has benefitted from the growth in outbound travel over the last 10 years but suffered more recently from falling international airfares, the new analyst notes.
Fares are now stabilising and a management review should lead to cost reductions. An improved earnings outlook drives the upgrade, with the company now expecting a result towards the top end of the guidance range.
Incitec Pivot (IPL) Upgraded to Buy from Neutral by UBS B/H/S: 4/2/2
Incitec has spent some $2bn since 2010 on its Moranbah and Louisiana ammonia plants and the cash flow from these investments is expected to flow from FY18, UBS notes. But fertilser prices have been weak as new supply has entered the market.
The market has adjusted for low prices but the broker expects a through-the-cycle recovery from FY18. A bottoming in prices and the market’s under-appreciation of Incitec’s planned cost controls leads UBS to upgrade to Buy on an unchanged $4.00 target.
Shopping Centres Australia (SCP) Upgraded to Neutral from Underperform by Credit Suisse B/H/S: 0/3/3
Shopping Centres have a track record of outperforming guidance and Credit Suisse believes FY17 might prove another case, given recent transactional activity and the later than expected launch of the second SURF fund. Solid growth in Woolworths ((WOW)) sales augur well for the landlord but specialty sales growth may prove a drag.
Ahead of the result next month, the broker has lifted forecasts to above consensus and raised its target to $2.18 from $2.04, prompting an upgrade to Neutral.
In the not-so-good books
Adairs (ADH) Downgraded to Hold from Add by Morgans B/H/S: 1/1/0
The company’s market update revealed operating dynamics have improved significantly towards the end of FY17, with Morgans pointing out operational profit (EBIT) is now expected to come in at the top-end of guidance range, adding [this is] “an outcome that looked highly unlikely six months ago”.
New price target of $1.35 compares with $1.20 prior but given the share price has moved significantly higher already, the rating has been pulled back to Hold from Add.
The analysts do expect gross margin to be pressured towards the bottom of management’s guidance, with the added observation the company will now be cycling a period of poor execution last year. Management’s focus is now seen shifting towards further cost productivity tailwinds.
Bellamy’s (BAL) Downgraded to Sell from Neutral by Citi B/H/S: 0/1/2
Fresh upon the announcement of the $28.5m acquisition of the Camperdown cannery, the company received news from Chinese authorities that the Camperdown licence had been suspended. The cockroach theory remains in full force.
Citi analysts state that it appears Bellamy’s cannot catch a break these days. They see alternatives and options for management, but in the short term, the mood is expected to turn sour. Downgrade to Sell from Neutral. Target falls to $5.63 from $5.75.
Magellan Financial Group (MFG) Downgraded to Neutral from Outperform by Macquarie B/H/S: 0/6/0
Fund underperformance in June has led to lower funds under management and lower performance fees for Magellan than Macquarie had expected. The broker has subsequently cut earnings forecasts by -8% and -3% in FY17-18 and cut its target to $26.37 from $26.63.
Given Magellan shares have substantially outperformed the index since May, Macquarie downgrades to Neutral.
Michael Hill (MHJ) Downgraded to Hold from Add by Morgans B/H/S: 2/1/0
Michael Hill’s FY17 sales grew 6%, thanks to an improvement in the June quarter, led by A&NZ and Canada. The US and Emma & Roe continue to provide a meaningful earnings drag, Morgans notes.
Because of material losses in these businesses, the broker needs to see a change in management strategy before it can recommend the stock to investors. As the stock is trading in line with the sector average PE, Morgans pulls back to Hold. Target falls to $1.32 from $1.53.
Platinum Asset Management (PTM) Downgraded to Underperform from Neutral by Macquarie B/H/S: 0/0/4
Platinum’s international fund has outperformed over 12 months and represents 43% of funds under management. Macquarie notes, while the Asia fund (18%) continues to underperform. Despite international outperformance, Platinum saw net FUM outflows of -7% in June.
Given the drag of outflows, the broker has cut forecast earnings and its target to $3.88 from $4.43, and downgraded to Underperform.
Royal Wolf (RWH) Downgraded to Hold from Accumulate by Ord Minnett B/H/S: 0/4/0
Royal Wolf’s major shareholder, GFN Asia Pacific, has launched a full takeover at $1.83 which the board has recommended. GFN is already on that board given 51% ownership.
For that reason, and given there is no domestic competitor with enough scale to acquire the company, Ords does not see another bid emerging. Target raised to $1.80 from $1.70 and as the market has already caught up, rating dropped to Hold.
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