In the good books

ASX (ASX) Upgraded to Hold from Lighten by Ord Minnett B/H/S: 0/4/4

Ord Minnett reviews the stock’s business model and takes a more positive view of medium-term earnings growth prospects and a reduced discount rate that reflects a defensive nature of the company’s earnings stream.

Ord Minnett believes the stock is currently fairly priced. Rating is upgraded to Hold from Lighten and the target raised to $52.79 from $48.50.

Bluescope Steel (BSL) Upgraded to Accumulate from Hold by Ord Minnett B/H/S: 6/1/0

Ord Minnett has undertaken a pre-report review and marked to market commodity prices. The broker has re-based costs to levels achieved post restructuring in FY16. Further potential value upside is envisaged from any additional efficiency benefits.

Rating is upgraded to Accumulate from Hold. Target is raised to $15 from $13.

Mantra Group (MTR) Upgraded to Overweight from Equal-weight by Morgan Stanley and to Buy from Neutral by Citi B/H/S: 5/3/0

The company has acquired the Art Series portfolio of around a thousand rooms across seven properties. FY18-19 earnings accretion is forecast at 5-6%.

As a result, the company now boasts higher growth at a lower price and the broker upgrades to Overweight from Equal-weight. Industry view is: In-Line. Target is raised to $3.40 from $3.20.

It is unclear to Citi how the acquisition fits with the portfolio but considers operating such hotels is a reasonable strategy against Airbnb.

While some synergies exist, the broker believes others may be harder to achieve, compared with an acquisition of stock more closely related to existing product.

Citi returns to Buy from Neutral, given this unforeseen acquisition delivers FY19 accretion to earnings per share of around 5% and the share price has fallen -8% since beginning of the month. Target is raised to $3.25 from $3.15.

Oroton Group (ORL) Upgraded to Buy from Neutral by Citi B/H/S: 1/0/0

The company is taking steps to address its losses by closing the Gap brand. Citi believes this is an important step and will allow the business to focus on the more profitable Oroton brand.

There are six stores trading and Citi estimates the brand contributed 20% to total sales for the group.

Citi upgrades to Buy, High Risk from Neutral, High Risk. Target is raised to $1.20 from $1.14.

In the not-so-good books

Air New Zealand (AIZ) Downgraded to Sell from Hold by Deutsche Bank B/H/S: 0/2/2

Deutsche Bank observes the domestic environment is near cyclical highs and competition has been benign. Current tailwinds are expected to support FY18 earnings but rising competition and input cost inflation in FY19 will mean earnings start to decline.

Hence, with a high valuation starting point and negative momentum the broker downgrades to Sell from Hold. Target is raised to NZ$2.75 from NZ$2.45.

Commonwealth Bank (CBA) Downgraded to Hold from Add by Morgans B/H/S: 0/5/3

Civil proceedings launched by AUSTRAC against the bank create the risk of a financial penalty which materially affects its CET1 capital position, Morgans asserts.

The proceedings also lead to the risk of brand damage and that management will be focused away from creating value for shareholders.

The broker now factors in a higher risk premium to its valuation and downgrades to Hold from Add. Target is reduced to $83.00 from $87.50.

Sims Metal Management (SGM) Downgraded to Neutral from Buy by Citi and to Neutral from Outperform by Macquarie and to Hold from Accumulate by Ord Minnett B/H/S: 1/5/1

Citi believes the departure of management – both the CEO and the CFO have resigned – without explanation creates investment risk.

The lack of public engagement by the board and the lack of detail in the announcement mean too many questions are unanswered ahead of the August 25 results.

The broker downgrades to Neutral from Buy. Target is reduced to $14.00 from $14.10.

The company has announced a trading update with earnings guidance between $180-185m for FY17 and has also announced the departure of its CEO and CFO. CEO Galdino Claro will be replaced by Alistair Field while Amit Patel will be acting CFO.

Macquarie was surprised at the sudden departures and suggests this indicates the succession strategy did not go to plan.  While the stock price moved aggressively on the news, the broker believes it is prudent to await more clarity and downgrades to Neutral from Outperform. Target is $14.80.

Ord Minnett has undertaken a pre-report review and marked to market commodity prices. The broker updates scrap forecasts in line with long-term iron ore forecasts of US$50/t.

The broker will also be seeking clarity at the results about the reasons for the surprise departures of the CEO and CFO.

Rating is downgraded to Hold from Accumulate as the stock looks fully valued. Target is reduced to $13.60 from $15.20.

Seven West Media (SWM) Downgraded to Underperform from Neutral by Macquarie B/H/S: 0/3/2

The company is facing pressure on revenue share because of improved programming from Nine Entertainment (NEC) as well as a weaker advertising market.

Macquarie expects cost pressures will also weigh, given higher cost for the rights to AFL and tennis that are up for re-negotiation soon.

The negatives outweigh the benefits and the broker downgrades to Underperform from Neutral. Target is reduced to $0.75 from $0.85.

Trade Me Group (TME) Downgraded to Sell from Hold by Deutsche Bank B/H/S: 1/1/3

Deutsche Bank observes the competitive environment for the company’s marketplace business has deteriorated significantly and the entry of Amazon into Australia, likely to be followed by New Zealand, will increase pressure.

The broker argues that the best option for the company, to ensure it remains relevant, is to launch an all-you-can-eat shipping service, even though this will depress earnings growth.

The shares are trading 21% above the broker’s revised target price and the rating is downgraded to Sell from Hold.

Transurban (TCL) Downgraded to Neutral from Buy by Citi B/H/S: 3/3/0

It appears underlying financial performance in FY17 slightly missed Citi’s expectation. Dividend guidance for FY18 (56c) is also slightly below the anticipated 57c but Citi analysts are not worried, arguing management has a habit of upgrading as the year progresses.

Equally important, Citi analysts note management remains confident current growth options can be funded by existing reserves. This statement is excluding the West Gate Tunnel Project (WGTP), which could require some raising.

All in all, there’s enough growth in the pipeline to withstand higher bond yields, argue the analysts. They thus see further upside in the share price towards the revised 12 month valuation/target of $12.62 (was $12.25).

Additional upside of $0.86 will be received upon successfully achieving financial close for WGTP, the analysts add. Rating nevertheless downgraded to Neutral from Buy.

Webjet (WEB) Downgraded to Underweight from Equal-weight by Morgan Stanley B/H/S: 3/1/1

The company will pay $330m to acquire JacTravel. A strong outlook and 20% accretion are not enough to entice Morgan Stanley into what it describes as an increasingly complex and opaque story.

JacTravel is a large acquisition to absorb and comes within a week of the auditor disagreeing with the accounting for a previous acquisition.

Morgan Stanley downgrades to Underweight from Equal-weight. Industry view: In line. Target is raised to $11.35 from $10.50.

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