In the good books

Ansell (ANN) Upgraded to Neutral from Sell by Citi and to Add from Hold by Morgans B/H/S: 2/2/1

FY17 missed and leaves Citi analysts with plenty of questions. The rating has been upgraded to Neutral from Sell, but more so because of the share price weakness that has ensued. EPS estimates have been lowered. Target gains $1 to $21.

FY17 sales were in line with expectations, although Morgans notes solid organic growth and expansion of gross margin did not translate into higher underlying profit growth because of divestments. The broker lowers revenue and underlying earnings estimates for FY18-20 by up to -1.8%. As earnings have effectively been re-set and the transformation program is in progress the broker envisages improved returns and upgrades to Add from Hold. Target is raised to $23.66 from $23.41.

ARB Corp (ARB) upgraded to Buy from Neutral by Citi B/H/S: 1/2/1

Citi analysts have upgraded to Buy from Neutral, while bumping up their price target to $17.85 from $16.77 on the back of small reductions to estimates post the FY17 results release. The analysts seem convinced management continues doing all the right things, and this company remains poised to widen the gap with its competitors, in Citi’s view.

Aurizon (AZJ) Upgraded to Neutral from Underperform by Macquarie and to Neutral from Sell by UBS B/H/S: 0/5/3

Aurizon’s result was pre-released so no surprises. The dividend was lower than expected but offset by an announced buyback, Macquarie notes. FY18 guidance is in line with forecasts.

The extent of losses in intermodal and bulk were actually above Macquarie’s expectation, but the company’s move to address these issues results in a net upgrade. Cash flow yield is strong. Re-contracting offers risk but Aurizon may also be able to win market share, the broker suggests. Target rises to $5.33 from $5.05. Upgrade to Neutral.

FY17 results confirmed a -4% decline in EBIT. UBS believes the growth outlook is anaemic although the stable cash-flow dynamic should appeal to some. There is limited ability to increase gearing. The broker forecasts a further $400m in buy-backs over the next three years in addition to the $300m just announced. Rating is upgraded to Neutral from Sell. Target is raised to $4.90 from $4.80.

Bendigo and Adelaide Bank (BEN) Upgraded to Neutral from Underperform by Credit Suisse B/H/S: 0/4/3

FY17 revenue missed Credit Suisse estimates. The broker downgrades forecasts for earnings per share by -4-5%. The broker suggests downside risk associated with capital adequacy and the Great Southern bad debts appear to have diminished. Credit Suisse upgrades to Neutral from Underperform. Target is $11.90.

CSL (CSL) upgraded to Add from Hold by Morgans B/H/S: 5/1/0

On Citi’s revised projections,  CSL stands to deliver 14% EPS CAGR for FY17-FY20. Such reliability deserves a premium, say the analysts. They think the stock looks attractive on a relative comparison. Price target declines to $145 from $148. Buy rating retained.

CSL’s FY17 full-year results beat the broker thanks to a margin lift on high-value products, strong plasma sales, more efficient operations and a stumble by competitors.

Morgans says expected second-half weakness should give way to a reinvestment year in 2018, and believes forecasts may be conservative. CSL is upgraded to Add from Hold and the target price eases marginally from $140.20 to $138.40.

REA Group (REA) Upgraded to Outperform from Neutral by Credit Suisse, to Add from Hold by Morgans and to Neutral from Sell by UBS B/H/S: 4/4/0

FY17 results were in line with Credit Suisse. A better Australian result was offset by lower Asian EBITDA. The broker believes the growth profile is strong going into FY19.

Credit Suisse does not consider the stock expensive, given the recent re-rating of peers. Rating is upgraded to Outperform from Neutral and the target to $72 from $65.

FY17 was weaker than Morgans expected but 12% underlying growth is still considered acceptable. FY18 is expected to provide rising volumes in depth advertising, a price rise and increasing numbers of Premier All subscribers.

The broker upgrades to Add from Hold. Target is raised to $68.75 from $60.73. Several more years of double-digit earnings growth and high free cash generation are expected.

Despite the negative price reaction UBS believes the company should be credited with delivering double-digit growth against depressed residential listings.

However, the market appeared to be pricing in a beat to estimates and the FY17 result missed consensus, albeit in line with UBS. The broker upgrades to Neutral from Sell after the re-set of the share price. Target is raised to $64 from $60.

Class Limited (CL1) upgraded to Add from Hold by Morgans B/H/S: 3/0/0

Class Limited shrugged of industry woes to meet consensus. Core operating earnings before interest, tax, depreciation and amortisation jumped 38%, struck on a 25% rise in revenue, with cash generation of 89%.

Morgans notes pleasant margin expansion and strong investment in sales and customer service and upgrades the stock to Add from Hold.

Westfield (WFD) upgraded to Outperform from Neutral by Credit Suisse B/H/S: 4/1/1

First half results were in line with Credit Suisse. The company has re-affirmed four-year earnings guidance.

The company has again indicated that future disposals will be at the margin and Credit Suisse no longer allows for US$1.5bbn in sales in FY18. In isolation this boosts funds flow estimates by 5-6%.

The broker believes the year-to-date decline in the share price of -18% creates an attractive buying opportunity and upgrades to Outperform from Neutral. Target is reduced to $8.95 from $9.25.

In the not-so-good books

Challenger (CGF) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 1/5/2

FY17 results disappointed Credit Suisse. Some of the underlying drivers were weaker than expected and guidance has signalled these might continue. June quarter annuity sales were surprisingly weak, down 35% from a year ago.

Credit Suisse lowers FY18 net profit forecast by -4.3%. Management continues to execute on a growth strategy and the broker acknowledges the 8-12% growth implied by guidance is a rarity.

The broker envisages increased risk of slowing domestic sales in the short term and downgrades to Neutral from Outperform. Target is reduced to $12.70 from $13.50.

Charter Hall (CQR) Downgraded to Underperform from Neutral by Macquarie B/H/S: 3/2/1

FY17 operating earnings were in line with Macquarie’s estimates. FY18 guidance is below expectations as the broker had previously anticipated growth around 3% whereas the company has guided to a flat year.

While the stock remains a relatively defensive proposition and the majority of its income is supported by large non-discretionary retailers, given limited growth and high gearing Macquarie moves to Underperform from Neutral. Target is reduced by 5% to $4.01.

Domino’s (DMP) Downgraded to Neutral from Outperform by Macquarie B/H/S: 2/3/2

FY17 earnings missed expectations. Macquarie observes the weaker performance was a function of softening comparable store sales growth across all regions and weaker earnings growth in Australia.

As much of the de-rating to the stock has already taken place, the broker finds merit in pulling back to Neutral from Outperform, given concerns around the growth drivers and earnings quality. Target is reduced by -40.7% to $44.47.

Mineral Resources (MIN) Downgraded to Hold from Buy by Deutsche Bank B/H/S: 2/1/0

FY17 earnings were below Deutsche Bank’s estimates. The broker remains positive on the company’s growth strategy but downgrades to Hold from Buy on valuation.

The broker observes the company has a solid track record of beating earnings guidance. FY18 guidance is for EBITDA of at least $500m.

Deutsche Bank believes guidance is conservative, despite the company flagging high iron product discounts. Target is $13.50.

Seek (SEK) downgraded to Underperform from Neutral by Credit Suisse B/H/S: 3/2/3

FY17 results were broadly in line with Credit Suisse. The broker reduces FY18 net profit forecast by -8.6% to reflect lower guidance.

The stock may be high-quality but the broker struggles to justify the share price at current levels. Rating is downgraded to Underperform from Neutral. Target is raised to $15.80 from $14.70.

Sigma Healthcare (SIG) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 0/1/3

The trading update suggests lowered expectations for FY18 and Credit Suisse notes similar trading updates from competitors, highlighting softness in retail-facing sales.

Credit Suisse lowers earnings forecasts by -3-6% and downgrades to Neutral from Outperform. Target is reduced to 85c from 90c.

Sonic Healthcare downgraded to Underperform from Neutral by Credit Suisse B/H/S: 2/1/3

FY17 net profit was below Credit Suisse forecasts. The broker updates modelling assumptions and, as a result, forecasts for earnings per share decreased by -7% over FY18-20.

Based on recent relative share price performance, the broker downgrades to Underperform from Neutral. Operating earnings growth is expected to improve in FY18 but this is essentially because of acquisitions rather than a step change in regional organic growth rates.

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