In the good books

COCHLEAR LIMITED (COH) Upgrade to Neutral from Underperform by Credit Suisse B/H/S: 0/4/2

FY17 net profit was in line with Credit Suisse forecasts and at the top end of guidance. The broker envisages robust services revenue growth over the short to medium term and expects Kanso will drive market share gains for the company’s Nucleus Profile implant.

Rating is upgraded to Neutral from Underperform on the back of improved free cash flow and better working capital management. Target is raised to $142.50 from $129.00.

See also COH downgrade.

TABCORP HOLDINGS LIMITED (TAH) Upgrade to Outperform from Neutral by Credit Suisse B/H/S: 2/0/1

Credit Suisse currently models Tabcorp as if it is merged with Tatts (TTS) effective January 1, 2018.

The broker believes the recent drop in the share price, combined with more certainty around Tatts earnings, warrants an upgrade to Outperform from Neutral. Target is $4.80.

TELSTRA CORPORATION LIMITED (TLS) Upgrade to Neutral from Underperform by Credit Suisse and Upgrade to Add from Hold by Morgans B/H/S: 2/3/2

FY17 results were ahead of Credit Suisse. The broker reduces FY18 operating earnings estimates by -2.1% to reflect guidance. The dividend reduction now means a majority of the bad news is out of the way, in the broker’s view.

Mobile is performing slightly better than forecast although competitive risks remain high. The broker believes the dividend yield is sustainable for the next five years and should provide some support.

Rating is upgraded to Neutral from Underperform. Target is reduced to $3.90 from $4.00.

Telstra’s result was in line with Morgans but while the broker had warned of dividend risk, 22c appears to be a worst case scenario. The cut is sparked by lower earnings due to both the NBN and competition, and a need for balance flexibility.

The cut is disappointing but does now remove uncertainty and a buyback may yet offset, the broker notes. Telstra is now better placed for the future and valuation has been rebased. Given the extent of rebasing, the broker sees a bear case in place suggesting upside risk. Upgrade to Add. Target falls to $4.15 from $4.37.

See also TLS downgrade.

In the not-so-good books

COCHLEAR LIMITED (COH) Downgrade to Reduce from Hold by Morgans B/H/S: 0/4/2

Cochlear’s result was in line, featuring strong growth across the portfolio. The return of services growth was a pleasant surprise for Morgans but the exact contribution from service programs is unknown.

The broker sees risk around the impending launch of the N7, being conducted out of the insurance cycle and offering greater connectivity rather than improved hearing. Target rises to $131.30, still well below the traded price which Morgans believes ignores this risk. Downgrade to Reduce.

See also COH upgrade.

COMPUTERSHARE LIMITED (CPU) Downgrade to Hold from Add by Morgans B/H/S: 1/6/1

Computershare’s result missed consensus by -3% but critically FY18 guidance fell short of expectation on several factors including wage increases and a higher tax rate. The result nevertheless indicated continuing business momentum, Morgans suggests.

Despite downgrading forecasts, the broker has been impressed with the company’s transformation so far. On share price strength over the past year, Morgan downgrades to Hold. Target falls to $14.72 from $15.42.

FAIRFAX MEDIA LIMITED (FXJ) Downgrade to Neutral from Outperform by Credit Suisse B/H/S: 3/2/0

FY17 results were broadly in line with Credit Suisse. The outlook for Domain revenue is strong but the broker notes costs will be higher. Domain digital revenue is up 26% in the first six weeks of FY18.

Credit Suisse reduces Domain base case valuation to reflect lower forecast earnings. While there is long-term valuation upside the higher cost base means this will take longer to be realised.

Rating downgraded to Neutral from Outperform and target drops to $1.06 from $1.10.

IRESS MARKET TECHNOLOGY LIMITED (IRE) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Lighten from Accumulate by Ord Minnett B/H/S: 1/2/0

First half results were weaker than Credit Suisse expected, attributed predominantly to non-recurring factors. The broker’s understanding of the UK industry conditions and client demand implies no fundamental change in the revenue outlook.

Although a strong second half great growth rate is expected, the weaker first half base has resulted in negative earnings revisions. The broker considers the stock fairly valued and downgrades to Neutral from Outperform. Target rises to $12.85 from $12.70.

First half net profit was below Ord Minnett’s forecast. Management has maintained guidance for 2017, implying a significant step up in profitability in the second half.

Ord Minnett believes the company could still achieve guidance but notes the stock has re-rated about 10% relative to the market over the past six months.

Given the significant uplift in earnings required in the second half, the broker downgrades to Lighten from Accumulate and reduces the target to $12 from $13.

TELSTRA CORPORATION LIMITED (TLS) Downgrade to Hold from Buy by Ord Minnett B/H/S: 2/3/2

FY17 results were considered “decent” and above forecasts but Ord Minnett believes the results of the capital management review and accompanying cut to the dividend were the worst outcome investors could have expected.

Management intends to use most of the proceeds from the NBN for new endeavours, potentially outside its expertise, in the broker’s opinion, rather than returns to shareholders.

Rating is downgraded to Hold from Buy. Target is reduced to $4.20 from $5.00.

See also TLS upgrade.

WHITEHAVEN COAL LIMITED (WHC) Downgrade to Accumulate from Buy by Ord Minnett B/H/S: 4/3/1

FY17 earnings were slightly behind Ord Minnett because of higher costs. The main positive surprise was the proposed distribution of $0.20 per share. However, the company outlined geological challenges at the Narrabri operation, leaving the broker to downgrade FY19 and FY20 estimates.

The share price has had a run-up recently and the broker downgrades to Accumulate from Buy. Target is reduced to $3.45 from $3.50.

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