In the good books

CSR Limited (CSR) Upgraded to Outperform from Neutral by Macquarie. B/H/S: 1/4/1

First half results were above Macquarie’s expectations. The most positive aspect was building products, and the broker suggests it could have been even better if it weren’t for the expensing of capital investment and the impact of sharply rising electricity costs. Macquarie upgrades to Outperform from Neutral as the sell-off following the solid result was a surprise and presents an opportunity. Target is raised to $5.15 from $4.40.

Macquarie Group Limited (MQG) Upgraded to Outperform from Neutral by Credit Suisse: B/H/S: 2/4/1

Credit Suisse upgrades FY18 earnings estimates by 1% following the first half result. Despite the fact earnings growth was narrowly based, the broker observes profitability continues to improve and the balance sheet is being replenished. Rating is upgraded to Outperform from Neutral and the target raised to $105 from $100. Target price is $105.00.

Orocobre Limited (ORE) Upgraded to Buy from Neutral by Citi and to Neutral from Underperform by Macquarie B/H/S: 4/1/1

September quarter production was soft, as expected, although still below Citi’s estimates. The cash margin profile is considered to be better and the balance sheet has been de-leveraged. Along with improving fundamentals in the lithium market, Citi no longer views the stock as high risk and upgrades to Buy from Neutral. Target is raised to $5.50 from $3.90.
Orocobre’s Sep Q production and sales missed forecasts, driving higher costs. The company has maintained first half production guidance but this would require a record second quarter, Macquarie notes. A strong October supports guidance, and management is confident costs will fall in FY19 when the CO2 circuit is installed. Before then, better volumes are needed. The share price fall has taken the stock down to where Macquarie sees fair value, hence an upgrade to Neutral. Target rises to $4.97 from $4.90.

Woolworths Limited (WOW) Upgraded to Neutral from Underperform by Credit Suisse: B/H/S: 3/2/3

The September quarter update suggests to Credit Suisse that food deflation remains a risk to the outlook. The main issue for the broker is whether the competitive environment is stabilising enough to allow for meaningful margin expansion over the medium term. Following a period of underperformance in the share price, the broker upgrades to Neutral from Underperform. Target is raised to $25.31 from $25.17.

In the not-so-good books

AWE Limited (AWE) Downgraded to Sell from Neutral by UBS B/H/S: 1/3/2

September quarter production was ahead of expectations, up 16% and driven by strong east coast gas. However, UBS observes, this is not sufficient to change full year guidance of 2.5-2.7mmboe. The broker attributes the 16% rally in the share price over the past two weeks to recent good news at Waitsia. However, this appears overdone and UBS downgrades to Sell from Neutral. Target is lowered to $0.47 from $0.45.

Beadell Resources Limited (BDR) Downgraded to Neutral from Outperform by Macquarie B/H/S: 0/3/0

While Beadell’s September Quarter production and costs showed big improvement on the June Quarter, they still both fell well short of Macquarie’s expectations. The company is now guiding to the lower end of the production range but this will require a big improvement in the December Quarter, the broker notes. It is not beyond the realms, but falling short could put mill upgrade funding at risk, and this is critical, Macquarie suggests, to improving the long term outlook for Tucano. Downgrade to Neutral. Target falls to 20c from 25c.

Beach Energy Limited (BPT) Downgraded to Neutral from Buy by Citi B/H/S: 2/3/0

Beach Energy’s Sep Quarter numbers beat Citi on more oil in the mix and higher realised oil prices. Cooper wells have been tied in earlier than expected. The broker has upgraded FY18 forecast earnings by 15.6%. The market was nevertheless concerned over Origin Energy’s ((ORG)) realised gas price for its Lattice business Beach is set to acquire, but the broker sees year one prices as less relevant than later years once Beach normalises for Otway interests. While the stock price has rallied with the oil price, Citi estimates a long term oil price in excess of US$66/bbl is being assumed. Downgrade to Neutral on valuation. Target rises to 97c from 92c.

Fairfax Media Limited (FXJ) Downgraded to Hold from Buy by Deutsche Bank B/H/S: 2/3/0

Deutsche Bank now incorporates Domain into forecasts as a separate entity. The uplift in corporate costs and the outflows relating to the agent equity model reduce the broker’s valuation. Whilst recognising the growth potential inherent in Domain, Deutsche Bank believes it is now fully factored into the share price. The broker downgrades to Hold from Buy and reduces the target to $1.10 from $1.15.

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