In the good books

1. ADELAIDE BRIGHTON LIMITED (ABC) was upgraded to Hold from Lighten by Ord Minnett

Ord Minnett believes the building materials backdrop has turned more challenging, as residential construction in Australia has pulled back and the US housing market has softened. Moreover, activity in New Zealand appears set to moderate.

Given the underperformance of the sector as a whole the broker upgrades Adelaide Brighton to Hold from Lighten, maintaining a $4.50 target. The broker remains cautious about the stock, nevertheless, because of its exposure to the Australasian housing market.

2. GALAXY RESOURCES (GXY) was upgraded to Outperform from Neutral by Credit Suisse

December quarter production was softer than Credit Suisse expected and guidance for 2019 pricing is notably weaker. Nevertheless, the broker finds reasons to be constructive about the stock and believes it offers value.

The share price is offering an attractive entry point and the rating is upgraded to Outperform from Neutral. Target is steady at $3.15.

See downgrade below.

3. ILUKA RESOURCES (ILU) was upgraded to Outperform from Neutral by Macquarie

Strong December quarter cash earnings have driven an upgrade to Macquarie’s 2018 estimates. The company has secured price increases of 8-11% for rutile and synthetic rutile in the first half of 2019.

Demand for zircon has softened but the company believes zircon is moving towards a structural deficit, while any price rises present upside risk to the broker’s forecasts.

Macquarie upgrades to Outperform from Neutral. Target is raised to $9.10 from $7.80.

4. REDBUBBLE (RBL) was upgraded to Add from Hold by Morgans

Revenue growth, operating profit and cash generation were ahead of forecasts in the first half.

Morgans notes the company has adjusted swiftly to the change in the Google algorithm and clawed back the lost profit margin through pricing strategies and better deals with suppliers.

As the risks associated with the algorithm change are now quantifiable, Morgans upgrades to Add from Hold. Target is raised to $1.27 from $1.19.

5. SANTOS LIMITED (STO) was upgraded to Buy from Neutral by UBS

Sales revenue in the December quarter beat estimates, largely because of higher domestic gas prices. UBS upgrades to Buy from Neutral and the stock is now its preferred pick of the Australian E&P majors.

The three-year production growth forecast is 13% and growth is expected from all core assets. UBS reduces the target to $7.20 from $7.55, setting the target based on an estimated oil price of US$65/bbl in 2019.

6. SUNCORP GROUP LIMITED (SUN) was upgraded to Buy from Neutral by Citi

Operating conditions, as anticipated, have probably worsened of late in Suncorp’s banking division, Citi suggests.

Suncorp is confident that cost savings could drive a cost-to-income ratio below 50% and the broker continues to give the company the benefit of the doubt. Citi factors in the impact of the life sale, including a likely capital return and stranded costs. With operating conditions seemingly favourable in the core general insurance business. the broker upgrades to Buy from Neutral and reduces the target to $14.60 from $16.00.

 7. SYDNEY AIRPORT HOLDINGS LIMITED (SYD) was upgraded to Overweight from Equal-weight by Morgan Stanley

Morgan Stanley upgrades to Overweight from Equal-weight, in view of the recent underperformance in the stock and the value relative to global listed airports, as well as Australian infrastructure stocks.

The broker acknowledges investors may be wary of passenger growth this year, as airports are cycling higher comparables and forward capacity data is pointing to moderating near-term growth.

The broker believes Sydney Airport has the best potential returns in the grouping and will benefit from a diversity of traffic sources. Target is reduced to $7.07 from $7.47. Industry view is Cautious.

In the not-so-good books

1. AMP (AMP) was downgraded to Equal-weight from Overweight by Morgan Stanley

Lower wealth earnings in the second half, amid volatile markets and regulatory uncertainty, have caused Morgan Stanley to downgrade to Equal-weight from Overweight.

The broker also cites a lack of clarity on the future strategy from the new CEO. The main concern is how AMP sustains a commercially viable model, while managing compliance risk and the likely elevated role of trustee boards. Target is reduced to $2.50 from $3.40. Industry view is In-Line.

2. CHALLENGER LIMITED (CGF) was downgraded to Neutral from Buy by Citi

The company has downgraded FY19 normalised earnings estimates. Citi lowers core estimates for earnings per share by -48% for FY19 and -8% for FY20.

The broker still expects the upcoming means test changes to be positive for the company’s annuities. Uncertainty in the meantime, as well as the need for a new CEO to build market confidence, may not be enough to propel the stock forward.

There are also risks around the longer-term return-on-equity target. Rating is downgraded to Neutral from Buy. Target is reduced to $8.40 from $13.10.

3. CREDIT CORP (CCP) was downgraded to Hold from Accumulate by Ord Minnett

First half underlying net profit was broadly in line with Ord Minnett’s forecasts. The broker believes the risk/reward equation is now more balanced, particularly with an uncertain macro economic backdrop in Australia.

Rating is downgraded to Hold from Accumulate, although the target is raised to $23 from $22 because of changes to earnings forecasts. The broker still believes double-digit earnings growth in FY20 is readily achievable. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.

4. EVOLUTION MINING LIMITED (EVN) was downgraded to Neutral from Buy by Citi

Citi analysts didn’t like the fact that operational costs made quite a pronounced jump in the December quarter, even though a number of events can be held responsible. They have downgraded to Neutral from Buy, also noting the share price has appreciated by some 40% since the October low last year.

Evolution Mining is probably en route to meeting its FY guidance, but higher costs remain the disappointment. Target lifts to $3.70 from $3.35 nevertheless, due to additional Cowal value attribution.

5. FORTESCUE (FMG) was downgraded to Hold from Add by Morgans

Following recent strength in the iron ore price and resulting rise in the Fortescue Metals share price, Morgans downgrades to Hold from Add. Target is reduced to $5.45 from $5.68.

The stock does not appear expensive but spot prices are already at around US$80/t and a discount on low-grade has already narrowed, so the near-term risks appear skewed to the downside, in the broker’s view.

6. GALAXY RESOURCES (GXY) was downgraded to Neutral from Outperform by Macquarie

December quarter concentrate sales were in line with expectations. Incorporating the quarterly production result and lower spodumene prices for the second half of 2019, drives material reductions to Macquarie’s earnings estimates.

The broker believes, with the advent of new, larger and lower-cost projects, Mount Cattlin is likely to become the marginal Australian producer and margin should continue to be eroded.

Meanwhile, the timeline for Sal de Vida development draws out. Macquarie downgrades to Neutral from Outperform and reduces the target to $2.20 from $2.70.

7. NORTHERN STAR RESOURCES LTD (NST) was downgraded to Neutral from Buy by UBS

December quarter production was -19% lower than UBS expected. The company has capitalised on higher Australian dollar gold prices to opportunistically mine lower grade and more marginal ore. This extends mine life but also lifts unit costs.

Unchanged guidance of 250-260,000 ounces in FY19 now appears to be a stretch. UBS believes the share price is factoring in positive momentum and the risk/return is now more balanced.

Rating is downgraded to Neutral from Buy on the back of the share price performance. Target is steady at $9.00.

8. OCEANAGOLD CORPORATION (OGC) was downgraded to Underperform from Neutral by Credit Suisse and to Neutral from Buy by UBS

Despite the weakness at Haile the company achieved upgraded production guidance in the December quarter. 2019/20 earnings estimates are reduced on the implications of the grade depletion over 2018, ahead of further guidance and details in the February results.

Credit Suisse downgrades to Underperform from Neutral as a result. Target is steady at $4.00.

UBS believes the risks to Waihi and Macraes in terms of mine life have been addressed. These assets contribute around half of current production.

The broker notes permit approvals and the gold price have driven the share price 20% higher since December and it is now above valuation. Rating is downgraded to Neutral from Buy as a result. Target is raised to $4.85 from $4.50.

9. QANTAS AIRWAYS LIMITED (QAN) was downgraded to Neutral from Outperform by Credit Suisse

Credit Suisse suspects, at some point, a weak consumer environment and increasing geopolitical uncertainty will weigh on demand for air travel. The broker expects Qantas will respond with capacity adjustments, but there could be a lag.

The broker lowers second half domestic ticket yield growth forecasts to 2.5% from 4% and international to 3% from 4.4%. The broker is now less confident of an additional buyback in the second half.

Target is reduced to $6.70 from $7.35. While there remains plenty of upside at the current share price, the broker believes it is insufficient to justify the prior rating and downgrades to Neutral from Outperform.

10. REGIS RESOURCES LIMITED (RRL) was downgraded to Underperform from Outperform by Credit Suisse and downgraded to Lighten from Hold by Ord Minnett.

The company is reporting strong exploration results from the Rosemont underground central zone and the Garden Well depth extension underground.

Credit Suisse notes the McPhillamys project has been pushed out further, to around 2022. The broker notes new management has continued with the old strategy which has served the company well.

Rating is downgraded to Underperform from Outperform, purely on valuation because of the recent strength in the share price. Target is $4.45.

The company expects FY19 gold production to be in the mid to upper end of its 340-370,000 ounces guidance range and costs to be at the mid to lower end of guidance.

Ord Minnett is mostly concerned about the McPhillamys operation amid further delays. Completion of the definitive feasibility study is now expected for the June or September quarter.

The broker struggles to justify the valuation and downgrades to Lighten from Hold. Target is reduced to $4.30 from $4.40.

11. RESMED (RMD) was downgraded to Lighten from Hold by Ord Minnett

December quarter operating income was almost -4% below Ord Minnett’s forecasts because of weaker-than-expected sales growth. This was offset by a better-than-expected gross margin.

The broker remains comfortable with the company’s leading position in sleep therapy but expects sales growth to be subdued over much of 2019 as past strength is cycled.

Rating is downgraded to Lighten from Hold as the broker now expects earnings to contract for the next few quarters. Target is lowered to $13.40 from $15.50. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.

The above was compiled from reports on FN Arena. The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.