In the good books
1. EVOLUTION MINING (EVN) was upgraded to Add from Hold by Morgans
Morgans upgrades to Add from Hold, given recent share price weakness, with macro events implying further global economic uncertainty and, hence, an increased probability the gold price will appreciate. The broker notes the company’s costs and production guidance have been met for the past seven years and costs are among the lowest in the industry. Target is reduced to $3.55 from $3.85. A consistent history, along with well-run operations and conservative assumptions provides long-term investors with a lower risk/value proposition, in the broker’s view.
2. FORTESCUE METALS GROUP (FMG) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse lifts iron ore price forecasts by 21% for 2019 and 33% for 2020. The broker expects the price to peak at US$110/t in the September quarter when China’s port inventory is expected to be at its tightest. This drives an increase to Fortescue Metals’ price target to $8.20 from $6.40, and the rating is upgraded to Outperform from Neutral. The company has also declared a $0.60 dividend, payable June 14, which is outside the standard February/August dividend announcements that typically come with results. Credit Suisse considers the dividend is pulling forward all or part of the dividend that otherwise would have been announced in August. The payment makes sense to the broker, in light of any potential changes to the franking credit regime that may, or may not, occur after the federal election.
3. FLEXIGROUP (FXL) was upgraded to Outperform from Neutral by Macquarie
The highlight of FlexiGroup’s update on the progress of its “humm” retail rollout, Macquarie suggests, is that there was no downgrade to FY guidance. This led to a positive market reaction. From here it will all be about the “humm journey”, which is still in its early stages and will result in a multi-year strategic reset. With the rollout supported by existing market stabilisation, Macquarie believes the stock can trade strongly ahead of execution and financial benefit. Upgrade to Outperform, target rises to $2.04 from $1.34.
4. INTEGRAL DIAGNOSTICS (IDX) was upgraded to Buy from Accumulate by Ord Minnett
Ord Minnett believes investors have woken up to the prevailing tailwinds and adjusts models to account for indexation. Revenue growth has been supported by long-term average growth in benefits of 6% and this is now supplemented by indexation of almost 80% of medical benefit services from FY21. The broker considers the sector appealing for the long-term. The broker also revises its view of the potential contribution from the soon-to-be-opened Prostate Centre of Excellence clinic. Rating is upgraded to Buy from Accumulate and the target raised to $3.30 from $2.99.
5. NEW HOPE CORPORATION (NHC) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse has become more bearish on thermal coal because of increased competition from displaced European coal, which it believes is undermining the Newcastle price. A mild winter in Europe has meant coal inventory has built up and an LNG glut is driving down gas prices. The broker lowers Newcastle F.O.B. thermal coal forecasts by -8% in 2019 to US$87/t and by -6% to US$80/t for 2020. Nevertheless, the broker upgrades to Outperform from Neutral because of recent underperformance in the share price. Target is reduced to $3.50 from $4.00.
6. SCENTRE GROUP (SCG) was upgraded to Outperform from Neutral by Credit Suisse
The stock has underperformed the A-REIT index by -7% since its February result, Credit Suisse observes. Underperformance has been driven by a deterioration in retail trading conditions as well as concerns around the balance sheet and ability to fund future developments. The broker is of the view that these factors are now reflected in the share price and the stock is again offering material value. Rating is upgraded to Outperform from Neutral. Target is steady at $4.20.
In the not-so-good books
1. AGL ENERGY (AGL) was downgraded to Sell from Neutral by Citi
Citi revamps its model, largely because of updates to consumer market electricity and gas discounts and revenue rates. The broker also marks to market the wholesale electricity prices to reflect the continued rally. Citi suspects FY20 core net profit will more likely be down and flat. The company has called out specific headwinds for FY20, such as lower electricity prices, higher input fuel costs for thermal generation and the regulated default offers in retail electricity. Citi considers FY19 is the peak in earnings for AGL and the share price does not reflect this. Rating is downgraded to Sell from Neutral. Target is reduced to $20.87 from $22.48.
2. ANSELL (ANN) was downgraded to Hold from Buy by Deutsche Bank
Deutsche Bank envisages risks to earnings from slowing global economic growth. Execution risks also exist with the rationalisation and expansion of manufacturing facilities. The stock has re-rated and now offers 7% compound growth in earnings per share between FY19-22. The broker downgrades to Hold from Buy. Target is $27.19.
3. AUSNET SERVICES (AST) was downgraded to Sell from Neutral by Citi
Post FY19 results release, Citi analysts have added 14% to their target price, but they also downgraded to Sell from Neutral with the share price up 19% year-to-date. Also, the increase in target reflects a short-term view on interest rates and bond yields, explain the analysts. Further out, Citi’s valuation has actually declined by -6%, thanks to weaker cash flow forecasts. Revised forecasts are -8% below market consensus, on the analysts’ assessment. The FY19 report itself proved pretty much in-line on just about every metric. AusNet’s FY20 dividend guidance proved better-than-expected. Citi continues to forecast 3% growth in dividends per annum. Price target moves to $1.71 from $1.50.
4. COMMONWEALTH BANK OF AUSTRALIA (CBA) was downgraded to Hold from Add by Morgans
The March quarter trading update was softer than Morgans expected, largely because of the re-basing of non-interest income. Non-interest income was down -10% versus the first half. Morgans reduces cash estimates for earnings per share for FY19 and FY20 by -9.1% and -6.2% respectively. Rating is downgraded to Hold from Add because of a lower target and share price strength over the past month. Target is reduced to $74 from $76.
5. COCHLEAR (COH) was downgraded to Neutral from Buy by Citi
The share price has rebounded significantly since the company announced the launch of the new MRI compatible implant, Citi observes. The broker downgrades to Neutral from Buy on valuation. Target is steady at $198. The company’s investor briefing has focused on growing the adult market in developed countries where the penetration rate is only 3% and the children’s market in developing countries where the penetration rate is around 10%.
6. CYBG PLC (CYB) was downgraded to Hold from Add by Morgans
The company is scheduled to release first half results on May 15, which will reflect the acquisition of Virgin Money. Morgans continues to expect net interest margins will be affected by intense competition in the mortgage and customer deposit segments. Amid Brexit-related uncertainty and the commencement of legal action on fixed rate tailored business loans, along with downgrades to underlying earnings forecasts, Morgans reduces the target to $3.64 from $4.39 and downgrades to Hold from Add.
7. MAYNE PHARMA GROUP (MYX) was downgraded to Neutral from Outperform by Credit Suisse
The company has announced a significant deterioration in the performance of its generic products since the first half results because of increased competition and -US$4m in one-off adverse items. The high-margin specialty brands revenue is also weaker than expected. Revenue declined -15% in January to April and gross profit was down -20%. The company is currently reviewing the carrying value of generic assets which could result in an impairment. Credit Suisse downgrades to Neutral from Outperform and reduces the target to $0.64 from $1.00. The broker envisages merit in the strategy to pivot towards the more stable earnings profile in specialty brands, but the outlook for FY20 remains unclear.
8. OIL SEARCH (OSH) was downgraded to Hold from Buy by Deutsche Bank
Deutsche Bank downgrades to Hold from Buy, believing the positive catalysts are factored into the stock and there are growing risks around geopolitics, Alaska and strain on the balance sheet. Target is reduced to $8.00 from $9.50.
9. RELIANCE WORLDWIDE CORPORATION (RWC) was downgraded to Hold from Add by Morgans
The company’s trading update disappointed Morgans, as FY19 underlying operating earnings (EBITDA) guidance was reduced by -7% to $260-270m. The main concern for the broker is that there are issues across all regions and the near-term outlook is uncertain. US customers are reducing inventory, particularly in the retail channel, and there is a sharper-than-expected decline in Australian residential construction activity. Certain product lines have been exited in the UK and there is slower growth in Spain. The main positive is that John Guest integration remains on schedule. The company will seek to mitigate the impact of US tariffs, which could negatively affect FY20 earnings, through customer price increases and/or negotiated supplier price reductions. US tariffs on imports from China are not expected to have a material impact on FY19 earnings. Morgans downgrades to Hold from Add and reduces the target to $3.94 from $5.56.
10. SIMS METAL MANAGEMENT (SGM) was downgraded to Equal-weight from Overweight by Morgan Stanley
Scrap prices in key markets have declined in the face of soft demand, Morgan Stanley observes. The stock is unlikely to outperform while this continues. Hence, the broker downgrades to Equal-weight from Overweight and lowers the target to $10.50 from $12.50. Global scrap prices have declined from first quarter 2019 highs in all key markets. The broker continues to believe in the long-term opportunities for Sims Metal. Industry view is Cautious.
11. SENEX ENERGY (SXY) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse believes Senex Energy is well positioned to benefit from higher domestic gas prices, as Project Atlas ramps up over the next two years. Yet, while the company has been touted as a takeover target, no bid has emerged. This is of concern to the broker, signalling there may be technical “skeletons” at the flagship Western Surat Gas Project in particular. Rating is downgraded to Neutral from Outperform and the target is reduced to $0.36 from $0.50. The broker asserts the upside is offset by risks to production/cost metrics and sustainability, particularly at WSGP.
12. SYDNEY AIRPORT HOLDINGS (SYD) was downgraded to Sell from Neutral by UBS
UBS observes international traffic momentum was weak in the March quarter, even after taking into account the timing of Easter. Airline schedules now suggest capacity declines for the remainder of 2019. The broker observes lower bond yields have also widened the gap between price and fundamentals. Ongoing traffic disappointment in 2019 has potential to drive underperformance and UBS downgrades to Sell from Neutral. Target is $7.
13. UNIBAIL-RODAMCO-WESTFIELD (URW) was downgraded to Sell from Neutral by Citi
Citi analysts, who are covering this stock from Europe, have downgraded to Sell from Neutral as further analysis has made them worried about asset values longer term. With online sales poised to take more market share in years ahead, the analysts believe values for shopping centres can potentially deflate by as much as -50%. In addition, it has become clear to the analysts that retailers are using rent decline to maintain their margins in an attempt to please their shareholders. This smells like trouble, doesn’t it? The analysts note the share price rallied recently, despite EPS forecasts actually declining. Target price falls to EUR125 from EUR142.
14. WESFARMERS (WES) was downgraded to Neutral from Outperform by Macquarie
Macquarie believes a further move into EVs, were Wesfarmers to take over Kidman Resources ((KDR)), makes sense. While oversupply will likely lead to lower lithium prices over the next 12 months, over five years lithium, cobalt and nickel should all be winners on battery demand. Kidman’s 50% owned Mt Holland project is substantial, but not without risk. Meanwhile, the broker believes the market is being too cautious over Bunnings, yet total shareholder return upside is becoming limited and risks are moving to the downside. Downgrade to Neutral from Outperform. Target unchanged at $37.13.
15. WOOLWORTHS (WOW) was downgraded to Neutral from Buy by UBS
UBS notes the Australian grocery market has become more rational while inflation has returned. While believing an improved inflation outlook provides near-medium term upside risk to forecasts, this appears to the broker to be priced in. UBS downgrades Woolworths to Neutral from Buy and now prefers Metcash ((MTS)) in the grocery sector. Target is raised to $32.90 from $30.80.
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.
