In the good books
1. COLES GROUP (COL) was upgraded to Neutral from Underperform by Credit Suisse
Credit Suisse believes Coles can accelerate sales growth over the medium term as it develops digital capability and addresses weakness in its fresh and convenience product range. A lag in supply chain modernisation is the central competitive risk, in the broker’s view, and costs are likely to be above Woolworths (WOW) for several years. Rating is upgraded to Neutral from Underperform and the target raised to $11.83 from $10.81.
2. OZ MINERALS (OZL) was upgraded to Add from Hold by Morgans
Morgans believes the stock’s retreat of nearly -20% since early April is overdone. The broker suspects sentiment is the culprit because of ongoing US/China trade uncertainty. The broker suspects marginal investors use OZ Minerals as a proxy for the outlook for both the copper market and global growth, given its status as the largest and most liquid ASX-listed pure copper play. The broker marks down copper prices for 2019-21 and raises gold assumptions for 2019. Overall, earnings forecasts improve by 6% over 2019-20 but are -12% lower for 2021. Rating is upgraded to Add from Hold, as the current valuation is a key buy trigger. Target is reduced to $11.27 from $11.40.
3. VOCUS GROUP (VOC) was upgraded to Neutral from Underperform by Macquarie and to Neutral from Sell by UBS
The company has confirmed the receipt of a non-binding, indicative proposal at $5.25 a share. Macquarie believes the offer from EQT Infrastructure assumes strong execution on the strategic turnaround at Vocus on the back of recent and ongoing initiatives. The broker upgrades to Neutral from Underperform and raises the target to $4.70 from $3.25. Should the due diligence not lead to a binding offer, and in the absence of other offers, the broker expects the stock price to return to around $4.15.
UBS observes several factors have led to an increase in price versus previous bids, including improved free cash flow conversion and a new management team. The broker upgrades to Neutral from Sell and raises the target to $4.60 from $3.10.
In the not-so-good books
1. BLUESCOPE STEEL (BSL) was downgraded to Neutral from Buy by UBS to Underperform from Outperform by Macquarie
The removal of Canadian & Mexican steel tariffs and high iron ore prices as well as softening demand for housing in Australia all conspire to put pressure on the business, UBS believes. Rating is downgraded to Neutral from Buy. FY20 and FY21 estimates for earnings are cut by -36%. Despite weakening US spreads, the broker believes the company will still push ahead with the expansion of North Star as this is the right strategy for the long-term. Target is reduced to $13 from $16.
Input costs are putting pressure on spreads and global conditions are turning down, overcoming easing risks in Australian end markets, Macquarie observes. An altered US tariff regime, ongoing trade issues with China and softening economic indicators are posing risks to the outlook. The broker believes there is a high probability of negative earnings revisions in coming months. Rating is downgraded to Underperform from Outperform and the target is lowered to $10.15 from $14.60. FY20 and FY21 net profit estimates are downgraded by -14% and -15% respectively.
2. CSR (CSR) was downgraded to Sell from Neutral by Citi
Citi observes the shares have strongly outperformed this year, amid easing alumina cost concerns and the boost in housing market sentiment. The stock has now priced in the rally and the broker downgrades to Sell from Neutral. Target is $3.50. The broker believes the recent court decision in Brazil to lift production restrictions at Alunorte should help improve supply but this may not be of help to CSR. CSR recently secured a new contract for half of its alumina requirements at around 18-18.5% linkage to the LME aluminium price.
3. DOMINO’S PIZZA ENTERPRISES (DMP) was downgraded to Equal-weight from Overweight by Morgan Stanley
Softer same-store sales growth and fewer store openings lead Morgan Stanley to lower forecasts, believing earnings risk has increased. While the broker still envisages great opportunity in Europe, execution needs to improve to sustain a re-rating. Morgan Stanley downgrades to Equal-weight from Overweight and lowers the target to $41 from $50. Cautious industry view. After over 10 years of strong double-digit growth the Australasian business is also slowing. The broker agrees a greater focus on franchisee health is the right strategy but is likely to affect growth in the near term.
4. DOWNER EDI (DOW) was downgraded to Underperform from Neutral by Credit Suisse
The company’s partner in the Murra Warra wind farm project, Senvion GmbH, has filed for self-administration in Germany. Despite Downer’s minor share in the project it is jointly and severally liable under the contract. Downer has indicated it has substantial bank guarantees from Senvion. Credit Suisse suspects the catalyst for the market update is the court-appointed custodian may be attempting to offload the cost of completing the project to Downer and the bank guarantee may be insufficient to cover the liability. Downer is assessing any impact on guidance for FY19. Rating is downgraded to Underperform from Neutral and the target lowered to $7.10 from $7.40.
5. ESTIA HEALTH (EHE) was downgraded to Neutral from Buy by UBS
The company has indicated that FY19 operating earnings (EBITDA) will be lower than previously anticipated, albeit up 2-4%. Ord Minnett continues to believe funding to the sector will be increased following the Royal Commission but awaits the interim report, due in October. Occupancy levels, in the interim, are expected to be below par. The broker maintains a Hold rating and raises the target to $2.70 from $2.50. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
6. KIDMAN RESOURCES (KDR) was downgraded to Hold from Buy by Ord Minnett
Ord Minnett reduces forecasts for global supply of lithium by -8% in 2020 and -14% in 2021, although continued market surplus is still considered likely. The broker lowers battery-grade price expectations for the next two years by -10%, to US$11,500-12,000/t of lithium carbonate equivalent, and concentrate pricing by -14% to US$550/t. Rating is downgraded to Hold from Speculative Buy and the target reduced to $1.90 from $3.00. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
7. METCASH (MTS) was downgraded to Underperform from Neutral by Credit Suisse
Credit Suisse believes the widening digital capability gap is another headwind for independent food retailers. While making no changes to forecasts, the broker downgrades Metcash to Underperform from Neutral because of the recent appreciation in the share price. Fragmented decision-making in relation to investment and implementation of digital strategies are likely to be significant structural barriers, Credit Suisse adds. Target is steady at $2.69.
8. PILBARA MINERALS (PLS) was downgraded to Lighten from Hold by Ord Minnett
Ord Minnett reduces forecasts for global supply of lithium by -8% in 2020 and -14% in 2021, although continued market surplus is still considered likely. The broker lowers battery-grade price expectations for the next two years by -10%, to US$11,500-12,000/t of lithium carbonate equivalent, and concentrate pricing by -14% to US$550/t. Ord Minnett lowers its rating to Lighten from Hold. Target is unchanged at $0.65, as falling concession prices add pressure for improved operating rates in order to deliver positive cash flow. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
9. QBE INSURANCE (QBE) was downgraded to Neutral from Outperform by Credit Suisse and Macquarie
The share price has outperformed the market over the past three months and moved close to the target. Credit Suisse reviews the earnings outlook and key drivers for the next leg up in the share price. While the company is benefiting from favourable premium rates and early-stage expense efficiency, it also faces a slowdown in the important lender mortgage insurance division, as well as increased volatility from adverse weather claims. Rating is downgraded to Neutral from Outperform. Target is steady at $13.
Macquarie notes some regions in the US have now passed final crop planting dates and this is expected to trigger claims on some crop insurance policies. US crop is QBE’s largest exposure and with downside risk growing Macquarie downgrades to Neutral from Outperform. The broker believes US crop risks are poised to de-rail the company’s FY19 results. Industry articles are recommending farmers do not plant crops at all and instead submit insurance claims for their maximum coverage. Should the attritional loss ratio for QBE’s US crop portfolio deteriorate -5%, Macquarie estimates this could result in a -5.8% hit to cash earnings in FY19. Target is reduced to $12.90 from $13.20.
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.
