With the local share market continuing its uptrend throughout June, one would feel inclined to think stockbroking analysts are issuing more downgrades than upgrades for individual ASX-listed stocks, but not so.
For the week ending Friday 21 June 2019, FNArena counted 7 upgrades and 7 downgrades.
AGL Energy was the only stock mentioned twice (two upgrades). Moreover, only two downgrades moved to Sell (with Coca-Cola Amatil and WiseTech Global the unlucky receivers). On the other hand, only three upgrades lifted to Buy. A number of companies is enjoying increases to profit forecasts, including Nearmap, Pushpay Holdings and Alacer Gold, but the pendulum remains firmly biased towards more negative adjustments. Pilbara Minerals, Wesfarmers, Caltex Australia, Fonterra, Senex Energy, and others continue to see forecasts under noticeable pressure. With the August reporting season only six weeks away, this is going to be an interesting dynamic underneath the Australian share market. Lower bond yields and RBA rate cuts versus operational challenges and downward pressure on profit estimates.
When is the undercurrent ready to turn, or will it?
In the good books
1. SYDNEY AIRPORT HOLDINGS LIMITED (SYD) was upgraded to Neutral from Underperform by Macquarie B/H/S: 2/3/3
International traffic at Sydney Airport bounced back a solid 6.3% in May following weak months prior. Macquarie remains concerned over the upcoming access agreement renegotiations but notes the opportunity to spend more on capex as an alternative to price declines, mitigating some of the pressure. More influentially, gfalling bond rates continue to support the stock and the broker has cut its discount rate assumption to 2.43% from 3.20%. This leads to a target price increase to $8.39 from $7.15 and an upgrade to Neutral.
2. WOODSIDE PETROLEUM LIMITED (WPL) was upgraded to Buy from Hold by Deutsche Bank B/H/S: 3/4/1
Deutsche Bank assesses the outlook for Woodside Petroleum is improving as the oil price stabilises. The broker upgrades to Buy from Hold and raises the target to $40 from $37.
In the not-so-good books
1. BRAMBLES LIMITED (BXB) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 3/5/0
The on-market share buyback has been completed and will be paused from June 21 as the company enters a black-out period ahead of the results on August 21. Credit Suisse expects the shares to drift over the next two months from the lack of buyback support. The broker is upbeat on the prospects for the pallet business in the Americas but notes there is now less than 4% upside to the target, unchanged at $13.50. Rating is reduced to Neutral from Outperform on valuation grounds.
2. COCA-COLA AMATIL LIMITED (CCL) was downgraded to Underperform from Neutral by Credit Suisse B/H/S: 0/4/4
Even assuming the price/earnings ratio is sustainable, Credit Suisse calculates, on estimates for 2021, there would only be 3% potential upside to the share price. As the stock has run ahead of expectations, the broker downgrades to Underperform from Neutral. Target is $8.90.
3. CALTEX AUSTRALIA LIMITED (CTX) was downgraded to Neutral from Buy by UBS B/H/S: 3/3/1
The company’s first half earnings (EBIT) guidance of $240-270m represents a downgrade of -27% versus UBS estimates at the midpoint. The broker is concerned as to why retail margins deteriorated so materially in May, as Caltex witnessed improving trends in April. The stock screens as value but UBS observes an absence of positive catalysts and risks to convenience targets. The broker reduces estimates by -13-19% for FY19-21. Rating is downgraded to Neutral from Buy as coverage is also transferred to another analyst. Target is reduced to $23.30 from $30.20.
4. VIVA ENERGY GROUP LIMITED (VEA) was downgraded to Hold from Add by Morgans B/H/S: 4/2/0
Morgans has pulled back on assumptions for the refining and retail businesses after a material downgrade from Caltex Australia (CTX). Caltex Australia has posted weak earnings guidance, emanating from refining & convenience retail, two areas to which Viva Energy is equally exposed. The broker awaits any trading update, but in the meantime recognises the prevailing headwinds and reduces forecasts. Assumed energy costs for 2019 have been increased by 10% for the Geelong refinery to reflect volatility in crude oil prices. Rating is downgraded to Hold from Add. Target is reduced to $2.07 from $2.57.
5. WISETECH GLOBAL LIMITED (WTC) was downgraded to Lighten from Hold by Ord Minnett B/H/S: 2/1/0
The share price has increased 25% since the first half result, now trading 60% above Ord Minnett’s target. Revenue expectations have increased for FY19, largely explained by the acquisitions of Containerchain and Xware. However, the broker suspects there is greater potential for organic revenue to disappoint in FY20. The valuation is considered stretched and the rating is downgraded to Lighten from Hold. Target is raised to $18.37 from $18.12.
Earnings forecast
Listed below are the companies that have had their forecast current year earnings raised or lowered by the brokers last week. The qualification is that the stock must be covered by at least two brokers. The table shows the previous forecast on an earnings per share basis, the new forecast, and the percentage change.
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.
