In the good books
1. BORAL (BLD) was upgraded to Neutral from Underperform by Credit Suisse and to Buy from Neutral by UBS
FY19 results were broadly in line. Credit Suisse observes the North American business, combined with Headwaters, has underperformed market growth by around -25% since Boral made the acquisition. The broker suggests this could prompt questions of a write-down to the US$3.2bn carrying value. In Australia, FY20 concrete volume forecasts are better than the declines envisaged in NSW by peers. Credit Suisse upgrades to Neutral from Underperform and does not anticipate a re-rating until the North American earnings issue is resolved and the volume outlook for Australia improves. Target is reduced to $4.10 from $4.40.
FY20 guidance is in line with expectations and UBS forecasts Boral Australia’s operating earnings (EBITDA) to decline -6% and property to increase to $40m. Zero operating earnings growth is forecast in North America. The company is articulating a clear a strategy in managing costs and positioning for the lower demand in Australia, while the fly ash business is reporting positive price and volume growth, the broker observes. UBS upgrades to Buy from Neutral and reduces the target to $5.20 from $5.40. Boral has also finally reached an agreement with Knauf over the USG Boral JV. The JV will expand by acquiring Knauf’s plasterboard assets in Asia for US$533m.
See downgrade below.
2. CALTEX AUSTRALIA (CTX) was upgraded to Accumulate from Hold by Ord Minnett
First half net profit was ahead of Ord Minnett’s forecasts. The broker considers the interim result an inflection point and is pleased with the increased focus on return on capital. Rating is upgraded to Accumulate from Hold. The company has announced a $100m cost savings program by 2020 and the divestment of 50 alternative-use retail sites. Target is raised to $27 from $25. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
See downgrade below.
3. HUB24 (HUB) was upgraded to Neutral from Sell by Citi
On Citi’s calculations, the company has made a robust start into the fresh financial year and risks are seen as to the upside, with net flows expected to grow by 18% in FY20. Estimates go up on lower cost growth as well as lower share based payments. Given the improved outlook for net flows, Citi has upgraded to Neutral from Sell, despite still seeing risk to platform pricing and potentially higher cost growth. Price target improves to $12.45 from $12.05. Citi believes another RBA rate cut will have a negative impact, while margins remain under pressure, also because there is increased focus on fees from advisors.
4. IOOF HOLDINGS (IFL) was upgraded to Neutral from Sell by UBS
The company envisages its challenges are more about stabilisation rather than a significant re-vamp of the business but Citi suspects there are major hurdles to overcome, including the need to restructure advice. The broker envisages risks to the idea of a small buyback, despite the sale of the Ord Minnett holding, if the ANZ P&I deal does not go ahead. Citi assesses, with a significant remediation charge affecting distributable profits, the unusual structure of the second half dividend seems to borrow from FY20 profits, in order to keep it fully franked. Sell/High Risk rating maintained. Target is reduced to $4.40 from $4.80.
5. INGHAMS GROUP (ING) was upgraded to Neutral from Sell by Citi
The FY19 report missed consensus forecasts, and it was accompanied by guidance for a decline in profits for FY20. Following on from the share price shellacking that ensued post the release, Citi has upgraded to Neutral from Sell. Forecasts have been slashed by -18%-19%. Price target reduces to $3.40 from $3.85. The two challenges for management are rising costs and slowing price increases, which creates a double whammy, the analysts explain. The company is organising a Strategy Day on 22 October 2019. Longer term, the analysts highlight this company is operating inside a concentrated industry structure, where scale benefits are important.
6. JAPARA HEALTHCARE (JHC) was upgraded to Neutral from Underperform by Macquarie
FY19 net profit was in line with estimates. Macquarie notes difficult operating conditions and inflated net debt provide for a tough investment case. This is likely to persist as the industry awaits the Royal Commission interim report in October. As the share price has reached the target the broker upgrades to Neutral from Underperform. Estimates for earnings per share are cut by -40% and -18% for FY20 and FY21 respectively. Target is reduced to $1.05 from $1.10.
7. MOTORCYCLE HOLDINGS (MTO) was upgraded to Add from Hold by Morgans
FY19 results were ahead of guidance and above forecasts. This came despite a tough year for motorcycle dealerships. Morgans upgrades forecasts by more than 20%. The broker believes FY20 will post fewer headwinds for the company and the industry. Rating is upgraded to Add from Hold. Target is raised to $2.27 from $1.32.
8. SANDFIRE RESOURCES NL (SFR) was upgraded to Outperform from Neutral by Credit Suisse and to Outperform from Neutral by Macquarie
Sandfire’s profit was $106m to the broker’s $116m forecast and the dividend of 65.2c missed a 72.6c assumption. An earnings miss is apparently due to lower inventory credit than expected. Credit Suisse upgrades to Outperform from Neutral and retains the $6.75 target.
FY19 results were in line with estimates, according to Macquarie. The company expects to update the market on the timing and scope of the T3 project in the second quarter along with the completion of the acquisition of MOD Resources. Macquarie envisages value at current levels and upgrades to Outperform from Neutral. The company has not changed FY20 guidance and, therefore, the broker has not updated estimates. Target is steady at $6.70.
In the not-so-good books
1. BORAL (BLD) was downgraded to Equal-weight from Overweight by Morgan Stanley
FY19 results were weaker than expected. Guidance is for net profit to be down -5-15%, which implies meaningful downgrades to Morgan Stanley’s forecasts. The company has signalled a weaker outlook in Australia and minimal growth in the US. The broker is quite alarmed by the decline in Australian guidance, as it comes despite Boral remaining relatively upbeat on materials pricing. Infrastructure is not expected to offset the weakness in residential construction. As the balance sheet is likely to come under scrutiny, Morgan Stanley finds no reason to own the stock at this stage and downgrades to Equal-weight from Overweight. Target is reduced to $4.50 from $6.50. Industry view is Cautious.
See upgrades above
2. COSTA GROUP HOLDINGS (CGC) was downgraded to Hold from Add by Morgans
First half earnings were weaker than expected. The company is cautious about the second half, given weak mushroom pricing and persistent issues with the raspberry crop. Citi lowers estimates for earnings per share by -3% for 2019 and -10% for 2020. The broker maintains a Buy rating and reduces the target to $4.20 from $4.45.
3. CALTEX AUSTRALIA (CTX) was downgraded to Neutral from Outperform by Credit Suisse
The take-out from Caltex result was not the numbers themselves — they were within the guidance range and unsurprising as far as Credit Suisse was concerned — but the omission of earlier guidance to a profit uplift for the Convenience business. But given the broker never included such an uplift in its forecasts, announced cost-cuts mean there is “no significant void” left by a lack of Convenience profit growth. Rather, Credit Suisse looks to lower assumptions for refinery production and margins in lowering its FY expectations. This leads to a target cut to $26.85 from $32.22 and a downgrade to Neutral from Outperform.
See upgrade above.
4. EBOS GROUP (EBO) was downgraded to Underperform from Neutral by Credit Suisse
FY19 underlying earnings were ahead of expectations. The business continues to make steady progress despite the pressures, Credit Suisse observes. The company has distinguished itself as a high-quality operator in wholesale pharmaceutical supply, but a number of factors constrain the broker’s valuation, including limited wholesale remuneration growth and competitive pressures. Rating is downgraded to Underperform from Neutral. Target is raised to NZ$21.75 from NZ$21.00.
5. ERM POWER (EPW) was downgraded to Hold from Add by Morgans
Shell has launched an unconditional cash takeover offer at $2.465 per share. The board has unanimously recommended the offer. The offer will be reduced to reflect any cash paid as dividends. Morgans believes the deal is likely to proceed and suggests the risk of missing out on the offer premium is low. Morgans found the FY19 result solid, despite some misses on retail sales volumes. The outlook for FY20 is stronger and the energy solutions division is expected to break even. Morgans downgrades to Hold from Add and raises the target to $2.47 from $2.05.
6. G8 EDUCATION (GEM) was downgraded to Hold from Buy by Ord Minnett, to Neutral from Buy by UBS and to Equal-weight from Overweight by Morgan Stanley
First half earnings (EBIT) were slightly below forecasts. Growth in costs and the reduced outlook for greenfield assets disappointed Ord Minnett. The broker materially reduces its forecasts, lowering the target to $2.40 from $3.40. Rating is downgraded to Hold from Buy.
G8 Education’s earnings came in ahead of UBS and a number of metrics, particularly organic centre performance and increased occupancy, but there the good news ends. Acquisitions and greenfield projects materially underperformed expectation and management’s FY20 earnings guidance falls well below prior consensus. UBS continues to believe in the long-term story and notes the stock appears cheap at the level, but consistent headwinds cannot be ignored, and the broker admits having been too optimistic on earnings growth. Downgrade to Neutral from Buy and target slashed to $2.25 from $3.80.
Morgan Stanley notes occupancy rates became harder to increase in the second quarter and the company must now cycle an improvement in the prior corresponding second half. The broker envisages little upside to management’s view of a 1.5% occupancy uplift. When combined with the cost pressures of labour and rents there is less scope for operating leverage as a result. Estimates are reduced by -12% for 2019 and -20% for 2020. Rating is downgraded to Equal-weight from Overweight. Target is lowered to $2.50 from $4.00. In-Line industry view maintained.
7. GOODMAN GROUP (GMG) was downgraded to Neutral from Outperform by Credit Suisse
FY19 results were largely in line with expectations. Credit Suisse expects FY20 will be another strong year and the business is well-positioned to deliver development margins and growth in funds under management. While earnings growth is strong, the broker considers this is reflected in the price and downgrades to Neutral from Outperform. Target is raised to $14.43 from $14.04. Credit Suisse notes the conundrum of whether to view the stock as an expensive A-REIT or a fund manager. At a time when many A-REITs lack earnings catalysts the broker suspects the stock will retain investor support.
8. INTEGRAL DIAGNOSTICS (IDX) was downgraded to Accumulate from Buy by Ord Minnett
Operating earnings were slightly below forecasts in FY19. The implied market share gains demonstrate the value of a strong regional focus and geographical diversification, in Ord Minnett’s view. This was bolstered by the acquisition of Imaging Queensland, a large practice with a strong regional presence. The broker believes the acquisition is a good one and should yield strong benefits in FY21. Ord Minnett raises the target to $3.41 from $3.31. Rating is downgraded to Accumulate from Buy on valuation.
9. LINDSAY AUSTRALIA (LAU) was downgraded to Hold from Add by Morgans
Lindsay Australia’s FY19 result met guidance thanks to a one-off fuel tax credit, but otherwise the result was well below Morgans’ forecasts. The company reports weak trading across all divisions, thanks to fuel-price volatility, the North Queensland floods and weather-inspired falls in produce freight volumes. Operating cash flow proved a beat, the company posting 107% conversion thanks to strong working capital management. No FY20 guidance was provided for the rail expansion and the company will exit Connect this September quarter citing barriers to entry into China. Morgans cuts profit forecasts and the target price falls to 39c from 50c. Rating downgraded to Hold from Add, the broker appreciating the company’s good management and undemanding valuation but noting the lack of catalysts.
10. OROCOBRE (ORE) was downgraded to Neutral from Outperform by Macquarie
Macquarie suggests Orocobre’s result was slightly softer than expected on a profit -15% below forecast. While FY20 production is forecast to exceed FY19, lithium pricing headwinds remain the issue. A debt facility has been finalised to finance Olaroz stage 2 but on lithium pricing pressure the broker downgrades to Neutral from Outperform. Target falls to $2.50 from $3.30.
11. VIVA ENERGY GROUP (VEA) was downgraded to Neutral from Outperform by Macquarie
Interim results were below expectations. Macquarie finds the retail outlook negative, with margins to remain under pressure from competition. Refining is not expected to show an improvement until the fourth quarter of 2019 at the earliest. Macquarie reduces 2019 and 2020 estimates for earnings per share by -58% and -42%, respectively, to reflect lower fuel volumes, lower retail margins, a higher corporate cost base and the lower ramp-up of the Geelong refinery. Target is lowered to $2.06 from $3.10 and the rating is downgraded to Neutral from Outperform.
12. WHITEHAVEN COAL (WHC) was downgraded to Lighten from Accumulate by Ord Minnett
Ord Minnett notes the second half was broadly positive, with earnings and cash flow beating expectations. However, guidance for FY20 is lacklustre. Critically, the company has kept its word and returned surplus cash to shareholders, delivering a $0.30 second half dividend. The broker transfers coverage to another analyst and incorporates a new model, resulting in substantial changes. Rating is downgraded to Lighten from Accumulate and the target reduced to $3.00 from $4.80. Relative to its peers the stock appears expensive on key valuation metrics and the broker notes coal prices are also under pressure.
The above was compiled from reports on FNArena. The FNArena database tabulates the views of seven major Australian and international stock brokers: Citi, Credit Suisse, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.
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