As the world of global finance continues to be dominated by macro factors, including Trump versus China and central bank stimulus/interventions, stockbroking analysts continue to downgrade more ASX-listed stocks than they issue upgrades.
For the week ending Friday, 11th October 2019, both Domino’s Pizza and Netwealth were responsible for two downgrades each. Netwealth received two fresh Sell ratings ahead of a better-than-anticipated trading update (it’s the outlook for margins).
Packaging company Orora, soon without paper operations, is represented on both sides of the week’s ledger.
The week’s table for positive revisions to earnings estimates sees Corporate Travel Management on top, followed by ResMed, AP Eagers and Baby Bunting. The flip side has gold miner St Barbara on top, but the numbers are smaller, followed by EclipX Group, Orora and Bingo Industries.
Throughout the short term momentum on the back of Trump versus China news flow, investors’ attention will likely draw to corporate earnings in the US, with the Australian calendar offering banks and AGMs.
In the good books
1. BRAMBLES LIMITED (BXB) was upgraded to Neutral from Underperform by Credit Suisse B/H/S: 1/5/0
The company reported first quarter revenue growth of 2% actual and 5% at constant currency, in line with Credit Suisse forecasts. Management reiterated guidance and noted CHEP Americas revenue was up 7% because of higher pricing, particularly in Latin America, amid rollover benefits from US pallet contracts and solid volume growth. Credit Suisse upgrades to Neutral from Underperform. Target is steady is $11.20.
2. FLIGHT CENTRE LIMITED (FLT) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 5/2/0
Credit Suisse suspects the discussion regarding the sustainability of the shop network will only intensify. The broker disagrees with the bear case which suggests that the growth of online and home-based consulting will put pressure on the shops. Flight Centre is considered well-placed to implement a transition and the cost base can be reduced with a manageable impact on profit. On the upside, Flight Centre now operates one of the largest online travel booking businesses in Australia. The home channel is growing strongly as is corporate. The broker upgrades to Outperform from Neutral and raises the target to $49.91 from $47.76. Guidance will be provided at the AGM on November 9.
3. ORORA LIMITED (ORA) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 2/4/0
The sale price of the Australasian fibre business, with proceeds of $1.57bn, was ahead of Credit Suisse’s valuation. Management has indicated a trading update will be provided at the AGM next week. Credit Suisse reduces earnings estimates, suspecting weakness on the back of a soft US manufacturing survey, and given the company’s statement that initiatives were being implemented to deliver earnings growth (does this mean earnings are not growing?). Rating is upgraded to Outperform from Neutral and the target raised to $3.40 from $2.80.
See downgrade below.
In the not-so-good books
1. DOMINO’S PIZZA ENTERPRISES LIMITED (DMP) was downgraded to Neutral from Outperform by Macquarie and to Neutral from Buy by Citi B/H/S: 1/5/0
Macquarie observes the company’s growth outlook is robust across Europe and Japan, as categories are expanded and market share is obtained. The company’s investor briefing provided no trading update and the broker downgrades to Neutral from Outperform following the recent share price performance and transfers coverage to another analyst. The broker expects the stock to trade sideways until the market becomes more comfortable about Australasian earnings in FY20 and beyond as well as franchisee profitability. Target is $48.40.
Citi lowers the rating to Neutral from Buy, given the 28% rise in the share price. The investor briefing provided more detail about the benefits of store density. While the reasoning is logical, the broker believes there are intermediate challenges, where a pre-existing store can experience lower sales for several years when a new store opens nearby. The business has good prospects but the broker believes this is factored into the share price. Targets raised to $46.40 from $44.00.
2. INDEPENDENCE GROUP NL (IGO) was downgraded to Lighten from Hold by Ord Minnett B/H/S: 1/1/2
With nickel prices rising 65% in the year to date and stockpiles continuing to be drawn down, Ord Minnett increases FY20 estimates for the nickel price by 35%. This lifts earnings estimates for the company by 30%. The broker believes strong spot prices have come at a good time for offtake negotiations as concentrate markets are already tight. The broker raises the target to $5.70 from $5.30 but downgrades to Lighten from Hold, assessing the positives are priced into the equity.
3. NETWEALTH GROUP LIMITED (NWL) was downgraded to Sell from Neutral by UBS and to Underperform from Neutral by Credit Suisse B/H/S: 1/2/3
Netwealth’s Sep Q net flows were up 40% on the prior year, but FY20 guidance requires a 60% increase. Given the ANZ Private Bank mandate win, UBS believes this is achievable. Thus earnings growth prospects remain strong. Target rises to $7.50 from $7.25. But margin risk is growing. The broker is forecasting an RBA cash rate of 0.25% by May, which would knock -9% off earnings on reduced cash spread margins. Given Netwealth’s forward PE has re-rated to 49x from 39x in FY19, UBS downgrades to Sell.
Credit Suisse downgrades to Underperform from Neutral, as trading multiples are now limiting the share price upside. First quarter funds under administration were up 8.5% amid positive market movements. Flows were strong but slightly below expectations. While the company is making the most of its unique opportunity, created by the disruption of the wealth management industry, a declining revenue margin is diluting growth, in the broker’s view. Target is $7.60.
4. ORORA LIMITED (ORA) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 2/4/0
Orora will sell its Australasian fibre business to Nippon Paper and Ord Minnett believes the latter has clearly paid a premium at $1.72bn. The broker believes the decision to sell was the right one as there were minimal synergies with the other businesses under Orora’s umbrella. However, the quality of the portfolio has been diluted, as the North American business now represents close to half of group earnings (EBIT). Given this, the broker downgrades to Hold from Accumulate, awaiting an update at the AGM. Target is raised to $3.25 from $3.00. The broker assumes the transaction closes in January 2020 and $1.2bn is returned to shareholders via a special dividend.
See upgrade above.
5. WESTERN AREAS NL (WSA) was downgraded to Hold from Buy by Ord Minnett B/H/S: 2/3/1
As nickel prices have risen 65% in the year to date and stockpiles are being drawn down, Ord Minnett updates nickel price forecasts. FY20 nickel price forecasts are increased by 35% which lifts earnings estimates for the company by 270%. The strong spot prices have arrived at a good time for offtake negotiations for miners as concentrate markets are already tight. However, the broker believes this is priced into the equities and downgrades Western Areas to Hold from Speculative Buy. Target is raised to $3.20 from $2.90.
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 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. 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.
