In the good books
AINSWORTH GAME TECHNOLOGY (AGI) was upgraded to Neutral from Underperform by Macquarie
Macquarie believes challenges in game performance will continue to affect the growth trajectory. Increased investment in game development is a positive but a recovery in earnings remains a challenge. FY20 guidance implies Ainsworth Game could report the worst financial result in the last 10 years, with Macquarie forecasting $2m adjusted pre-tax profit. The broker upgrades to Neutral from Underperform as valuation support has emerged. Target is raised to $0.80 from $0.55.
BLUESCOPE STEEL (BSL) was upgraded to Outperform from Neutral by Macquarie and to Accumulate from Hold by Ord Minnett
Macquarie believes risks are receding and, from a steel perspective, envisages renewed momentum in US prices after the winter. A partial or full resolution of the US/China trade conflict would also be a bullish development and the news of a deal is therefore an important development. Rating is upgraded to Outperform from Neutral and the target raised to $16.50 from $14.00.
Ord Minnett upgrades to Accumulate from Hold and raises the target to $17 from $15. The broker’s new model incorporates raw material prices aligning with mining coverage and near-term steel and scrap prices based on the forward curve. The broker remains attracted to the company’s dominant Australian market position, production growth at North Star and a strong balance sheet. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
NEW HOPE CORPORATION (NHC) was upgraded to Neutral from Underperform by Macquarie
Macquarie considers coal a tough investment call, with downside pressure on coking coal prices partially offset by improving thermal coal prices and a soft Australian dollar. Rating on New Hope Corp is upgraded to Neutral from Underperform. Target is reduced to $1.90 from $2.00. The reduction in the target also reflects risks around New Acland approvals.
NORTHERN STAR RESOURCES (NST) was upgraded to Neutral from Underperform by Credit Suisse
Northern Star will become Australia second-largest gold producer after taking a 50% stake in the Kalgoorlie Super Pit. After the transition, Citi notes the joint venture will get its third general manager in less than seven months, a key “person risk”. Reservations on the timing and management challenges aside, Citi considers the transaction should improve the company’s global appeal. Importantly, the broker acknowledges the re-vamping of Pogo is on track. Citi retains a Buy rating and $12.40 target.
PUSHPAY HOLDINGS (PPH) was upgraded to Outperform from Neutral by Macquarie
The company has acquired Church Community Builder for US$87.5m. Macquarie expects the acquisition will provide an uplift across revenue from FY21 and beyond. The broker finds the strategic rationale for the acquisition sound, and assesses the medium-term outlook has been de-risked. Macquarie envisages additional value emerging in the stock and upgrades to Outperform from Neutral. Target increases 28% to NZ$4.61.
SANDFIRE RESOURCES (SFR) was upgraded to Outperform from Neutral by Macquarie
For the first time Macquarie incorporates both the T3 project and Black Butte into modelling. While lower grade resources are likely to add 2-3 years life to DeGrussa, albeit at half the current production rate, the T3 project should offset this. Meanwhile, at Black Butte the company is expecting to secure a decision later this year, although Macquarie notes there is a risk of further delays. Rating is upgraded to Outperform from Neutral. Target is lifted 13% to $6.80.
SIGMA HEALTHCARE (SIG) was upgraded to Neutral from Sell by Citi
Citi upgrades to Neutral from Sell on the back of the decline in the share price, as the company adjusts FY20 guidance to reflect the Chemist Warehouse contract. FY20 guidance is downgraded to $46-47m, with the new contract being the only reason for the downgrade. Citi expects investors will look through FY20 and focus on FY21, with guidance to be provided at the results in March. Target is steady at $0.65.
In the not-so-good books
BEACH ENERGY (BPT) was downgraded to Underperform from Neutral by Macquarie
As the share price has doubled over the last 12 months, Macquarie believes longer-term guidance, which incorporates significant upside, is now factored into the stock. Macquarie assesses there is downside risk over the next few months and downgrades to Underperform from Neutral. Target is raised to $2.40 from $2.20.
MCMILLAN SHAKESPEARE (MMS) was downgraded to Equal-weight from Overweight by Morgan Stanley
Morgan Stanley downgrades to Equal-weight from Overweight. This is primarily driven by the exposure to softening conditions in consumer demand, responsible lending and corporate expenditure. The broker envisages little near-term respite. Target is reduced to $14.80 from $17.60. In-Line sector view. The broker makes it clear there are no alarming company-specific issues but suspects there is reduced scope for re-rating.
OCEANAGOLD CORPORATION (OGC) was downgraded to Neutral from Outperform by Macquarie
The expected dip in US dollar gold prices has come earlier than Macquarie expected. This is also more pronounced than forecasts indicated. The broker is now forecasting a low for gold of US$1400/oz in mid 2020 against an improved global outlook and a strengthening US economy. The broker downgrades to Neutral from Outperform as the new gold price forecasts mean a material downgrade to 2020 and 2021 earnings for all gold producers under coverage. Target is reduced to $2.80 from $4.80.
PILBARA MINERALS (PLS) was downgraded to Underperform from Neutral by Macquarie
Macquarie is cautious about battery mineral stocks, given weak lithium prices, and downgrades Pilbara Minerals to Underperform from Neutral. Target is reduced to $0.21 from $0.32.
PERSEUS MINING (PRU) was downgraded to Neutral from Outperform by Macquarie
The expected dip in US dollar gold prices has come earlier than Macquarie expected. This is also more pronounced than forecasts indicated. The broker is now forecasting a low for gold of US$1400/oz in mid 2020 against an improved global outlook and a strengthening US economy. The broker downgrades to Neutral from Outperform, given recent appreciation in the share price and as the new gold price forecasts mean a material downgrade to FY20 and FY21 earnings for all gold producers under coverage. Target is raised to $1.05 from $0.90.
REGIS RESOURCES (RRL) was downgraded to Neutral from Outperform by Macquarie
The broker downgrades to Neutral from Outperform as the new gold price forecasts mean a material downgrade to FY20 and FY21 earnings for all gold producers under coverage. Target is reduced to $4.50 from $5.20.
SMARTGROUP (SIQ) was downgraded to Neutral from Outperform by Credit Suisse, to Neutral from Outperform by Macquarie and to Hold from Buy by Ord Minnett
The company’s insurance underwriting partner intends to change product terms sold by authorised representatives. Credit Suisse understands this relates to add-on insurance and will affect the price point and service fees Smartgroup receives. The company estimates a -$4m unmitigated impact for FY20. Credit Suisse had assessed changes to add-on insurance products were already in the earnings base and is surprised by the extent of the earnings hit, and the fact there are evidently service fees outside of the commission structure. Rating is downgraded to Neutral from Outperform. Target is reduced to $8.25 from $10.10.
Macquarie downgrades to Neutral from Outperform. The company has announced its insurance underwriting partner intends to make changes to the terms, which will affect service fees and commissions. Macquarie finds the impact and timing extremely disappointing. Based on guidance Smartgroup will receive a reduction of -$11.4m in service fee earnings. Target is reduced to $7.66 from $11.66.
Ord Minnett notes the company has made three surprise announcements in the last couple of months, these being a complete sell-down by a major shareholder, the upcoming retirement of the CEO, and now the insurance underwriter is implementing changes to the terms of the products. As new car sales data remains weak and a headwind for the sector, Ord Minnett suggests the timing of the announcements has not been helpful. As a result, the rating is downgraded to Hold from Buy. Target is reduced to $9.00 from $11.60. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
ST BARBARA (SBM) was downgraded to Neutral from Outperform by Macquarie
The broker downgrades to Neutral from Outperform as the new gold price forecasts mean a material downgrade to FY20 and FY21 earnings for all gold producers under coverage. Target is reduced to $2.60 from $3.30.
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.
