In the good books 

THE REJECT SHOP (TRS) was upgraded to Overweight from Underweight by Morgan Stanley 

Morgan Stanley assesses The Reject Shop is a leader in a fragmented market, a niche that has proved to be large and profitable in other global markets. Still the business has been under-earning and the broker suspects a simplified strategy and new management will be the positive catalyst. Morgan Stanley acknowledges measuring earnings growth is problematic as the starting point is either negative or very small. Hence, it is the long-term potential that is evaluated. The broker upgrades to Overweight from Equal-weight. Target is raised to $10.00 from $2.60. Industry view: In Line. 

THE STAR ENTERTAINMENT GROUP (SGR) was upgraded to Buy from Neutral by Citi 

Citi believes the outlook for domestic casinos is robust as they re-open on schedule with limited restrictions. The broker forecasts JobKeeper will boost first half margins as wages are subsidised during the early stages of the re-opening. Citi upgrades Star Entertainment to Buy from Neutral, envisaging more share price upside in the near term. Target is raised to $3.50 from $3.10. 

In the not-so-good books 

ADBRI (ABC) was downgraded to Hold from Accumulate by Ord Minnett and to Sell from Buy by UBS 

Alcoa will not be renewing its lime supply contract with Adbri, set to expire on June 30, 2021. Ord Minnett notes the loss from this will be -70m in revenue or about 40% of the lime business. Earnings forecasts have been lowered by -19% by FY22. The broker sees risk of more volume loss, price resets and import threats and has reduced its rating to Hold from Accumulate with the target price reducing to $2.70 from $3. 

UBS downgrades to Sell from Buy and lowers the target to $2.00 from $2.82 The broker had expected that the lime division would be stable, but the loss of the Alcoa contract has now affected this view. The broker is concerned about the company’s inability to renegotiate the contract and price & quality are likely to have played a part. However, UBS points out Adbri has a dominant position in lime and this may have been a contributing factor to Alcoa seeking a new source. 

AFTERPAY (APT) was downgraded to Neutral from Outperform by Macquarie 

The pandemic has accelerated Afterpay’s growth with sales momentum showing up through a jump of 127% in the June quarter, driven by scaling of the business in three markets. Macquarie expects strong subscriber growth to underpin sales growth. The company’s ability to scale quickly gives it a competitive advantage, highlights the broker. There is uncertainty in forecasting an emerging model, admits the broker and downgrades to Neutral from Outperform with the target price increasing to $70 from $36. This reflects increased long-term gross merchandise value (GMV) assumptions and the capital raising. 

ASX (ASX) was downgraded to Sell from Neutral by UBS 

UBS notes heightened market volatility has benefited ASX in two main areas in the second half, cash equity turnover and capital raisings. Trends elsewhere have been softer, with reduced activity across futures volumes and equity derivatives. Given delays to the CHESS replacement, now slated for April 2022, project expenditure remains elevated over the near term. With a more moderate medium-term growth outlook, UBS downgrades to Sell from Neutral. Target is raised to $75.00 from $68.50. 

BHP GROUP (BHP) was downgraded to Neutral from Outperform by Credit Suisse 

Credit Suisse believes the recent appreciation in the share price means the risk/reward is balanced and downgrades to Neutral from Outperform. The broker still regards the balance sheet as robust and envisages little risk to dividends. However, yields are considered no longer attractive enough to serve as a trigger to push the stock higher. Target is reduced to $37 from $39. 

COCA-COLA AMATIL (CCL) was downgraded to Neutral from Outperform by Credit Suisse 

Credit Suisse observes early signs consumers are seeking value in the beverage category. Discounted water volumes have started to grow again. The broker is also concerned about the short-term impact of the renewed lockdown in Victoria. Until the uncertainty around the operating performance clears, Credit Suisse downgrades to Neutral from Outperform. 

CROWN RESORTS (CWN) was downgraded to Neutral from Buy by Citi 

Citi believes the outlook for domestic casinos is robust as they re-open on schedule with limited restrictions. The broker forecasts JobKeeper will boost first half margins as wages are subsidised during the early stages of the re-opening. Crown Resorts is downgraded to Neutral from Buy because of relative valuation and the risk of further delays in the re-opening of Melbourne. Target is raised to $10.00 from $8.20. 

DOMINO’S PIZZA ENTERPRISES (DMP) was downgraded to Hold from Accumulate by Ord Minnett and to Neutral from Outperform by Macquarie 

Even though Domino’s Pizza Enterprises continues to enjoy strong performance drivers, Ord Minnett is of the opinion the strong share price performance (an increase of 34% versus the ASX100 falling by -9.7% since January 1) reduces its valuation support. Earnings forecasts for FY20-21 have been upgraded by 4% and 7% on account of higher same-store sales growth and higher net store numbers. The broker highlights the company is performing well in Australia and New Zealand. Ord Minnett downgrades its rating to Hold from Accumulate with the target price increasing to $70 from $57.50. 

Analysts at Macquarie observe consumer discretionary stocks have significantly outperformed in Australia as trading restrictions have seen consumer spending on services switch to goods. Meanwhile, strong fiscal stimulus programs and incentives to retain employees will gradually unwind leaving current valuations vulnerable to a derating, the analysts believe. They have downgraded Domino’s Pizza to Neutral from Outperform. Target $66.10, unchanged. 

JB HI-FI (JBH) was downgraded to Neutral from Outperform by Macquarie 

Analysts at Macquarie observe consumer discretionary stocks have significantly outperformed in Australia.They have downgraded JB Hifi to Neutral from Outperform. Target $41, unchanged. 

LENDLEASE GROUP (LLC) was downgraded to Hold from Buy by Ord Minnett 

Ord Minnett reduces construction EBITDA forecasts in aggregate by -$200m for FY21 and FY22. This assumes productivity has not returned to pre-pandemic levels for the US business. The broker downgrades to Hold from Buy and lowers the target to $13.50 from $14.00. The business is well-positioned from a capital perspective, in the broker’s view, having raised equity and sold $500m in settlement revenue at One Sydney Harbour development as well as settling the sale of 25% of the project after June 30. 

MAGELLAN FINANCIAL GROUP (MFG) was downgraded to Neutral from Buy by Citi 

Citi has downgraded to Neutral from Buy, while remaining attracted to Magellan Financial’s positive leverage to equity markets, its solid investment performance on top of strong net cash generation, but it’s time for a pause in the share price rally, apparently. The analysts have taken the opportunity to lift earnings estimates (noticeably) and this has pushed up the price target to $66 from $40. The new target includes a 10% valuation premium for the potential growth into retirement income, the analysts explain. 

SIMS (SGM) was downgraded to Neutral from Outperform by Credit Suisse 

Credit Suisse reviews the earnings drivers and revises down earnings forecasts for the second half of FY20. A more conservative outlook is also adopted for FY21/22. The broker’s forecasts are based on weakness in scrap prices and soft US peer results. The pricing and volume backdrop needs to turn around to signal a buying opportunity. Hence, Credit Suisse downgrades to Neutral from Outperform. Target is reduced to $7.95 from $9.10. 

WESFARMERS (WES) was downgraded to Neutral from Outperform by Macquarie 

Analysts at Macquarie observe consumer discretionary stocks have significantly outperformed in Australia. They have downgraded Wesfarmers to Neutral from Outperform. Target $44.50, unchanged. 

The above was compiled from reports on FNArena. The FNArena database tabulates the views of seven major Australian and international stockbrokers: 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.