A pattern of downgrades over the last month was re-established this week for individual ASX-listed stocks. For the week ending Friday 24 July 2020, FNArena registered 9 upgrades versus 20 downgrades. Of the 20 downgrades, 10 moved to a direct sell and 4 of those 10 related to gold shares. 

BHP Group received 2 downgrades, one to align with recent share price strength and the other due to lower production concerns. On a positive note, Helloworld received 2 upgrades to a Buy, after a recent capital raising and a potential lift in earnings once the lockdown is over. 

OZ Minerals and Alumina Ltd led the largest percentage positive upgrades to earnings, while BlueScope Steel was third with reported earnings well ahead of consensus broker forecasts.  

Covid-19 headwinds ensured that QBE Insurance Group received the largest negative forecast earnings revision from broking analysts, while Cooper Energy was second on the list after reporting weak quarterly production and lower guidance for the 2021 financial year. 

Total Buy ratings for the 7 brokers monitored daily remains high at 49.18% of total ratings, versus 39.83% on Neutral/Hold, and 10.99% in Sell ratings. 

In the good books 

NANOSONICS LIMITED (NAN) was upgraded to Add from Hold by Morgans B/H/S: 2/0/1 

Even though the August profit release may cause some price weakness, Morgans prefers to get in early with an upgrade to Add, given the share price is -10% below the broker’s target price of $6.92. The post-result weakness may arise from limited hospital access in the last few months. Nanosonics has a technology platform that is highly regarded and Trophon 2, the current product offering, is soon to be expanded with the release of a new technology platform. The timing of the release remains uncertain. Morgans believes high level disinfection will continue to be a long-term thematic. Rating is upgraded to Add from Hold. The target price is $6.92. 

RESOLUTE MINING LIMITED (RSG) was upgraded to Outperform from Underperform by Macquarie B/H/S: 2/0/0 

On Monday Macquarie was awaiting more detail on the Syama Sulphides ramp-up, which is key to deleveraging, while retaining Underperform. Yesterday’s quarterly report showed performance roughly in line with expectations, with production beating but costs missing. Most importantly, Syama Sulphides showed positive processing momentum and the broker now feels more comfortable in the operations’ longer term outlook. This results in a double-upgrade to Outperform from Underperform. Target rises to $1.60 from $1.05. 

STOCKLAND (SGP) was upgraded to Neutral from Sell by Citi B/H/S: 2/4/0 

Upgrade to Neutral from Sell as Citi analysts have updated estimates to reflect higher than previously expected impact of Homebuilder, along with state based stimulus, to land sale volumes. Citi analysts have increased residential volumes for FY20/FY21. They lowered estimated volumes in future years given they also believe Homebuilder will pull forward demand. EPS estimates increase 1.4% and 3.4% in FY20 and FY21, and decline -0.5% in FY22. The broker’s price target declines to $3.16 from $3.21. 

In the not-so-good books 

COOPER ENERGY LIMITED (COE) was downgraded to Neutral from Outperform by Macquarie B/H/S: 2/2/0 

Cooper Energy has released a weaker-than-expected FY21 guidance and Macquarie blames the Otway shutdown, as well as Cooper declines and an uncertain outlook for the Sole project. In light of a resilient share price, combined with Sole uncertainty, Macquarie thinks the safer option is to downgrade to Neutral from Outperform. Target price has fallen to 44c from 55c. Estimates have been scaled back and EPS is now expected to return into the black in FY22 instead of the previously forecasted FY21. 

EVOLUTION MINING LIMITED (EVN) was downgraded to Neutral from Outperform by Credit Suisse and to Underperform from Neutral by Macquarie B/H/S: 0/2/5 

Evolution Mining’s June quarter production stands at 218koz with high free cash flows. The company has not provided any explicit guidance except for Cowal which is lower than expected. For Red Lake, the broker reports management indicated it will be focusing on long term establishment but did not go into specifics. Credit Suisse downgrades its rating to Neutral from Outperform with the target price increasing to $6 from $5.45. 

It is Macquarie’s view that Evolution Mining finished FY20 with strong momentum, supported by cost discipline and buoyant metal prices. Cash flow came in at a record. Plus the maiden reserve at Cowal proved ahead of schedule, opening up the possibility of an early start to mining, but the grade is marginally below expectation. Macquarie, however, does not think current strong momentum can be maintained. On that basis, the rating is being downgraded to Underperform from Neutral. Target price $5.20 (-20c). 

MAGELLAN FINANCIAL GROUP LIMITED (MFG) was downgraded to Underperform from Neutral by Macquarie B/H/S: 0/5/2 

Magellan Financial delivered $779bn of inflows in the June quarter which by its standards, Macquarie notes, was a quiet quarter. Market performance added back half of assets under management value lost in the prior quarter. The positive surprise were $39m in performance fees. The stock now trades on a 25x forward PE, which is 52% above peers. Hence on a valuation basis, the broker downgrades to Underperform from Neutral. Target rises to $57.50 from $50.00. 

NORTHERN STAR RESOURCES LTD (NST) was downgraded to Underperform from Neutral by Macquarie and to Neutral from Outperform by Credit Suisse B/H/S: 0/3/2 

Northern Star’s pre-release market update revealed virus impacts at Pogo and an overall higher level of all-in operational costs, but Macquarie points out management still remains confident in its Australian mines given it paid down $200m in debt. For now, Macquarie downgrades to Underperform from Neutral, also because the share price has run hard, but the analysts are keen to find out management’s guidance for FY21 in August, as well as the FY20 result itself. Target $14 (-50c). 

Northern Star Resources pre-disclosed quarterly production of 267koz, which is 30% of FY20’s 905koz. Credit Suisse considers the result a strong finish to the year. Jundee’s performance coupled with high group free cash flows were the highlights, notes the broker. Mining rates at KCGM accelerated and the broker awaits management’s commentary for its longer-term strategy (due later in 2020). The broker makes no structural changes to its Pogo investment thesis but does expect a more negative impact than expected on FY21 production. Kalgoorlie is facing issues due to grade decline and there is no clear path for improvement. No guidance has been provided but management indicated limited growth at Pogo with productivity still constrained due to covid-19 measures. Credit Suisse downgrades its rating to Neutral from Outperform with the target price increasing to $16 from $14.70. 

OZ MINERALS LIMITED (OZL) was downgraded to Hold from Add by Morgans B/H/S: 5/1/1 

2020 guidance for OZ Minerals’ copper production was lifted by 6% with gold guidance rising by 8%. AISC costs have been lowered materially, reports Morgans. The upgrade has been driven by pricing tailwinds, faster than expected ramp-up at Carrapateena and strong execution, lists the broker. Led by the new guidance and the strong rebound in copper prices, the broker also upgrades its 2020-22 operating income forecasts by 9-17%. While the company enjoys pricing tailwinds, it is trading at a premium to Morgans’ valuation, compelling the broker to downgrade its rating to Hold from Add. The target price increases to $12.05 from $10.65. 

QBE INSURANCE GROUP LIMITED (QBE) was downgraded to Underperform from Neutral by Macquarie B/H/S: 6/0/1 

Ongoing reserve strengthening in the US and a lack of correlation between QBE Insurance’s definition of attritional claims ratios and group earnings reinforce Macquarie’s concerns that large portions of the group remain non-core to QBE’s underlying business. Management has provided more detail on covid losses and first half income. Investors continue to focus on pricing and attritional claims momentum, but the broker believes another group-wide review should be undertaken. Rating is downgraded to Underperform from Neutral. Near term earnings forecast have been cut, but on assumed higher premiums in the longer term, target rises to $8.20 from $6.90. 

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 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.