Over the course of the last month, a clear trend has emerged toward downgrades for stockbroking analysts’ company ratings on individual ASX-listed stocks. Downgrades have totalled ninety compared to forty upgrades over that period. 

For the week ending Friday, 31st of July, FNArena registered four upgrades versus sixteen downgrades, with six of those moving to a direct sell. 

Brokers have continued to downgrade recommendations for gold mining shares, largely on valuation concerns, as they rally in response to a climbing gold price. This week, three of the sixteen downgrades were gold shares, including Regis Resources, St Barbara and Gold Road Resources. 

Two of the upgrades related to property. CSR was upgraded due to unrealised value in its large property portfolio and GWA Group as a result of the potential continuation of elevated home improvement expenditure. 

Ongoing weak demand for lithium had Orocobre represented in the ratings downgrade table, while Galaxy Resources was third in the table for the largest negative earnings downgrades of the week. Cooper Energy had the largest earnings downgrade due to weaker-than-expected future earnings guidance, while another gold casualty was OceanaGold Corp following an earnings downgrade. 

Both Insurance Australia Group (margin concerns) and QBE Insurance Group (covid-19 costs) had negative earnings revisions of greater than 10%. Meanwhile, on a positive earnings revision note, AP Eagers led the table with a material structural reduction in costs and coming in second was Janus Henderson Group due to consensus-beating profits. 

Total Buy ratings for the seven brokers monitored daily remains high at 48.83% of total ratings, versus 39.89% on Neutral/Hold, and 11.28% in Sell ratings. 

In the good books 

GWA GROUP LIMITED (GWA) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 1/3/0 

Elevated home improvement expenditure is likely to continue, Credit Suisse assesses. The company reports results on August 17. The broker acknowledges the risks to renovation expenditure, as working-from-home trends ease. Declines in house prices and turnover historically drive lower business in this area. Still, the broker observes renovation-exposed companies have been more resilient during prior downturns compared with new construction. The broker upgrades to Outperform from Neutral as the stock has fallen around -20% and is now seen as at a reasonable entry point. Target is reduced to $3.05 from $3.15. 

 

In the not-so-good books 

DOMINO’S PIZZA ENTERPRISES LIMITED (DMP) was downgraded to Sell from Neutral by UBS B/H/S: 0/4/3 

Domino’s Pizza Enterprises has outperformed the ASX200 by about 109% year to date, reports UBS. This was driven by covid-19 induced effects like an uptake in delivery. The broker notes the stock exhibits defensive characteristics. Earnings forecasts for FY20-22 have been upgraded due to strong like-for-like sales, currency tailwinds and an increasing number of stores. The company is positively affected by the shift to online but the broker believes this has already been priced in. The company will declare its FY20 result on Aug 19. No earnings upside expected for FY20. This leads UBS to downgrade its rating to Sell from Neutral with the target price increasing to $64 from $50.80. 

 

MACQUARIE GROUP LIMITED (MQG) was downgraded to Accumulate from Buy by Ord Minnett B/H/S: 3/3/0 

The AGM commentary and first quarter trading update were in line with Ord Minnett’s expectations. The broker suspects subsequent quarters may be more subdued because of delays in capital recycling, although activity is assumed to recover in the fourth quarter. The stock has run up strongly over recent months and the broker envisages only modest potential upside. This leads to a downgrade to Accumulate from Buy. Target is raised to $133 from $130. 

OROCOBRE LIMITED (ORE) was downgraded to Sell from Hold by Ord Minnett B/H/S: 2/3/2 

Ord Minnett observes, despite the company’s good work with costs, stage 1 operations are losing cash and stage 2 expenditure has exceeded estimates. The prospect of further delays resulting from the pandemic could also raise costs. In the short term the market is oversupplied and any recovery is expected to be well into 2021. As the stock no longer offers valuation support, Ord Minnett downgrades to Sell from Hold and lowers the target to $2.00 from $2.10. 

PARADIGM BIOPHARMACEUTICAL (PAR) was downgraded to Reduce from Hold by Morgans B/H/S: 0/0/1 

Paradigm Biopharmaceutical posted its 4Q20 cashflow report with the most significant item being an uptick in R&D expenses, according to Morgans. These expenses of -$4.7m were incurred as a number of studies and regulatory submissions are imminent. The broker is concerned about a number of issues including large management and founder selling of shares and the sudden departure of the chairman. The analyst also sees risk to the viability of the drug, named Ph2b, as a commercial asset with its low IP value and heading into an expensive Phase 3 trial. Morgans also suggests delays are likely to occur to clinical timelines as a result of covid-19. Additionally, the analyst sees downside risk ahead of filing the investigational new drug (IND) application for the Phase 3 trial by the end of 2020. All this, combined with recent share price strength, has led Morgans to downgrade the recommendation to Reduce from Hold. The target price is maintained at $1.74. 

RIO TINTO LIMITED (RIO) was downgraded to Hold from Add by Morgans B/H/S: 2/4/1 

The Rio Tinto 1H20 result was ahead of consensus estimates, according to Morgans. The company announced an interim ordinary dividend of US$1.55ps, with no special dividend. This fell short of the broker’s estimate of US$1.74ps. Resilient iron ore pricing helped offset lower copper and aluminium prices. The broker believes Rio Tinto may seek to further expand its copper business through inorganic options, with buoyant iron ore earnings creating an earnings and share price advantage over base metal peers. Morgans still views the company as a core holding for most investor types, with an attractive yield profile, high margin earnings and a strong balance sheet. Despite this, the rating is downgraded to Hold from Add, after the broker altered various inputs into the forecast model. The target price is decreased to $107 from $110. 

ST BARBARA LIMITED (SBM) was downgraded to Hold from Buy by Ord Minnett B/H/S: 2/2/1 

St Barbara announced June-quarter production figures for gold in-line with the Ord Minnett forecast. However, FY21 guidance for Gwalia was about -20% below the broker’s estimate and FY22 onward has also been set -20% lower.  The analyst still sees significant value-adding potential across Gwalia, Moose River and Simberi. The rating is lowered to Hold from Buy. The target price is decreased to $3.60 from $4.40. 

SANDFIRE RESOURCES NL (SFR) was downgraded to Neutral from Outperform by Macquarie B/H/S: 3/4/0 

Sandfire Resources’ June quarter was strong with higher than expected production and shipments. Production of both copper and gold was 9% and 26% higher than Macquarie’s forecasts. FY21 guidance was weaker than expected. DeGrussa is expected to produce 67-70kt of copper and 36-40koz of gold. This has led the broker to decrease its earnings forecasts for FY21-23. Macquarie downgrades the stock to Neutral from Outperform with the target price decreasing to $5.20 from $5.60. 

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.