The trend continued this week toward downgrades for stockbroking analysts’ company ratings on individual ASX-listed stocks. Downgrades have more than doubled upgrades over the past six weeks and for the week ending Friday, August 7, there were 7 upgrades and 13 downgrades. 

Of the 7 upgrades, 5 were elevated to a Buy, including OceanaGold, which despite weaker than expected second quarter production figures is benefiting from growth prospects and one broker adjusting the gold price higher in valuation models.  

For the 13 downgrades, 6 were reduced to a direct Sell, featuring the perennial disappointment that is AMP, Regis Resources on weak June quarter production and Saracen Mineral Holdings due to higher than expected capital expenditure requirements. 

Qantas achieved the highest percentage earnings upgrade from analysts after moderating expenditure, and commitments such as a deferral of aircraft purchases. AP Eagers was second for an upbeat assessment of first half results and received plaudits for a structural reduction in costs. 

Flexigroup’s profit result was hit by pandemic-related provisioning which resulted in the second largest percentage earnings downgrade. Proving it is possible to receive both a rating and target price upgrade and simultaneously win the title for largest percentage earnings downgrade for the week was OceanaGold. Considering the differing broker views and the sometimes lingering disparities that occur between the target price and the actual price for a share, one comes to appreciate it’s all in the relativities! 

Total Neutral/Hold recommendations take up 48.55% of the total, versus 39.86% on Neutral/Hold, while Sell ratings account for the remaining 11.59 %. 

In the good books 

In the not-so-good books 

ARISTOCRAT LEISURE LIMITED (ALL) was downgraded to Accumulate from Buy by Ord Minnett B/H/S: 7/0/0 

Ord Minnett downgrades Aristocrat Leisure to Accumulate from Buy based on valuation. Target is $28.50. 

RESMED INC (RMD) was downgraded to Equal-weight from Overweight by Morgan Stanley B/H/S: 1/4/1 

Morgan Stanley considers the business is emerging from the pandemic in a stronger position but this has been encapsulated in the outperformance of the stock over the year to date. Hence, the broker downgrades to Equal-weight from Overweight. Earnings in FY20 beat estimates largely because of slower costs growth. The company has tripled production capacity for ventilators, while mask resupply sales associated with obstructive sleep apnoea have remained solid in the US, albeit below estimates. Target is reduced to $25.40 from $26.60. Industry view: In-Line. 

TPG TELECOM LIMITED (TPG) was downgraded to Sell from Neutral by UBS B/H/S: 3/1/2 

UBS thinks TPG Telecom’s share price has not fully adjusted for the special dividend payment. The stock appears to be trading at a premium to Telstra which UBS considers fair given that synergies will take time to achieve and the broker expects more growth from TPG in the near term. Even so, the broker believes the magnitude of the premium is excessive. Valuation remains highly dependent on synergy assumptions. UBS downgrades its rating to Sell from Neutral with its target price decreasing to $7.20 from $8. 

VIRGIN MONEY UK PLC (VUK) was downgraded to Reduce from Hold by Morgans B/H/S: 2/0/1 

Virgin Money UK provided a 3Q20 trading update last week, which failed to excite Morgans. Credit loss provisions increased by -GBP42m over the quarter, which was unsurprising to the broker, given the grim macroeconomic backdrop in the UK. The analyst forecasts a further -GBP285m provision top-up for the mortgage book over the next 12 months. Morgans downgrades the rating for the company to Reduce largely due to lower Net Interest Margin (NIM) forecasts, after third quarter NIM disappointed.  Morgans downgrades underlying EPS forecasts by -11%, -14% and -9% for FY20, FY21 and FY22, respectively. The rating is downgraded to Reduce from Hold. The target price is decreased to $1.30 from $1.44. 

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.