In the good books
ALTIUM (ALU) was upgraded to Hold from Lighten by Ord Minnett
Yesterday, Ord Minnett had placed its Lighten rating under review (see Report yesterday). Today, that review has led to an upgrade to Hold. The broker explains that while Altium’s operational (EBITDA) performance proved slightly better-than-expected, management’s projections out to FY25 imply a slower growth rate, and that was exactly why the Lighten rating had been put in place. Even with the updated FY25 revenue mid-point of $429m circa -14% below the prior $500m target, Ord Minnett observes investors have chosen to look through the downgrade. Target price lifts to $31.15 from $29.50.
See downgrade below.
BLUESCOPE STEEL (BSL) was upgraded to Equal-weight from Underweight by Morgan Stanley
Morgan Stanley found the results commendable, given difficult markets. Earnings (EBIT) were in line with prior guidance and the broker’s estimates. Conditions appear to be gradually improving and Morgan Stanley upgrades to Equal-weight from Underweight. No first half guidance was provided because of the high level of uncertainty. Target is raised to $11.50 from $10.00. Industry view: Cautious.
HARVEY NORMAN HOLDINGS (HVN) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett increases estimates by 2% for FY20 and 8% for FY21. Retailer success is considered a result of lower expenditure in other consumption categories and this should drive solid results when the company reports on August 28. The broker upgrades to Accumulate from Hold as Harvey Norman is likely to benefit from operating leverage and housing. Target is raised to $4.75 from $3.85.
METCASH (MTS) was upgraded to Outperform from Neutral by Credit Suisse
Macro factors are expected to support expenditure on food retail. Metcash is also expected to experience mid-high single digit sales growth. Credit Suisse expects shopping behaviour will become more localised over the short term, benefiting independent food stores. Housing-related expenditure is a potential cyclical headwind for hardware, but that risk is expected to become more obvious in 2021-22. Rating is upgraded to Outperform from Neutral and the target raised to $3.47 from $3.07. A trading update is expected at the AGM on August 26.
MONADELPHOUS GROUP (MND) was upgraded to Outperform from Neutral by Macquarie and to Hold from Lighten by Ord Minnett
Monadelphous Group’s FY20 net profit (NPAT) is 34% ahead of Macquarie’s estimate. Margins, cash flows and dividend were all ahead of the broker’s forecasts. The company sees potential for operating income margins to return to pre-covid-19 levels although the broker considers this too optimistic. Macquarie upgrades its rating to Outperform from Neutral with the target price increasing to $11.57 from $11.16.
Ord Minnett notes Monadelphous Group reported net profit of $36.5m for FY20, below the broker’s estimate by -10%. The company also pointed due to covid-19, 10% of FY210 revenue has been deferred into FY21. The year ahead is expected to be strong but a lawsuit worth circa -$500m from Rio Tinto (RIO) precludes the broker from being more positive on the stock. Ord Minnett upgrades its rating to Hold from Lighten with the target price increasing to $10.80 from $10.
NETWEALTH GROUP (NWL) was upgraded to Neutral from Underperform by Credit Suisse
FY20 results were slightly ahead of estimates. Guidance for flows of $8bn in FY21 is significantly higher than Credit Suisse’s previous forecasts. While the company pointed to further revenue margin pressure, the broker considers this manageable given the strong growth in funds under administration. Forecasts are raised by 17% for FY21 and 27% for FY22. Rating is upgraded to Neutral from Underperform as, while the valuation is optically high, it is considered justified by the three-year compound growth rate of around 20%. Target is raised to $14.00 from $8.45.
SARACEN MINERAL HOLDINGS (SAR) was upgraded to Buy from Neutral by UBS
Saracen Mineral Holdings has unveiled its Superpit mine plan a month early, albeit not a full reveal. UBS reckons near-term production is lower than markets expected, triggering near-end earnings downgrades, but notes the plan has greater duration. Given some details remain hazy, UBS spies potential to increase disappointing FY25-FY27 guidance, and extend the mine life from FY35. UBS says the miner offers a sector-leading five year production compound average growth rate of 5% out to 2025. Broker upgrades to Buy from Neutral noting the miner is trading at a 15% discount to valuation. Target price rises to $6.75 from $6.50. Production forecasts fall -3% for FY21 and -6% for FY22, driving a -17% and -27% fall in net profit after tax estimates.
SG FLEET GROUP (SGF) was upgraded to Outperform from Neutral by Macquarie
SG Fleet Group’s FY20 net profit beat Macquarie’s forecast by circa 11.7% with the fourth quarter performance better than expected. The group did not provide any guidance for FY21. Trading improved in June continuing into the first half of FY21, notes the broker, along with better than expected novated leads. Macquarie upgrades its rating to Outperform from Neutral with the target price increasing to $1.92 from $1.85.
SIMS (SGM) was upgraded to Outperform from Neutral by Macquarie
Sims reported a better than expected FY20, observes Macquarie, with some improvement in market and profitability. No dividend was declared. Macquarie is impressed by how the group managed to reduce its costs in the UK and ANZ while winning four important contracts in FY20 and another three for FY21. The company has not provided any guidance although notes intake volumes are recovering. The market environment has improved post lockdowns in North America and the UK, assesses the broker, and upgrades its rating to Outperform from Neutral. Target is raised to $9.50 from $7.95.
In the not-so-good books
ALTIUM (ALU) was downgraded to Neutral from Outperform by Macquarie
Altium’s FY20 earnings beat Macquarie’s forecasts by a nose, thanks to improved margins on in-line revenue, but forward estimates disappointed. The broker notes strong subscriber growth in response to heavy discounting in the June quarter. Revenue and subscriber guidance is maintained out to 2025 but company management has pushed out the timeline by six to 12 months. The goal remains to shift from a licence model toward SaaS, and to graduate from software to a platform. Earnings per share forecasts rise 1% in FY21; fall -10%, -13% and -8% in FY22, FY23 and FY24; and rise 1% in FY25. Target price rises 2.9% to $35 after removing the -5% covid-discount. Neutral rating retained, to reflect virus uncertainty.
See upgrade above.
BENDIGO AND ADELAIDE BANK (BEN) was downgraded to Hold from Accumulate by Ord Minnett
FY20 net profit was below Ord Minnett’s forecasts. Costs rose 10% half-on-half in the second half. The broker upgraded in June, predicated on evidence of an improving funding cost environment and a defensive book mix that should limit the downside on impairment expenses. Since then, developments have moved against this view and the rating is downgraded to Hold from Accumulate. Ord Minnett reduces net profit estimates by -10% for FY21 and -12% for FY22. Target is reduced to $6.70 from $8.10.
COCHLEAR (COH) was downgraded to Sell from Neutral by Citi
FY20 results were largely in line with expectations. Citi reduces FY21-22 estimates for earnings per share by -24-27%. The broker expects flat sales compared with FY20, with growth returning in FY22. The broker acknowledges Cochlear could increase its implant market share given continued investment, potentially helped by the recall from Advanced Bionics. Rating is downgraded to Sell from Neutral on valuation. Target is lowered to $184 from $203.
COLES GROUP (COL) was downgraded to Hold from Accumulate by Ord Minnett
Coles Group’s FY20 reported a mixed FY20 result: underlying net profit disappointing Ord Minnett; earnings from the core food business in-line on expanded margins; and liquor, convenience and corporate segments underperforming. Operating cash flow was strong, the company boasting 111% cash conversion. The broker is adopting a cautious outlook noting flattening food margins in the first quarter, growth challenges and continued weakness in convenience, liquor and corporate segments. Ord Minnett downgrades to Hold from Accumulate and the target price falls to $19 from $19.50.
IMDEX (IMD) was downgraded to Neutral from Buy by UBS
Imdex’s FY20 operating income beat UBS’s forecast. The broker highlights a strong start to FY21 with tools to hire exceeding last year. Progressive recovery is expected across FY21 and FY22. Earnings growth forecasts downgraded by -3-7% for FY21-23 driven by higher D&A charges which offset operational upgrades of 3-11% across FY21-23. The broker downgrades its rating to Neutral from Buy with the target price increasing to $1.45 from $1.30.
TELSTRA CORPORATION (TLS) was downgraded to Hold from Accumulate by Ord Minnett
FY20 net profit was down -14.4% while underlying operating earnings (EBITDA) increased 11.5%. Ord Minnett makes material reductions to forecasts based on the FY20 financials and FY21 guidance and also transfers coverage to another analyst. The broker’s review highlights significant structural challenges and the dividend yield is not considered overly compelling. Rating is downgraded to Hold from Accumulate and the target lowered to $3.40 from $4.10.
TREASURY WINE ESTATES (TWE) was downgraded to Neutral from Outperform by Macquarie
Treasury Wine Estates is caught between rising geopolitical tensions between Australia and China, with the latter investigating the winemaker for anti-dumping practices. Macquarie sees the company as a pawn in a larger game, noting Treasury Wine’s Asian division which forms about 40% of the group’s operating income may suffer. China is the winemaker’s key export region, highlights the broker, adding any disruption in this market would be “very destructive” for the company. The rating is downgraded to Neutral from Outperform. The target price is decreased to $10.60 from $14.90.
VIVA ENERGY GROUP (VEA) was downgraded to Hold from Add by Morgans
The first half result was pre-released. The main news, Credit Suisse notes, are the proposed $530m capital management initiatives. The broker is somewhat bearish when it comes to the outlook for retail margins. Still, the proposed capital return should support the stock in the near term, suggest the analysts. A slow improvement in profit drivers is expected through 2020-21. Neutral retained. Target is reduced to $1.67 from $1.74.
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.
