In the good books
AVENTUS GROUP (AVN) was upgraded to Buy from Neutral by UBS
Aventus Group’s FY20 result highlighted the resilience of large format retail during the pandemic, observes UBS. The REIT’s funds from operations (FFO) was slightly ahead of the broker’s forecast. No FFO or distribution guidance was provided due to the current uncertainty. The group’s resilient large-format retail assets, strong foot traffic and benefits from changing household spending patterns will more than offset the risk of any housing slowdown, expects the broker. UBS upgrades its rating to Buy from Neutral with the target price increasing to $2.50 from $1.65.
ELANOR INVESTORS GROUP (ENN) was upgraded to Buy from Accumulate by Ord Minnett
Earnings in FY22 were materially lower than Ord Minnett expected following the temporary suspension of several fund distributions. The highlight of the result was the growth in funds management, with revenue up 43%. The portfolio was obviously affected by the pandemic, given the concentration in retail and hospitality assets, but the capital position of each fund is stable, the broker notes. Ord Minnett also assesses the share price describes no value to the funds management business now and this is underpinned by recurring fees. Rating is upgraded to Buy from Accumulate and the target lowered to $1.77 from $2.27.
FORTESCUE METALS GROUP (FMG) was upgraded to Neutral from Sell by Citi
Fortescue Metals Group’s FY20 profit was in line with Citi’s estimates as well as the consensus. A (total) dividend of $1.76 implies a payout ratio of 77% and was more than Citi expected. There is no change in FY21 guidance with shipments of 175-180mt expected during the year. Citi’s mining team notes upside risk to iron ore pricing in 2021 given China stimulus and positive lead indicators like excavator sales and property starts. The mining team thinks iron price could average US$85/$75/t in 2021-22 with Fortescue earnings per share of US$1.46/$1.13 in FY21-22. Citi upgrades its rating to Neutral from Sell with the target price increasing to $17.50 from $11.70.
See downgrade below.
INTEGRAL DIAGNOSTICS (IDX) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse is confident of a sharp recovery in both Victoria and New Zealand after restrictions are eased in the next 4-6 weeks. Industry growth of 5-7% appears increasingly bankable. However, the broker does not believe the relative valuation appeal will last for long and upgrades to Outperform from Neutral. Target is raised to $4.50 from $4.30. FY20 results were broadly in line and the broker notes cash conversion was excellent.
NIB HOLDINGS (NHF) was upgraded to Outperform from Neutral by Macquarie
Macquarie notes nib Holdings’ result missed consensus forecasts for both earnings and the dividend. But in the wake of a sharp share price response, the broker upgrades to Outperform. Despite no underlying profit growth guidance being offered, on a -22% discount to peers the broker believes value has emerged. Target rises to $5.15 from $4.80.
OIL SEARCH (OSH) was upgraded to Buy from Neutral by Citi and to Add from Hold by Morgans
Citi believes a value argument is developing for Oil Search and upgrades to Buy/High Risk from Neutral/High Risk. The High Risk tag is retained because of the potential for oil prices to be volatile. Unless there is another sharp contraction in the oil price, however, Citi believes Oil Search has raised enough equity, although a top up may be required for the final investment decision on Alaska to keep the non-escrowed cash balance above US$50m. Target is raised to $3.87 from $3.76.
Morgans reports Oil Search delivered an in-line first half result, while adapting its growth plans to lower medium-term and long-term energy demand conditions. The main news in the result for the broker was the company working on a new development plan in Alaska, with plans evolving materially as it seeks to optimise capital efficiency. The key question for Morgans is how the company funds its future growth in Alaska and PNG (where risks remain a key hurdle). The rating is upgraded to Add from Hold as Morgans suggests shares are trading at a -20% discount to valuation. The target price is increased to $3.65 from $2.80.
PTB GROUP (PTB) was upgraded to Add from Hold by Morgans
Morgans increases the valuation for PTB Group on more optimistic assumptions for FY21 earnings, growth rates in the US and the potential for dividends. The broker has increased forecast FY21 revenue significantly on the assumption that reduced customer flight hours will be mostly limited to Trans Maldivian Airways (TMA). If US earnings remain resilient, the analyst says the company could implement its growth plans more quickly. Morgans lifts the forecast FY21 dividend to 5cps because of higher earnings forecasts and an assumption that 50% of dividends will be funded by the DRP. The rating is upgraded to Add from Hold. The target price is increased to $0.77 from $0.65
REDBUBBLE (RBL) was upgraded to Add from Reduce by Morgans
Morgans bypasses a Hold rating and gives a double increase in rating for Redbubble to Add from Reduce. The broker highlights momentum is strong and growth rates since the end of FY20 have accelerated on an already impressive 4QFY20. Additionally, the business model should provide a fair degree of leverage, is capital light and in the right place at the right time. The only incremental information from a pre-announced result was August trading had continued a similar trend to July (up 132%). The target price is increased to $4.33 from $0.54.
SOMNOMED (SOM) was upgraded to Add from Hold by Morgans
SomnoMed posted an impressive result according to Morgans, considering the impact covid-19 was supposed to have on the business, aided by strict cost containment and government assistance. The broker states it is willing to back a recovery over the medium-term, with revenues returning to pre-covid-19 levels by FY22. Despite lockdowns in many of the jurisdictions having an impact on sales, North America was up 3%, Europe was down -6% and the Asia Pacific Region (APAC) was down -6%, notes the analyst. The broker highlights a number of positives including a strong thematic of sleep, a solid underlying business with a wide distribution network, net cash with minimal debt and quality market leading products and new product launches due shortly. Morgans upgrades profit (NPAT) assumptions by 120% and 114% for FY22 and FY23. The rating is upgraded to Add from Hold. The target price is increased to $2.02 from $1.33.
SUNCORP GROUP (SUN) was upgraded to Neutral from Underperform by Credit Suisse and to Equal-weight from Underweight by Morgan Stanley
FY20 results beat Credit Suisse estimates and the final dividend of $0.10 was also above forecasts. The second half did not contain the conservatism the broker was expecting and margins were also higher than anticipated. Still, further margin pressure is considered likely. The broker assesses FY21 is commencing in better shape than previously anticipated and upgrades to Neutral from Underperform. That said, while acknowledging Underperform was incorrect, Credit Suisse suspects the market is underestimating the extent of the headwinds in FY21 and is not supportive of a more positive stance. Target is raised to $9.95 from $8.75.
Suncorp Group’s cash net profit beat Morgan Stanley’s estimate by 5%. The second half dividend was 10c which is slightly below the broker’s forecast. The broker expects bank margins to benefit from deposit mix shift away from term deposits and towards at-call deposits in FY21. While the group has not given any cost targets, the broker expects cost headwinds from covid-19 to abate in FY21. Morgan Stanley rates the stock as Underweight with a target price of $7.50. Industry view: In-line. [FNArena has received confirmation the rating has been upgraded since to Equal-weight with a $9.50 price target].
TPG TELECOM (TPG) was upgraded to Neutral from Underperform by Credit Suisse and to Outperform from Neutral by Macquarie
First half operating earnings (EBITDA) were ahead of Credit Suisse estimates. The beat primarily came from Vodafone Australia. Regardless of the strong performance, management is still guiding to a more severe impact from the pandemic in the second half. Credit Suisse notes market share trends remain unfavourable for Vodafone Australia with subscriber losses a result of limited network capacity prior to the merger and the impact of the pandemic from April to June. Synergies from the merger were not quantified but integration is underway. Given the recent decline in the share price, Credit Suisse upgrades to Neutral from Underperform and raises the target to $7.40 from $7.35.
TPG Telecom’s maiden result post merger was in line but mixed, Macquarie notes. The virus dragged on mobile subscriptions but fixed line was as expected. Capex guidance has been reduced. The reduction in capex, along with solid execution on fixed line, and recent share price weakness lead the broker to upgrade to Outperform from Neutral. Target rises to $9.00 from $8.60.
See downgrade below.
WAGNERS HOLDING COMPANY (WGN) was upgraded to Neutral from Underperform by Macquarie
The FY20 result for Wagners Holding was largely in-line with Macquarie’s estimates, segment margins were better, but offset by corporate costs. Management is depending on an infrastructure-driven activity boost to offset the softer residential market and anticipates stable concrete demand. Unfortunately, Macquarie believes margins have now reset at structurally lower levels. The broker lifts FY21-FY23 EPS estimates by 26%, 5% and 2%, respectively, driven by marginally increased sales expectations and better margins from improved cost control. The rating is upgraded to Neutral from Underperform. The target price is increased to $1.20 from $1.05.
WESTERN AREAS (WSA) was upgraded to Outperform from Neutral by Credit Suisse
FY20 earnings missed forecasts largely because of depreciation & amortisation. Beyond this the results were in line. There are a number of emerging options for Forrestania, Credit Suisse observes. The balance sheet remains solid and finances are considered prudently managed. Rating is upgraded to Outperform from Neutral on valuation. Target rises to $2.50 from $2.40.
In the not-so-good books
BINGO INDUSTRIES (BIN) was downgraded to Neutral from Outperform by Credit Suisse
FY20 results were assessed as strong. Citi revises FY21 estimates down by -32% and FY22-23 down by -20%. The majority of the earnings impact in FY21 is likely to be in the post collections business as Bingo Industries uses price to retain volumes and win incremental market share. No quantitative guidance was provided and Citi acknowledges the forecast for operating earnings margins to contract -200-300 basis points could prove conservative if volumes stabilise. The High Risk tag is removed from the Buy rating and the target is lowered to $2.80 from $3.00.
CHARTER HALL GROUP (CHC) was downgraded to Neutral from Outperform by Credit Suisse
FY20 results were better than Credit Suisse expected. All three operating divisions reported growth and the broker envisages a growth opportunity from sale and leaseback opportunities and completions. Charter Hall is guiding to operating earnings per security of 51c in FY21 with distribution growth of 6%. Credit Suisse increases FY21 and FY22 estimates by 5.1% and 4.6%, respectively. The stock appears fairly valued, hence the rating is downgraded to Neutral from Outperform. Target is raised to $12.21 from $9.17.
FORTESCUE METALS GROUP (FMG) was downgraded to Underperform from Neutral by Credit Suisse
The highlight in FY20 results was the strong $1 (final) dividend and Credit Suisse now makes less conservative assumptions around long-run unit costs and strip ratios, which increases the target to $15.00 from $12.50. Nevertheless, given the recent sustained outperformance of the share price the rating is downgraded to Underperform from Neutral. The downgrade is a valuation call, the broker emphasises. While a lot of the strong run up in the share price is justifiable, the question Credit Suisse believes should be asked is how much upside is available when iron ore is over US$120/t and earnings may be close to peaking.
See upgrade above.
MICHAEL HILL INTERNATIONAL (MHJ) was downgraded to Neutral from Buy by Citi
Citi finds the sales outlook challenging, given the deteriorating macro economic outlook. The broker upgrades estimates for FY21 and FY22 net profit because of wage subsidies and rent concessions that were stronger than expected. However, the easy gains appear to be exhausted and there remains an absence of material long-term growth strategies, in the broker’s view. Rating is downgraded to Neutral from Buy and the target lowered to $0.33 from $0.46.
NEW ENERGY SOLAR (NEW) was downgraded to Equal-weight from Overweight by Morgan Stanley
Morgan Stanley thinks New Energy Solar’s near-term outlook suffers from operating and capital issues. Moreover, the company’s gearing levels have increased, necessitating the company to consider refinancing options. Noting the distributions are largely tax-deferred and supported by cashflows, Morgan Stanley downgrades its rating to Equal-weight from Overweight with the target price decreasing to $1.08 from $1.41. Industry view: Cautious.
OOH!MEDIA (OML) was downgraded to Hold from Accumulate by Ord Minnett
oOh!media reported a first half 2020 underlying net loss of -$16.9m versus a profit of $18.2m in the same period last year, but Ord Minnett states management has done an excellent job achieving more than -$80m in cost savings, and supported by its capital raising, reducing leverage. Despite signs of emerging positivity for regional growth, the broker lowers earnings (EBITDA) estimates for 2020 and 2021 by -50.7% and -38.8%, respectively. This is due to lower than expected revenues in the first half, as well as the company’s commute, retail, fly and locate segments continuing to be affected by macro weakness, the pandemic restrictions and reduced audiences. The rating is downgraded to Hold from Accumulate on a lack of valuation support.  The target price is decreased to $1.05 from $1.25.
STOCKLAND GROUP (SGP) was downgraded to Neutral from Outperform by Credit Suisse
FY20 results were better than Credit Suisse expected. While there are some hurdles to overcome in FY21 these have been well flagged. Upside potential stems from the commercial pipeline and the broker assesses Stockland Group has capacity to fund incremental expenditure on new developments via debt. While acknowledging the leverage to a recovery in residential and the long-term upside from developments, Credit Suisse downgrades to Neutral from Outperform as the stock is considered fairly valued. Target rises to $3.96 from $3.56.
TPG TELECOM (TPG) was downgraded to Hold from Accumulate by Ord Minnett
Given the merger was completed only four days before the end of the interim period, Ord Minnett describes the TPG Telecom result as messy. The company flagged a number of headwinds that impacted profitability in the half including Vodafone revenue and margins declines due to lower handset sales, lower subscribers and reduced roaming charges, while TPG Corporation saw lower margins because of the ongoing transition to the NBN, notes the broker. The rating is downgraded to Hold from Accumulate. The target price is decreased to $7.70 from $8.65.
See upgrades above.
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.
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