In the good books

a2 Milk Company (A2M) was upgraded to Add from Hold by Morgans

a2 Milk’s guidance downgrade was weaker than expected but not particularly surprising to Morgans. The impact on daigou sales given international travel restrictions and the Victorian lockdown is to blame, which the broker assumes will prove but a short-term blip. Management is of the same opinion, suggesting the first half of FY21 will be weak but assuming the virus situation normalises in Australia, the second half should see a return to double-digit sales growth. Target falls to $18.14 from $18.45, but as this is still a long way above the current price, Morgans upgrades to Add form Hold.

ATLAS ARTERIA (ALX) was upgraded to Outperform from Neutral by Macquarie

France has allocated EUR30bn for ecological improvement, including toll roads. The opportunities for APRR include expansion of the recharge network for electric cars and development of the hydrogen refilling network. Macquarie observes Atlas Arteria has an attractive yield and is benefiting from an early recovery in France. Some slowdown because of a second wave of coronavirus is observed but this is not considered material. Meanwhile, economic policy in France is likely to generate material benefits through concession extensions as APRR can better use its latent debt capacity. Rating is upgraded to Outperform from Neutral and the target is raised to $6.99 from $6.81.

BORAL (BLD) was upgraded to Buy from Neutral by Citi

Citi assesses Boral is in an earnings trough, although construction markets are rebounding. Most upside is envisaged in detached housing in Australia and the US, which is partially offset by sharp declines in commercial building. In valuing the surplus property portfolio, the broker believes this could deliver post-tax earnings in the range of $1.4-2.9bn over the next 20 years. The main issue is whether Boral can crystallise value from Penrith Lakes and Waum Ponds which have been long-standing assets on the balance sheet. Rating is upgraded to Buy from Neutral as the broker assesses investors are looking through to a turnaround. Target is raised to $5.30 from $4.35.

CLEANAWAY WASTE MANAGEMENT (CWY) was upgraded to Outperform from Neutral by Credit Suisse

Reports of a board investigation into CEO Vik Bansal’s methods and the sale by the CEO of shares for the first time after five years with the company has triggered concerns, with the resultant shakedown in the share price, Credit Suisse observes. The broker notes the CEO has been extremely effective and there is also the retirement of respected CFO Brendon Gill looming. However, Credit Suisse thinks it unlikely the CEO will be forced to resign and believes the board has dealt with the issues appropriately. Rating is upgraded to Outperform from Neutral and the target is steady at $2.45.

CORPORATE TRAVEL MANAGEMENT (CTD) was upgraded to Outperform from Neutral by Macquarie

Corporate Travel will acquire Travel & Transport for $275m, undertaking a $375m equity raising in the process. Macquarie considers this a strategically sound acquisition which materially increases the company’s scale in the US. The broker believes the industry is “right for consolidation” and, moreover, the balance sheet capacity is there. While forecasting a recovery in corporate travel is difficult, the broker believes creating significant value for the medium term could cement Corporate Travel’s position globally. Rating is upgraded to Outperform from Neutral and the target raised to $16.40 from $14.40.

DOWNER EDI (DOW) was upgraded to Buy from Neutral by UBS

UBS sees Downer EDI as a restructuring story that will position the company to deliver free cash flow of at least $300m. The broker’s scenario analysis envisages a plan that is consistent with Downer’s plan to divest its capital-intensive mining and laundries operations and wind down its problematic construction operations. The broker notes after the restructure, Downer will be focussed on its core urban services businesses, with its business model less cyclical and providing more predictable revenue. UBS thinks the divestment of mining and laundries operations will be a key catalyst. The broker upgrades its rating to Buy from Neutral. Target is raised to $5 from $4.50.

NORTHERN STAR RESOURCES (NST) was upgraded to Neutral from Sell by UBS

Looking at Northern Star Resources’ Strategy Day, UBS asserts its Sell recommendation no longer holds true. Northern Star Resources expects to see its production to increase by 40% over the next three years led by Jundee/Yandal and Pogo. Costs are expected to decline and noting its forecasts were too conservative, the broker has reduced its cost outlook. UBS upgrades its rating to Neutral from Sell with the target price raised to $14.20 from $14.

SUNCORP GROUP (SUN) was upgraded to Outperform from Neutral by Macquarie

Macquarie considers the risks of business interruption are overstated and the bank provisions are fair. Hence the discount of -33% compared with the ASX100 is considered excessive. The broker understands Suncorp has provisioned -$70-75m, post reinsurance, for Australian business interruption losses. While Macquarie’s estimate is closer to -$225m, pre-reinsurance, this is considered substantially less than the discount currently encapsulated in the stock price. Rating is upgraded to Outperform from Neutral and the target is raised to $11.00 from $10.40.

In the not-so-good books

SYNLAIT MILK (SM1) was downgraded to Neutral from Outperform by Credit Suisse

Credit Suisse observes a solid second half, although net profit in FY20 was slightly below expectations. The main surprise was a material downgrade to the FY21 outlook, a combination of daigou disruption and the significant cost drag from recent diversification investment. The company has noted it is close to finalising a new global customer for packaged products. This should have a positive contribution from FY23 onwards, the broker points out, and provide some offset to the tail risk from a2 Milk (A2M), which was recently heightened by the potential entry of the latter into manufacturing with Mataura Valley Milk. Rating is downgraded to Neutral from Outperform and the target is reduced to NZ$6.15 from NZ$7.70.

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.