In the good books
CSL (CSL) was upgraded to Accumulate from Hold by Ord Minnett
Encouraging news regarding a covid-19 vaccine provides a two-fold boost to the outlook for CSL, in the opinion of Ord Minnett. Plasma collections should normalise by the end of FY21, allowing a potential boost to nearer-term sales from a larger inventory release, explains the broker. The analyst believes the vaccine candidates the company is manufacturing now appear more likely to succeed, based on the similar antibody profiles. This is considered to raise the potential for a new multi-year revenue stream. The company began production of the AstraZeneca/Uni Oxford vaccine this week at its Melbourne facility. The broker expects the company will be paid for these initial doses irrespective of whether the vaccine is successful. Ord Minnett raises the target price to $330 from $290, leading the broker to upgrade the recommendation to Accumulate from Hold. See downgrade below.
FLETCHER BUILDING (FBU) was upgraded to Overweight from Equal-weight by Morgan Stanley
Fletcher Building’s trading update for the four months ending October showed better revenue and operating income than last year with improvement seen in margins across all business units. Morgan Stanley believes the strong performance is an indication of the resilience of the New Zealand market and has increased its operating income forecast for FY21 by 66% with the estimate for FY22 increased by 46%. Morgan Stanley upgrades its rating to Overweight from Equal-weight with the target rising to $5.91 from $3.66. Industry view is Cautious.
MAGELLAN FINANCIAL GROUP (MFG) was upgraded to Buy from Hold by Ord Minnett
The flagship Global Fund has continued to perform well and Magellan Financial has added new growth avenues, including the investment in Barrenjoey. In addition, Ord Minnett notes the company has generated its strongest institutional net inflow for a half year since 2015. As the stock has remained flat since early July, the broker now envisages a valuation gap re-emerging and upgrades to Buy from Hold. Target is raised to $70.48 from $63.57.
PENDAL GROUP (PDL) was upgraded to add from Hold by Morgans
Morgans upgrades the rating for Pendal Group to Add from Hold due to a favourable balance of risk/reward over the next twelve months, a good net cash position and leverage to a broader equity market recovery. The company reported ‘core’ net outflows of -$3.9bn in FY20, of which -$3.3bn was from EU funds. The result was broadly in-line with the analyst expectations. The broker sees flows as remaining relatively subdued, unless assistance comes from potential funds flow into UK/EU markets. In that case, the analyst highlights the upside leverage the company has to a broad and sustained equity market improvement through 2021. The rating is upgraded to Add from Hold and the target price of $7.02 is unchanged.
SUNCORP GROUP (SUN) was upgraded to Add from Hold by Morgans
Suncorp Group has given a natural hazard update following the significant Queensland/New South Wales hailstorm on 31 October 2020. The group has disclosed that natural hazards for the four months ended October are tracking at -$348m-$408m, which compares to the group’s FY21 hazard allowance of -$950m (split evenly 1st half vs 2nd half). Morgans lowers FY21 and FY22 EPS forecasts by -2%-4%, which reflects an update of numbers for a mark-to-market. The rating is increased to Add from Hold on valuation grounds. While the operating environment remains difficult for the group near term, Morgans thinks the recent pullback in share price is probably overdone. The target is decreased to $9.90 from $10.32.
In the not-so-good books
CSL (CSL) was downgraded to Neutral from Buy by Citi
Citi now assumes plasma collections return to pre-pandemic levels from January 2021 and, with the 6-7 month lead time for production, the earnings impact will be spread over FY21 and FY22. The broker eases back on forecast declines in earnings per share for FY21-22, and as the stock has outperformed the ASX200 by 16% over the year to date, downgrades to Neutral from Buy. Target is reduced to $320 from $325.
See upgrade above.
DOMAIN HOLDINGS AUSTRALIA (DHG) was downgraded to Neutral from Outperform by Credit Suisse
A strong listings recovery in Sydney provided a favourable first quarter for Domain Holdings and Credit Suisse notes reliance on the Sydney market was evident in October volumes. October volumes were more subdued nonetheless and the broker lowers first half digital revenue growth estimates to 4.1%. Management has also guided to a -12% reduction to the first half cost base. Credit Suisse downgrades to Neutral from Outperform, given the limited upside from current trading levels. Target is raised to $4.40 from $4.00.
DOMINO’S PIZZA ENTERPRISES (DMP) was downgraded to Underperform from Neutral by Macquarie
In a response to the response to the vaccine news with regard consumer stocks, Macquarie suggests that while virus winners will have a positive 2020, consumer behaviour will return to normal in 2021. To that end the broker has reverted to pre-covid sum-of-the-parts valuations. Domino’s Pizza’s target is lowered to $72.10 from $84.30. Downgrade to Underperform from Neutral. The broker has not provided earnings/dividend forecast updates.
FINEOS CORP (FCL) was downgraded to Accumulate from Buy by Ord Minnett
The company has reiterated guidance for 30% underlying growth in FY21 subscription revenue at its AGM but did not recommit to the 20% organic top-line growth target. While the long duration growth opportunity is highly attractive, particularly in the US, Ord Minnett moves the rating down to Accumulate from Buy, pending a clearer view on the impact of macro conditions, such as the pandemic and the US election. Uncertainty around new deal closures are likely to overhang the stock, in the broker’s view, albeit probably short term. Target is reduced to $4.50 from $5.00.
INCITEC PIVOT (IPL) was downgraded to Neutral from Outperform by Macquarie
Incitec Pivot’s FY20 underlying profit and earnings fell short of Macquarie’s and consensus forecasts. Dyno Americas (explosives) was the biggest source of the miss, with management suggesting a return to normal only post-covid. We’re not yet post-covid, so no dividend was declared due to ongoing uncertainty when the broker had forecast 3.5c. An anticipated earnings recovery has been pushed out to FY22, with FY21 a “transition year”, management suggests. Vaccine news since announced is a positive but coal volumes remain challenging. Macquarie pulls back to Neutral for now from Outperform. Target falls to $2.30 from $2.63.
JB HI-FI (JBH) was downgraded to Neutral from Outperform by Macquarie
In a response to the response to the vaccine news with regard consumer stocks, Macquarie suggests that while virus winners will have a positive 2020, consumer behaviour will return to normal in 2021. To that end the broker has reverted to pre-covid sum-of-the-parts valuations. JB Hi-Fi’s target is lowered to $49.50 from $54.90.. Downgrade to Neutral from Outperform. The broker has not provided earnings/dividend forecast updates.
JAMES HARDIE INDUSTRIES (JHX) was downgraded to Neutral from Outperform by Credit Suisse
Cash flow has been confirmed as strong in the second quarter, with revenue and earnings having been pre-announced. Credit Suisse notes operating cash flow was already 92% of full FY22 cash flow because of an inventory reduction attributed to customer integration. Net debt is reduced and the company will pay a full-year equivalent dividend for the final, which the broker estimates at US48c. Given the earnings revisions over the year to date, Credit Suisse considers the potential for further material upgrades in FY21/22 has diminished. Rating is downgraded to Neutral from Outperform. Target is raised to $39.00 from $38.50.
RAMSAY HEALTH CARE (RHC) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse notes the shares are up 6% following the Pfizer announcement of positive interim data for its coronavirus vaccine. While continuing to believe that Ramsay Health Care would benefit from volume post the pandemic, significant earnings pressure is assessed for the near term as cases rise in Europe. Credit Suisse makes earnings downgrades of -1-2% across the forecast period. The stock is now trading in line with a target of $70 and the rating is downgraded to Neutral from Outperform.
WESFARMERS (WES) was downgraded to Neutral from Outperform by Macquarie
In a response to the response to the vaccine news with regard consumer stocks, Macquarie suggests that while virus winners will have a positive 2020, consumer behaviour will return to normal in 2021. To that end the broker has reverted to pre-covid sum-of-the-parts valuations. Wesfarmers’ target is lowered to $49.70 from $51. Downgrade to Neutral from Outperform. The broker has not provided earnings/dividend forecast updates.
In the not-so-good books (Morgans analysis)
As a result of recent vaccine developments, Morgans lowers multiples (while largely leaving earnings unchanged) for those stocks likely to suffer from a return to some sense of normality (redirection of spend). The broker continues to think Christmas will be a boomer this year and first half results will show extraordinary growth with strong operating expense leverage on buoyant top-line trading. However, it’s considered the market will likely look through this strength.
ACCENT GROUP (AX1) was downgraded to Hold from Add by Morgans
Accent Group is yet to provide a trading update post its FY20 result (due at the AGM). Morgans expects trading outside of Melbourne has remained robust, with online the major driver. Nonetheless, as a discretionary retailer, the broker expects the stock’s ability to outperform will be limited from here. The rating is decreased to Hold from Add. The target price is decreased to $1.67 from $1.84
BABY BUNTING GROUP (BBN) was downgraded to Hold from Add by Morgans
Baby Bunting benefited more from covid-19 than the broker anticipated. The company’s products are far less discretionary than the rest of Morgans retail coverage. Nonetheless, the analyst downgrades to Hold from Buy on the elevated price earnings multiple versus vaccine sentiment only. Morgans still thinks the group looks very well positioned over the long term. The price target is decreased to $4.84 from $5.23.
BEACON LIGHTING GROUP (BLX) was downgraded to Hold from Add by Morgans
Beacon Lighting was a major beneficiary of covid-19 via in-home spending and Morgans still sees upside risk to FY21 earnings. Nonetheless, from the fourth quarter the group will cycle elevated comparisons to prior corresponding periods. The rating is downgraded to Hold from Add and the target price is decreased to $1.50 from $1.73.
MOTORCYCLE HOLDINGS (MTO) was downgraded to Hold from Add by Morgans
Motorcycle Holdings was a major beneficiary of covid-19 and Morgans still sees potentially material upside to FY21 forecasts. However, the company’s products are highly discretionary and a potential redirection of spend is a key risk from current elevated earnings levels. The broker highlights the balance sheet position looks rock solid post covid-19. The rating is downgraded to Hold from Add and the target price is decreased to $2.67 from $2.83.
SUPER RETAIL GROUP (SUL) was downgraded to Hold from Add by Morgans
Super Retail Group’s businesses (excl. Macpac) have benefited from domestic consumption conditions resulting from covid-19 in recent months, notes Morgans. The balance sheet is also considered in a solid position (zero net debt). While the broker expects this will continue to play for a period yet, it’s expected the market will be less willing to capitalise current earnings at higher price earnings (PE) levels. The rating is decreased to Hold from Add and the target price decreased to $11.78 from $12.59.
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.
