In the good books
BREVILLE GROUP (BRG) was upgraded to Outperform from Neutral by Macquarie
Macquarie notes revenue trends remain strong into the holiday season and are likely to stay elevated while households redirect spending.  For Breville Group, the broker expects strong consumer demand to continue, expected to push the re-stocking benefit into 2021 in some markets. Rating is upgraded to Outperform from Neutral with the target rising to $27 from $26.
DOMINOS PIZZA ENTERPRISES (DMP) was upgraded to Neutral from Underperform by Macquarie, to Buy from Hold by Ord Minnett, to Add from Hold by Morgans and to Neutral from Sell by UBS
Domino’s Pizza Enterprises expects the shift in customers to digital delivery from restaurants and takeaway to continue post-covid. Growth drivers include store rollouts, marketing and technology. Despite strong double-digit earnings growth, Macquarie finds the valuation support to be modest. The broker believes absent any M&A activity, further expansion may be difficult. With the stock trading around Macquarie’s target price of $72.10, the broker upgrades to Neutral from Underperform.
Looking at Domino’s Pizza Enterprises’ recent share price underperformance, Ord Minnett upgrades its rating to Buy from Hold. The broker expects the company to enjoy multi-year earnings growth led by store expansion, growth in same-store-sales (SSS) and operating earnings margin expansion.  The target price remains unchanged at $85.
Following recent share price falls and positive momentum across the company, Morgans upgrades the rating to Add from Hold. It was clear to Morgans after an investor briefing that Japan and Germany are exhibiting strong top-line growth and margin expansion. The broker highlights management comments that Germany would likely become the company’s strongest growth market for the short-term and ultimately become the largest market. The target price is increased to $82.96 from $81.29.
UBS upgrades its rating on Domino’s Pizza Enterprises to Neutral from Sell. UBS found the company’s 2020 investor day to be positive with takeaways operating leverage expected to improve and most of the second half covid costs unlikely to repeat in FY21. Also, the broker highlights strong franchisee profit across the board with Germany scaling up and Japan expected to continue to grow. Target is unchanged at $72.
IGO (IGO) was upgraded to Lighten from Sell by Ord Minnett
Ord Minnett remains cautiously optimistic that recent board changes could translate to much-needed change. The broker continues to question a Trop sale although acknowledges, with the review ongoing, IGO Ltd could still realise a reasonable return on the back of spot gold prices as well as re-rate if converted into a nickel mine. Despite some “generous assumptions” the broker finds the valuation heavy going, upgrading to Lighten from Sell. Target is raised to $4.30 from $3.40.
SANDFIRE RESOURCES (SFR) was upgraded to Outperform from Neutral by Macquarie
Sandfire Resources has approved the development of its T3 Motheo copper-silver project in Botswana, which is expected to deliver around 30ktpa of copper for 10 years. After incorporating the expanded production scenario, Macquarie’s FY21 earnings forecast rise by 1%. Earnings forecasts for FY25-28 rise by 7-28% and by 100% for FY29. Rating is upgraded to Outperform from Neutral with the target rising to $5.40 from $4.20.
TREASURY WINE ESTATES (TWE) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse assesses the news is unlikely to get worse now that China has announced import tariffs of 169% as provisional measures on the company’s wines. The broker assesses the best-case scenario is for the tariffs to be removed in four months’ time should the anti-dumping investigation warrant their removal. The broker models lost volumes in China and discounting in Australia and the UK, particularly in commercial and premium categories as around 11.5m cases of Australian wine exported to China will need to be re-directed. Rating is upgraded to Outperform from Neutral, with the main risk that the tariffs persist for longer than expected. Target is raised to $11.00 from $8.50.
See downgrades below.
In the not-so-good books
GPT GROUP (GPT) was downgraded to Neutral from Outperform by Credit Suisse
Given GPT Group’s relatively high exposure to Victoria, Credit Suisse suspects part of its recent rally could be on the back of the re-opening. No 2020 guidance has been provided although Credit Suisse expects 2021 earnings will be meaningfully stronger without new government-mandated restrictions. Earnings headwinds remain in the retail and CBD office segments for the sector as a whole. GPT is seeking to raise its weighting to the logistics sector while lowering its exposure to office. The broker downgrades to Neutral from Outperform in the wake of the rally and raises the target to $4.83 from $4.29.
HELLOWORLD TRAVEL (HLO) was downgraded to lighten from Buy by Ord Minnett
Ord Minnett finds valuation stretched in the travel & tourism sector as stocks have rallied on the back of progress with the coronavirus vaccines and domestic border re-opening. Nevertheless, the broker suspects a meaningful recovery is at least 12-18 months away. In such circumstances the focus needs to be on stocks that have strong fundamentals while investors need to be nimble and watch for anomalies in valuation at any point in time, in Ord Minnett’s view. Helloworld Travel’s rating is downgraded to Lighten from Buy and the target raised to $2.65 from $2.13.
SANTOS (STO) was downgraded to Neutral from Outperform by Credit Suisse
The company provided positive production and operating expenditure guidance at its investor briefing. New investments have experienced strong 20-60% margins. The company’s 26-30% carbon emission reduction target by 2030 appears plausible to the broker. While the view on fundamentals has not changed and Santos remains the preferred pick for oil, having a number of catalysts over the next 18 months, the equity has rallied ahead of industry sentiment. Hence, Credit Suisse would need to witness price assumptions increase beyond the macro view to justify further upside. Rating is downgraded to Neutral from Outperform and the target is raised to $6.40 from $6.33.
TEMPLE & WEBSTER (TPW) was downgraded to Neutral from Outperform by Macquarie
Macquarie notes revenue trends remain strong into the holiday season and are likely to stay elevated while households redirect spending. The broker believes Temple & Webster Group will continue to grow with online sales penetration remaining a prominent feature. The broker is waiting for the market to find the balance between a slowing revenue growth rate with continued share gains and increasing profitability. Macquarie downgrades its rating to Neutral from Outperform with the target rising to $10.60 from $10.50.
TREASURY WINE ESTATES (TWE) was downgraded to Sell from Buy by Citi, to Lighten from Hold by Ord Minnett and to Neutral from Buy by UBS
China has imposed anti-dumping tariffs of 169% on Treasury Wine wines. Citi believes this will impact the company’s earnings significantly in the near-term on account of an oversupply of Australian wine (given China has effectively closed its door). According to the broker’s estimate, China generates about $164-$190m in operating income for Treasury Wine. In FY21, the operating income is expected to fall to $421m but the real challenge for the company, suggests Citi, is a circa 11% overhang of supply. The broker believes it will be difficult for the company to maintain any presence in China and going ahead, expects the key share price driver to be the Americas. Citi downgrades its rating to Sell from Buy with the target trimmed to $8.20 from $10.40.
In response to the 169.3% provisional anti-dumping measure rate imposed by China, Treasury Wine Estates has decided to grow its global priority markets via reallocation. The company has also decided to change its operating model and reduce costs. With the outcome worse than expected, Ord Minnett finds the risk posed by China’s recent measures difficult to price. Also. with access to the high-growth China market limited and reallocation plans expected to take time, the broker has reduced its rating on Treasury Wine to Lighten from Hold with the target price falling to $8 from $9.
UBS downgrades its rating on Treasury Wine Estates to Neutral from Buy. Although the broker sees value in the stock ex-China, UBS also concedes there is uncertainty with respect to ex-China operating income (on account of increased supply). Following the circa 169% provisional tariffs on China exports, the broker sees pricing risk in the short term, as about $1bn of wine exports are re-allocated both offshore and domestically. With almost $1.5bn in liquidity and circa $226m of near-term maturities, UBS considers the risk to the balance sheet manageable. The target price is increased to $9.20 from $8.80.
See upgrade above.
WEBJET (WEB) was downgraded to Hold from Buy by Ord Minnett
Ord Minnett finds valuation stretched in the travel & tourism sector as stocks have rallied on the back of progress with the coronavirus vaccines and domestic border re-opening. Nevertheless, the broker suspects a meaningful recovery is at least 12-18 months away. In such circumstances the focus needs to be on stocks that have strong fundamentals while investors need to be nimble and watch for anomalies in valuation at any point in time, in Ord Minnett’s view. The broker downgrades Webjet to Hold from Buy and the target is raised to $5.52 from $4.58.
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.
