Brokers in the FNArena database have ushered in 2021 with an even balance of nine upgrades and downgrades to ASX listed companies for the week ending Friday January 15.

Boral was the only company to receive two ratings adjustments (upgrades) by separate brokers. Morgan Stanley expects infrastructure-focused stimulus to have positive benefits in Australia and gather momentum in the US. Asset sale potential and likely cost out are considered additional tailwinds.

Meanwhile, Ord Minnett upgraded the company’s rating while simultaneously expressing reservations about the outlook for the fly ash operations in the US. This is due to the structural decline of US coal-fired power.

During the week Morgans and Ord Minnett undertook an oil and gas review. As a result, Karoon Energy, Oil Search and Santos dominated the table for largest percentage upgrades to earnings estimates.

Morgans suggests now is an opportune time to invest in the oil and gas sector after gaining further conviction both oil and LNG markets have moved off their lows. Ord Minnett now has Brent priced at US$53/bbl in 2021 and US$50/bbl in 2022 and 2023. The broker considers the most preferred sector exposures are Santos, Beach Energy and then Oil Search.

Macquarie’s Commodities Strategy team upgraded short-term, medium-term and long-term nickel price forecasts by 7-8%, 10-13% and 3%, respectively. This elevated Western Areas to third on the table for percentage earnings upgrades. Both Accent Group and ARB Corp also received material forecast earnings upgrades from brokers for the reasons explained in prior paragraphs.

Earnings forecasts were also revised down as a result of the separate oil and gas reviews undertaken by Morgans and Ord Minnett.  Both brokers lowered forecast earnings for Cooper Energy, while Ord Minnett also lowered forecasts for Viva Energy Group.

Finally, UBS performed a mark-to-market exercise for Australian financials and insurers. As a result, both QBE Insurance and Insurance Australia Group were among the largest percentage falls in forecasts earnings for the week.

In the good books

BORAL LIMITED (BLD) was upgraded to Overweight from Equal-weight by Morgan Stanley B/H/S: 3/2/0

Morgan Stanley believes housing momentum is expected to continue into 2021 in the key markets led by affordability, stimulus, changing consumer preferences and a low-rate environment continue. The broker expects infrastructure-focused stimulus to contribute in Australia and gather momentum in the US. As a result, Morgan Stanley retains a preference for Boral given end market momentum, asset sale potential and likely cost out. Rating upgraded to Overweight from Equal-weight rating. Target rises to $5.80 from $4.80. Industry view is Cautious.

FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED (FPH) was upgraded to Neutral from Underperform by Credit Suisse B/H/S: 1/1/2

Following a period of share price underperformance, coupled with the ongoing surge in covid-19 hospitalisations in America and Europe, Credit Suisse believes there is strong valuation support for the company’s share price.  The broker lifts FY21-23 profit (NPAT) estimates by 7%, 2% and 1%, respectively, to reflect a likely stronger demand for consumables. The rating is upgraded to Neutral from Underperform and the target rises to NZ$33.55 from NZ$31.

INCITEC PIVOT LIMITED (IPL) was upgraded to Overweight from Equal-weight by Morgan Stanley B/H/S: 6/1/0

It looks like Morgan Stanley’s wait for a catalyst for Incitec Pivot is finally over with the broker noting an improvement in all commodities for the company.  Fertiliser prices are expected to strengthen during FY21-22 and the broker sees Incitec well-positioned to benefit from this improving trend. Rating is upgraded to Overweight from Equal-weight with the target rising to $2.75 from $2.45. Industry view: Cautious.

WHITEHAVEN COAL LIMITED (WHC) was upgraded to Neutral from Underperform by Macquarie B/H/S: 5/1/0

While production and sales in the second quarter were on expected lines, the quarter was marred by damage at a ship loader and Chinese import restrictions. Managed run-of-mine coal production guidance has been tightened to 21-22.5mt from 21-22.8mt after incorporating a circa 4% upgrade to Maules Creek guidance and reducing the Narrabri guidance by circa -10%. Since run-of-mine coal production in the first half accounts for only about 43% of guidance, Macquarie believes there will be a step-up in the second half volumes. Rating is upgraded to Neutral from Underperform with the target price rising to $1.80 from $1.30.

In the not-so-good books

ADBRI LIMITED (ABC) was downgraded to Underweight from Overweight by Morgan Stanley B/H/S: 0/4/3

Despite the loss of the Alcoa lime supply contract, Adbri’s share price recovered after the initial significant fall and ended off just 4% across the year. Morgan Stanley sees the valuation as relatively fully priced especially given the relatively modest earnings growth. This prompts the broker to downgrade its rating to Underweight given better upside elsewhere in the sector. Rating is downgraded to Underweight from Overweight. Target falls to $3.30 from $3.60. Industry view: Cautious.

ORORA LIMITED (ORA) was downgraded to Equal-weight from Overweight by Morgan Stanley B/H/S: 0/7/0

Morgan Stanley believes packaging stocks are a valuable defensive addition but favour Amcor (AMC) which the broker considers a quality defensive name with an attractive yield. While Orora offers a similar yield along with upside from better performance in the North America segment, concerns around wine volume prompt caution and lead the broker to downgrade its rating to Equal-weight from Overweight. The target price falls to $3 from $3.40. Industry view: Cautious.

PACT GROUP HOLDINGS LTD (PGH) was downgraded to Underweight from Equal-weight by Morgan Stanley B/H/S: 1/3/1

While Morgan Stanley’s earnings forecast for Pact Group Holdings remains unchanged, the stock has traded beyond the broker’s price target and is thus the least attractive among packaging companies with the broker preferring Amcor (AMC) and Orora (ORA). The broker believes the key to performance for the group will be delivery on key turnaround milestones and progress on the targeted sale of the contract manufacturing business. Since those remain uncertain, the broker adopts a wait and watch approach. Rating is downgraded to Underweight from Overweight. Target is unchanged at $2.60. Industry view: Cautious.  

PREMIER INVESTMENTS LIMITED (PMV) was downgraded to Neutral from Buy by UBS B/H/S: 1/4/0

Premier Investments’ first-half operating income guidance is circa 80% ahead of UBS’s expectations led by strong sales momentum and higher gross margins. While UBS is optimistic on the outlook for the next 12-24 months (driven by a falling AUD and potential rent reductions), the circa 52% share price rally over the last few months may mean this strong outlook has already been priced in.  Rating is downgraded to Neutral from Buy with the target rising to $24.50 from $20.50.

Earnings forecast

Listed below are the companies that have had their forecast current year earnings raised or lowered by the brokers last week. The qualification is that the stock must be covered by at least two brokers. The table shows the previous forecast on an earnings per share basis, the new forecast, and the percentage change.

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.