In the good books
BLUESCOPE STEEL (BSL) was upgraded to Outperform from Neutral by Macquarie
Macquarie has upgraded its outlook, expecting US steel prices will stay around current levels over the third quarter and any moderation subsequently will be mild. The broker expects earnings momentum should be strong in the short term and considers the risk/reward balance has improved for BlueScope Steel. As a result, the rating is upgraded to Outperform from Neutral and the target raised to $25.40 from $23.90.
COLES GROUP (COL) was upgraded to Outperform from Neutral by Macquarie
Macquarie reviews its outlook for Coles Group ahead of the strategy briefing on June 17. The broker envisages upside from normalising consumer behaviour with comparable sales narrowing. The stock screens attractively on valuation and the broker switches its preference to staples, upgrading to Outperform from Neutral. Coles is expected to be a beneficiary from the unwinding of the “local shopping” trend. Coles supermarkets are over-indexed to shopping centres and the CBD, areas most affected by the pandemic. Target is raised to $18.20 from $17.30.
ILUKA RESOURCES (ILU) was upgraded to Outperform from Neutral by Macquarie
Strong demand and ongoing supply issues are driving zircon prices higher, Macquarie notes, hence the broker has upgraded forecasts. The broker had forecast Sierra Rutile to post negative earnings over the next two years, thus concurs with the decision to suspend operations, which should provide a modestly positive impact on rutile prices. With price momentum for both zircon and titanium turning positive, the broker upgrades to Outperform from Neutral. Target rises to $8.60 from $7.30.
REGIS HEALTHCARE (REG) was upgraded to Add from Hold by Morgans
With reference to M&A generally and multiples relating to the Japara Healthcare (JHC) takeover offer in particular, Morgans lifts the rating for Regis Healthcare to Add from Hold. The target price increases to $2.23 from $2.03. The broker believes the increased level of M&A activity in the sector is likely to increase further, and a successful conclusion to the Japara Healthcare bid will likely attract more investor attention.
SEEK (SEK) was upgraded to Outperform from Neutral by Macquarie
Macquarie estimates the removal of the recruiter discount results in a 9% yield tailwind in total for Seek and the broker’s recruiter survey suggests a 24% uplift in yield is achievable before volumes are impacted. The broker’s economists are forecasting a fall to the low 4s for the unemployment rate during 2023, and ad volumes and the labour market are strongly correlated. The recent sale of Zhaopin has reduced financial leverage and lowered capital outlay requirements. Macquarie sees Seek as “quality” stock, and upgrades to Outperform from Neutral. Target rises to $40.00 from $31.60.
SIMS (SGM) was upgraded to Buy from Hold by Ord Minnett
Upgraded guidance for EBIT in FY21 is now $360-380m, stemming from higher gross margin and zorba prices. Ord Minnett was surprised at a modest reaction in the share price, given the strong trading update. The broker increases FY22 estimates for EBIT by 66%, believing scrap and zorba markets will remain strong in the short term. Rating is upgraded to Buy from Hold and the target lifted to $20.00 from $16.30. Overall, Ord Minnett is attracted to the scrap markets for the medium term because of the potential for Chinese imports to increase and the positive ESG backdrop.
In the not-so-good books
ATLAS ARTERIA (ALX) was downgraded to Hold from Add by Morgans
Morgans downgrades the rating for Atlas Arteria to Hold from Add, given recent share price strength. The target price rises to $6.35 from $6.31. The broker forecasts DPS of 33 cents over the next 12 months, implying a 5.2% cash yield on the current share price. With DPS growth, this yield lifts to greater than 8% by 2025-26. It’s felt this will appeal to income investors and to those looking for a covid-recovery trade.
BRICKWORKS (BKW) was downgraded to Hold from Add by Morgans
Following a strong share price performance, Morgans moves to a Hold from an Add rating and lifts the target price to $23.50 from $21.60. The company provided a stronger-than-expected FY21 guidance for its Property segment. This was due to the recognition of a further $100m (Brickworks 50% share) in revaluation gains in its Property Trust, explains the broker. FY21 earnings (EBIT) for both Building Products Australia (BPA) and Building Products North America (BPNA) are expected to be higher. The analyst continues to see a cyclical recovery in the Building Products businesses over FY21-23 and scope for further bolt-on M&A in North America.
DOMINO’S PIZZA ENTERPRISES (DMP) was downgraded to Hold from Add by Morgans
Domino’s Pizza Enterprises will acquire 100% of Domino’s Taiwan for a payment of $79m. Morgans considers the move a first step to building a larger presence in Asia, despite the relatively smaller size of the Taiwan business. The proximity of the new business to Japan will allow these two regions to share marketing and operational functions. Management has noted a target of 400 stores in Taiwan, and Morgans expects strategy to be similar to that of Japan with a focus on growing volume and stores. Domino’s Taiwan currently operates 157 stores and reported underlying earnings of $4.8m in FY20. The purchase price represents 16.5 times FY20 underlying earnings, notably higher than the 10 times paid for the Japan stake. The rating is downgraded to Hold and the target price increases to $123.35 from $118.60.
DOWNER EDI (DOW) was downgraded to Lighten from Hold by Ord Minnett
Ord Minnett suggests labour costs and availability are turning into a key focal point for the industry, and possibly trigger a number of profit warnings. Based upon in-house research, the situation is most acute in Western Australia. Downer EDI is the most labour-intensive business under the broker’s coverage, and with the lowest margins. Ord Minnett has decided to downgrade to Lighten from Hold, with the target price falling to $5.30 from $5.90.
IGO (IGO) was downgraded to Underweight from Equal-weight by Morgan Stanley
Morgan Stanley hails the achievement of a “clean energy” transition, noting this business is still in a strong cash position. Nevertheless, the high implied value for the lithium business leaves a significant valuation gap, at around -15%. Hence, the broker downgrades to Underweight from Equal-weight. Morgan Stanley suspects IGO Ltd could chase additional opportunities or increase dividend payments and anticipates dividend yields could reach 6% in FY24. Target is raised to $6.35 from $5.65. Industry view: Attractive.
NEW HOPE CORPORATION (NHC) was downgraded to Neutral from Outperform by Macquarie
While multiples remain attractive for coal miners, Macquarie downgrades New Hope to Neutral from Outperform following recent strength in the share price. Despite there being significant earnings and valuation upside at spot prices, the broker’s base case assumptions for thermal coal are muted. Target is raised to $1.70 from $1.50.
SOMNOMED (SOM) was downgraded to Hold from Add by Morgans
SomnoMed shares have rallied in recent months as access to dental and sleep clinics in North America and Europe has improved. The broker looks to a July quarter update for company management to provide guidance on stabilisation of the North American region. Morgans highlights that a recall on an estimated 3.5m ventilation devices from competitor Philips may provide a boost in demand for MAD devices, but notes it is too early to call. The rating is downgraded to Hold and the target price of $2.55 is retained.
SUNCORP (SUN) was downgraded to Neutral from Outperform by Credit Suisse
Suncorp has updated on its catastrophe expenses in the light of flooding in Victoria. In assuming the events in Victoria create an additional expense of -$50m, Credit Suisse assesses FY21 peril expenses will be at least -$1.05bn. The broker points out the insurer has probably negotiated most of its July 1 reinsurance renewals so while the current event could affect pricing of the remainder of the program, the impact should be minimal. Following a strong run in the share price, Credit Suisse downgrades to Neutral from Outperform. Target is $11.25.
WHITEHAVEN COAL (WHC) was downgraded to Neutral from Buy by Citi
While noting the in-house commodities team has revised up 2021 Newcastle 6000kcal thermal coal price forecast to an average of US$93/t from $84/t, Citi sector analysts have downgraded their rating for Whitehaven Coal to Neutral from Buy. Price target has increased to $2.20 on higher forecasts, incorporating the revised coal price projections, but the share price has rallied too. The latter explains the downgrade.
WOOLWORTHS (WOW) was downgraded to Neutral from Outperform by Macquarie
Macquarie observes the share price has had a strong run ahead of the upcoming de-merger of Endeavour Group. The broker likes the medium-term growth outlook while the increased focus on core business should drive efficiencies. Yet, the rating is downgraded to Neutral from Outperform and the broker’s preference is switched to Coles Group (COL). Macquarie believes the de-merger is priced into the stock and the valuation is now full. Target is steady at $44.50.
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.
