In the good books
BORAL (BLD) was upgraded to Hold from Lighten by Ord Minnett
Boral has sold its North American building products business to Westlake Chemical. The sale price of $2.9bn (US$2.15bn) is $1bn more than Ord Minnett’s valuation. Boral is looking at options for capital returns. Net debt has been reduced to $1.3bn and the broker calculates there could be up to $3.56bn in potential shareholder returns. The rating is upgraded to Hold from Lighten as the valuation has increased and Ord Minnett assesses Seven Group (SVW) could raise its bid for Boral. Target is raised to $6.70 from $5.70.
FLIGHT CENTRE TRAVEL GROUP (FLT) was upgraded to Neutral from Underperform by Credit Suisse
Flight Centre’s leisure business is, globally, one the last travel recovery stories, Credit Suisse asserts, because of onerous government restrictions. The long-term earnings potential of this division is also an issue and the broker prefers other operators in the sector. That said, increased travel complexity could benefit bricks & mortar participants although the store footprint has halved, reducing the scale advantage. Credit Suisse transfers coverage to another analyst, noting the corporate business is the value driver and new business has been won during the travel shutdown. The broker upgrades to Neutral from Underperform and raises the target to $17.00 from $15.44.
NEW HOPE CORPORATION (NHC) was upgraded to Outperform from Neutral by Credit Suisse
Adjusting thermal coal prices for the June quarter, Credit Suisse lifts FY21 estimates for New Hope’s operating earnings by 23% to $350m. The broker also increases the Newcastle thermal price assumption to US$100/t for FY22. This drives an expected earnings upgrade of 95% for FY22. The broker upgrades to Outperform from Neutral and raises the target to $1.95 from $1.30.
RESMED (RMD) was upgraded to Outperform from Neutral by Macquarie
Macquarie envisages market share opportunities for ResMed associated with the recent recall of the Philips DreamStation devices. In the short term supply chain constraints will limit the company’s response and, hence, the broker assumes incremental sales will be driven primarily from existing inventory. Combined with a balance sheet that provides flexibility for capital management/growth, Macquarie judges the outlook is favourable and upgrades to Outperform from Neutral. Target is raised to $34.85 from $27.50.
In the not-so-good books
ABACUS PROPERTY (ABP) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse calculates that roughly half of the December equity raising has been deployed and, from a cash flow perspective, a net outlay of -$235m on investments will occur by the end of the financial year with further proceeds from asset sales to be received in FY22. The broker makes minor earnings revisions to reflect the impact of known transactions and estimates for FY21-23 FFO per security increase by 1%. Second half distribution guidance of 8.5c is in line with existing estimates. The broker downgrades to Neutral from Outperform, noting uncertainty exists over how quickly capital is redeployed. Target is raised to $3.21 from $3.04.
ADAIRS (ADH) was downgraded to Hold from Accumulate by Ord Minnett
Ord Minnett assesses Adairs has been a beneficiary of elevated demand in the home improvement segment over the past 12 months. Sales growth has been well above average while operating margins appear unsustainably high. The broker suggests this will normalise in FY22. Moreover, following settlement of the Mocka acquisition the implied earnings are below its forecasts. This has required downgrades to estimates for FY21-23. Ord Minnett lowers the rating to Hold from Accumulate and reduces the target to $4.45 from $4.50.
CSL (CSL) was downgraded to Neutral from Buy by Citi
Citi downgrades to Neutral from Buy given the stock has outperformed since March. The plasma collection market is expected to normalise this year and the broker asserts the rating change is purely based on valuation. The risk is to the upside if the CSL 112 phase III trial results due at the end of 2021 are positive. Target is steady at $310.
EBOS GROUP (EBO) was downgraded to Hold from Add by Morgans
Morgans lowers the rating for Ebos Group to Hold from Add after a 12% rise in the share price over the last three months and suggests an entry point below $30 is appealing. The broker makes no change to forecasts though a changed valuation method lifts the target price to $31.03 from $28.90. In an update, management noted second half trading conditions had started strongly. The company will post its full year FY21 result mid-August.
ILUKA RESOURCES (ILU) was downgraded to Hold from Accumulate by Ord Minnett
After assessing the outlook across a range of commodity prices, Ord Minnett downgrades Iluka Resources to Hold from Accumulate as the stock is trading in line with valuation. Target is raised to $8.10 from $8.00.
RIO TINTO (RIO) was downgraded to Sell from Neutral by UBS
Rio Tinto has delivered a total shareholder return of 79% over the past 12 months, largely thanks to the iron ore price. While substantial cash flow suggests shareholder returns should remain elevated in 2021, UBS believes the top of the cycle may have been reached. The broker forecasts iron ore prices to retreat in excess of -50% in the 12-18 months. Nearer term, the Fed is turning more hawkish and China is taking action to deflate commodity prices, while Brazilian iron ore production begins to recover. While retaining a $104 target, UBS downgrades to Sell from Neutral.
SONIC HEALTHCARE (SHL) was downgraded to Neutral from Buy by Citi
Citi notes the stock has outperformed the ASX 200 by 6% over the last quarter and 10% over the last 12 months. Sonic Healthcare has benefited enormously from coronavirus testing and Citi anticipates peak earnings will occur in FY21. While there is a risk FY22 earnings will also be elevated the broker considers the stock fairly valued and downgrades to Neutral from Buy. Meanwhile, Sonic Healthcare has acquired Canberra Imaging Group, which generates annual revenue of $60m. The acquisition is expected to be immediately accretive. This will increase the company’s revenue from imaging by 10%. Target is $37.50.
WESTERN AREAS (WSA) was downgraded to Equal-weight from Overweight by Morgan Stanley
Commodity sector analysts at Morgan Stanley have updated their expectations and price deck. Bottom line: while multiple headwinds are building, the analysts believe ongoing firm demand and supply disruptions continue to dominate the picture, in particular for base metals. Iron ore is experiencing its final leg of upgrades, predicts the broker. Irrespective of the overall uncertainty, Morgan Stanley finds miners continue to screen cheaply relative vis a vis industrials ex-banks. This is why the sector rating remains Attractive. The latter also explains why currently 50% of all commodities related stocks in the broker’s universe are rated Overweight, with an average upside of 10%. Operational problems for Western Areas are considered ‘transitory’. The shares are seen as fairly valued. The broker has downgraded to Equal-weight from Overweight. Price target lifts to $2.50 from $2.40.
Macquarie commodities upgrades and downgrade
After recent upgrades to the iron ore forecast, Macquarie’s commodities team has adjusted forecasts for other commodities. The 2022-25 forecasts for copper rise by 13-14% and 2021-25 aluminium lifts by 4-5%. Thermal coal prices rise 9% and 7% for 2021 and 2022. The most material downgrades are to manganese, which falls -12% in 2022 and by -6 and -9% for 2024 and 2025.
SOUTH32 (S32) was upgraded to Outperform from Neutral by Macquarie
The bullish outlook for aluminium has driven strong longer-term earnings upgrades for South32 and the broker lifts the rating to Outperform from Neutral. The price target lifts to $3.50 from $3.10.
WEST AFRICAN RESOURCES (WAF) was upgraded to Outperform from Neutral by Macquarie
December year-end producers, such as West African Resources receive material forecast EPS upgrades from the broker in 2021, due to the 2021 gold upgrades aligning with the reporting period. Macquarie lifts the rating to Outperform from Neutral following recent weakness in the company’s share price. The price target of $1.10 is unchanged.
JUPITER MINES (JMS) was downgraded to Neutral from Outperform by Macquarie
The cuts to manganese forecasts drive material downgrades to Jupiter Mine’s forecasts by Macquarie. FY22-24 earnings forecasts fall by -20%, -32% and -4%, respectively. The rating is downgraded to Neutral from Outperform. The target falls to $0.30 from $0.35.
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.
