In the good books
AUSNET SERVICES (AST) was upgraded to Equal-weight from Underweight by Morgan Stanley
The potential for corporate activity, with the company receiving an offer from Brookfield, highlights for Morgan Stanley the cost of capital differential between listed and unlisted investors. This drives the broker to upgrade to Equal-weight from Underweight. Target is raised to $2.41 from $1.77. Should the proposed transactions proceed, the de-listing of both AusNet Services and Spark Infrastructure ((SKI)), Morgan Stanley points out, will mean there is no pure regulated utility left on the ASX. The main concern is that the Australian Energy Regulator may perceive the premium in the proposed transactions a sign that regulated allowances are overly generous and seek to reduce them accordingly, suggests the analyst. Industry view: Cautious.
BABY BUNTING (BBN) was upgraded to Buy from Neutral by Citi
Citi upgrades its rating for Baby Bunting Group to Buy from Neutral with the risk/reward trade off seen as more favourable following the -12% share price decline since the FY21 result. The target price rises to $5.98 from $5.90 on higher market multiples. The analyst feels the group is well placed to report a relatively stronger AGM trading update compared to most listed retail peers, given the non-discretionary nature of its products. Ord Minnett forecasts gross margins to expand by 68bps in FY22. This is driven by a forecast increased share of higher margin private label and exclusive product sales, and supply chain efficiencies from the new national distribution centre in Melbourne.
CHAMPION IRON (CIA) was upgraded to Buy from Neutral by Citi
While Citi lowers its price target for Champion Iron to $6.40 from $7.25, the broker raises the rating to Buy from Neutral after recent share price underperformance. It’s thought iron ore may hold at greater than US$100 per tonne levels for longer than the market expects. The analyst believes China’s lead indicators are stabilising and have turned up off recent lows. The fact steel prices have stayed high is considered to point to consumption being driven more by state-imposed production cuts than weakness in underlying demand.
EVENT HOSPITALITY & ENTERTAINMENT (EVT) was upgraded to Buy from Neutral by Citi
Citi sees the company as materially undervalued and raises its rating to Buy from Neutral and lifts the target to $17.70 from $13.45. This is predicated on likely strong pent-up demand after lockdowns and lesser structural concerns surrounding cinemas than initially thought. Additionally, there has been a successful property divestment program and a material cost-out program, explains the analyst. A $2.1bn property portfolio (worth $12.76 per share) implies to the broker that investors are paying circa 4x FY23 earnings for the operating business.
NEW HOPE (NHC) was upgraded to Outperform from Neutral by Macquarie
Macquarie continues to prefer iron ore and metallurgical coal amongst the bulk commodities. The broker is positive about coal, given the upside from buoyant spot prices. While upgrading to Outperform from Neutral, the broker notes movements in thermal coal prices present the main risk to its base case valuation of New Hope. Target is raised to $2.40 from $2.20.
TRANSURBAN (TCL) was upgraded to Outperform from Neutral Credit by Suisse
Transurban in consortium is acquiring the remainder of WestConnex from the NSW government for $11.1bn. This will take its stake to 50% from 25.5% at a cost of $5.6bn. Credit Suisse believes the deal is attractive as it will provide Transurban with control of all Sydney’s toll roads and places the company in a good position to deliver value. Rating is upgraded to Outperform from Neutral and the target raised to $15.10 from $14.00.
In the not-so-good books
INCITEC PIVOT (IPL) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse expects fertiliser pricing will peak in 2021. Pricing is expected to remain above the mid-cycle average in 2022 as markets appear to be well supplied. Meanwhile, the outlook for the explosives business seems stable. The broker downgrades to Neutral from Outperform and reduces the target to $2.98 from $2.99, adjusting for fertiliser pricing expectations. Production assumptions are reduced to allow for the outage at Waggaman.
SIGMA HEALTHCARE (SIG) was downgraded to Neutral from Buy by Citi
Citi downgrades its rating to Neutral from Buy as a result of lower-than-expected margins and guidance. The company downgraded FY23 earnings (EBITDA) guidance to $95-100m from $100m. The target price falls to $0.60 from $0.70. The company reported first half underlying profit around -10% below consensus due to a lower-than-expected gross margin on a normalisation of the sales mix, explains the broker. While it’s too early to see an impact, the analyst feels the potential acquisition of Australian Pharmaceutical Industries (API) by Wesfarmers (WES) is unlikely to be positive.
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.
