“Busy” no longer covers it. In the third week of the local February reporting season, ending on Friday, 23rd February 2018, FNArena registered no less than 45 upgrades for individual ASX-listed entities accompanied by 23 downgrades. The combo JPMorgan/Ord Minnett has now joined the three Ms (Macquarie, Morgans and Morgan Stanley) in carrying more Buy ratings for stocks under coverage than either Neutral or Sell ratings.
In the good books
THE A2 MILK COMPANY LIMITED (A2M) was upgraded to Outperform from Neutral by Credit Suisse and to Buy from Hold by Deutsche Bank. B/H/S: 4/1/0. First half results beat expectations across the board. With significant financial capacity and a commitment to further investment in marketing, Credit Suisse expects the company to double its revenue stream in 10 years. Target is raised to NZ$12.75 from NZ$8.50. Deutsche Bank was expecting a strong result, but what A2 Milk released was still a “strong beat”. Announcing a strategic agreement with Fonterra further lifted overall sentiment. Price target rises to NZ$14 (up 52%).
APN OUTDOOR GROUP LIMITED (APO) was upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 3/3/0 FY17 results were “not great” in the broker’s opinion. Of most interest was the second half sales growth of 2% in Roadside against an 11% forecast, a big miss for the company’s biggest division. Credit Suisse lowers EPS forecasts by 7-8%. With turnaround measures either complete or in train the broker expects a better performance in 2018. The broker upgrades to Outperform from Neutral and raises the target price to $5.05 from $4.70.See also APO downgrade.
ARB CORPORATION LIMITED (ARB) Upgrade to Outperform from Neutral by Macquarie. B/H/S: 1/2/0. Domestic conditions remain robust and the outlook is positive. Export markets are strengthening and the company’s initiatives have improved revenue growth, which should lead to margin expansion. Greater market confidence in the improving growth outlook should prompt a re-rating, the broker believes. Target rises to $21.00 from $17.70. See also ARB downgrade.
CORPORATE TRAVEL MANAGEMENT LIMITED (CTD) was upgraded to Buy from Accumulate by Ord Minnett and to Buy from Neutral by UBS. B/H/S: 4/1/0.The interim report was carried by a large increase in EBITDA margins, and Ord Minnett sees yet more evidence of the strength on top of the simplicity of Corporate Travel’s business model. Estimates were lifted. Price target moves to $24.36 from $21.98. Rating upgraded to Buy from Accumulate with the analysts lauding “the strength of the business model”. First half results were just shy of UBS estimates. ANZ and Europe were the stand-outs while N America and Asia faced challenging conditions. UBS raises the target to $25.85 from $23.25.
CLEANAWAY WASTE MANAGEMENT LIMITED (CWY) was upgraded to Add from Hold by Morgans. B/H/S: 3/2/0. First half results were ahead of forecasts. Morgans lifts operating earnings forecasts for FY18-21 by 1-2%. The company envisages recent changes to the Chinese importation of municipal recycled waste as an opportunity, by assisting local governments to mitigate the issue. Target is raised to $1.68 from $1.61.
ESTIA HEALTH LIMITED (EHE) was upgraded to Buy from Neutral by UBS. B/H/S: 1/2/0. The solid first half result was in line with UBS estimates. The 100% dividend pay-out ratio was a surprise to the upside. FY18 EBITDA guidance was reiterated at mid-single digit percentage growth, with the updated UBS forecast now sitting at $92.1 million. Target is raised to $4.00 from $3.75.
FLIGHT CENTRE LIMITED (FLT) was upgraded to Neutral from Sell by Citi and to Equal-weight from Underweight by Morgan Stanley. B/H/S: 2/4/2. First half results were above the top end of guidance ranges despite the disruption to the core Australian business. Citi notes the results were driven by the US, EMEA and Asia, which have been challenged from a profitability perspective for many years. Target is raised to $54 from $45. First half results were better than Morgan Stanley expected, driven by acquisitions and cost savings. The broker expects total transaction value growth to accelerate in the second half. Target rises to $54 from $38 to reflect lower capex and expanding corporate business. Industry view is Cautious.
FLEXIGROUP LIMITED (FXL) was upgraded to Buy from Neutral by Citi. B/H/S: 3/3/0. Citi analysts have been biding their time, waiting for that trigger that would allow for the gap between share price and valuation to close. It appears they now think the recent interim report release might be that trigger. Upgrade to Buy from Neutral. Target price rises by 14% to $2.14.
IRESS MARKET TECHNOLOGY LIMITED (IRE) was upgraded to Hold from Lighten by Ord Minnett. B/H/S: 0/4/0. 2017 results were at the top end of the prior guidance range and ahead of Ord Minnett’s forecasts. Given the substantial number of acquisitions over the last couple of years the broker awaits signs of a sustained recovery in profitability before becoming more constructive. Nevertheless, the drop in the share price since January leads to a raising of the recommendation to Hold from Lighten. Target is $11.
MEDIBANK PRIVATE LIMITED (MPL) was upgraded to Buy from Hold by Deutsche Bank. B/H/S: 1/4/2. Medibank Private’s results impressed the broker. Deutsche Bank noted a $34 million claims provision release boosted the result, but it demonstrates positive momentum on claims management. The broker notes strong margin momentum resulting from cost control and lower hospital utilisation. Target rises to $3.35 from $3.20.
NEWCREST MINING LIMITED (NCM) was upgraded to Accumulate from Hold by Ord Minnett. B/H/S: 2/3/3. Ord Minnett observes the stock has underperformed the US dollar and Australian dollar gold price as well as mid-cap peers. Yet, despite major production disruptions and a shrinking portfolio, the company is considered in better shape than it has been for many years. The balance sheet has been repaired, gearing is 16% and free cash flow is improving while there are accretive growth options. Target is raised to $25.00 from $22.50.
NINE ENTERTAINMENT CO. HOLDINGS LIMITED (NEC) was upgrade to Neutral from Sell by UBS. B/H/S: 3/2/1. UBS was impressed by the first half results, which showed revenue share at 13-year highs. UBS believes FY18 guidance of $231-261 million looks slightly conservative and is factoring FY18 EBITDA of $262 million. The broker raises the target price to $1.90 from $1.35.
NIB HOLDINGS LIMITED (NHF) Upgrade to Neutral from Sell by Citi. B/H/S: 0/5/2. Management has upgraded guidance, but Citi maintains the risk is to the upside. Their own forecast remains well above increased guidance for this year. Estimates have been increased by 6-8%. Target price lifts by 50c to $6.50.
ST BARBARA LIMITED (SBM) was upgraded to Neutral from Underperform by Credit Suisse and to Accumulate from Hold by Ord Minnett. B/H/S: 2/2/1. First half earnings were in line with expectations. The extra guidance for Gwalia, with a materially improved production and cost profile, adds to Credit Suisse’s valuation on base case assumptions. Target is raised to $3.85 from $3.00. Ord Minnett estimates the new mining strategy could add $400 million in value, or $0.80 a share, over the previous mine plan. Target is raised to $4.30 from $3.80.
SANTOS LIMITED (STO) was upgraded to Neutral from Sell by UBS. B/H/S: 3/4/1. The positive take-away is that, after cutting costs, Santos looks to be on track to shrink net debt to below $2 billion by the end of 2019. Not only is this well ahead of schedule, it also allows for the return of shareholder dividends in 2019, points out UBS. The broker upgrades to Neutral from Sell on a weak share price, noting that the above should also allow for an increase in growth investment. Target remains $5.25.
VILLAGE ROADSHOW LIMITED (VRL) was upgraded to Hold from Lighten by Ord Minnett, to Neutral from Underperform by Macquarie and to Buy from Neutral by Citi. B/H/S: 1/3/0. The company stated that theme parks have shown a significant recovery in January, with ticket yield up 30% and admission revenue up 24%. Ord Minnett welcomes the positive developments but would prefer to wait for an extended recovery, given recent disappointments. The broker upgrades to Hold from Lighten. Target is $3.25. Macquarie sees an improving outlook for Village Roadshow post result release. Improvement at Gold Coast theme parks suggests upside risk to earnings and capital structure is more sustainable. Risk/reward potential is nevertheless better reflected in the current price, hence Macquarie upgrades to Neutral from Underperform. Target rises to $3.50 from $3.30. A worried Citi has remained on the sideline for a long while, but now the analysts believe the time is right for an upgrade to Buy from Neutral. Improved theme park momentum seems to be the trigger point. Price target has lifted to $3.90 from $3.45 with higher forecasts further out supported by the company’s cost out ambition.
WEBJET LIMITED (WEB) was upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 4/0/1. First half results were materially better than forecast. Credit Suisse observes the company has successfully de-risked the core flights business through ancillary products. Despite a history of weak first half cash flow, worst fears did not materialize. Credit Suisse believes the short-term overhang on the stock will continue to unwind and upgrades to Outperform from Neutral. Target rises to $13.65 from $11.80.
WESFARMERS LIMITED (WES) was upgraded to Hold from Sell by Deutsche Bank and to Neutral from Sell by Citi. B/H/S: 1/6/1. First half earnings were slightly ahead of estimates. Deutsche Bank still envisages risks around the UK operations amid continued large operating losses or the potential for substantial exit costs. Meanwhile, Bunnings Australasia and Kmart are well-positioned. The broker believes the risk/reward is now balanced and upgrades to Hold from Sell. Target rises to $40 from $37. Citi has now upgraded to Neutral from Sell, while bumping up the price target to $41 from $39.30. The good news, as Citi sees it, is the supermarket operators are seemingly behaving rationally for now.
In the not-so-good books
APN OUTDOOR GROUP LIMITED (APO) was downgraded to Hold from Add by Morgans. B/H/S: 3/3/0. The new CEO, James Warburton, has outlined a plan to rebuild the company, involving a step up in investment in personnel and technology. Morgans suggests this may provide long-term benefits but will make earnings growth almost impossible in 2018. The broker slashes profit forecasts to reflect higher costs and higher ongoing capital expenditure. Target is reduced to $4.44 from $5.48.See also APO upgrade.
ARB CORPORATION LIMITED (ARB) was downgraded to Neutral from Buy by Citi. B/H/S: 1/2/0. Citi believes it is time to take some profits in light of the strong start to FY18 in the first half. Rating is downgraded to Neutral from Buy. The broker increases FY19-20 forecasts by 6-7%. Citi expects the PE will moderate over the short term. Target is raised to $22.43 from $17.85 as the model is rolled forward amid index multiple expansion. See also ARB upgrade.
BLACKMORES LIMITED (BKL) was downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 1/2/0. Credit Suisse has downgraded to Neutral from Outperform with a reduced target to $130 from $150, suggesting the share price might remain under pressure short term, but also emphasising it remains “optimistic” on the company’s growth prospects. Following the interim report, the analysts now suggest Blackmores will still grow, but it won’t be at a spectacular rate. They also observe competitor Swisse seems to be performing better.
HT&E LIMITED (HT1) Downgrade to Neutral from Buy by UBS. B/H/S: 4/2/0. 2017 results were largely in line with estimates. UBS notes Adshel outperformed the broader market in both Australia and New Zealand while Hong Kong outdoor also improved. Despite meeting expectations, UBS downgrades to Neutral from Buy, now incorporating a potential liability from the ATO tax dispute. Target is reduced $1.80 from $2.25.
INVOCARE LIMITED (IVC) was downgraded to Neutral from Outperform by Macquarie. B/H/S: 1/2/3. InvoCare posted a solid result ahead of Macquarie’s forecast. FY guidance nevertheless surprised to the downside, suggesting flat earnings growth due to capital spending on the company’s protect & grow strategy. Target falls to $14.34 from $15.31.
OOH!MEDIA LIMITED (OML) was downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 4/1/0. 2017 gross profit was ahead of expectations. Credit Suisse believes the risk/reward profile warrants a more circumspect view. Most of the business is performing well but there are areas that require caution. The company continues to press on with an elevated capital expenditure program despite industry growth declining to mid-low single digits, the broker notes. Target is raised to $4.95 from $4.75.
THE STAR ENTERTAINMENT GROUP LIMITED (SGR) was downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 7/1/0. First half earnings were mixed. Net debt was higher than Credit Suisse modelled while Gold Coast earnings surpassed the broker’s forecasts. While the first half was costly, the broker believes good growth remains intact. Costs are the main reason the broker downgrades forecasts for earnings per share by 6%.Target is reduced to $5.90 from $6.25.
SIRTEX MEDICAL LIMITED (SRX) was downgraded to Neutral from Buy by UBS. B/H/S: 0/3/0. First half results were in line with UBS estimates. A soft top line was more than offset by sales force and R&D cost out. As previously announced, Sirtex has entered into a binding agreement with Varian Medical Systems for the company to acquire all of Sirtex’s shares for $28 cash. UBS downgrades the stock to Neutral from Buy and moves the price target into line with the offer price of $28.00.
WESTPAC BANKING CORPORATION (WBC) was downgraded to Equal-weight from Overweight by Morgan Stanley. B/H/S: 4/4/0. Morgan Stanley has lowered its target to $30.00 from $32.10. The broker has a negative stance on the major banks but provides six reasons for its Westpac downgrade. The margin sweet spot has ended, the capital intensity of retail banking is increasing, there is growing scrutiny of conduct and competition, little scope for a cost surprise, no institutional tailwind this year and the stock is fully valued. The broker prefers ANZ Bank (ANZ), also Equal-weight, and has Underweight ratings on the other two. Industry view: In Line
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 FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.
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