In the good books

Harvey Norman (HVN) was upgraded to Neutral from Underperform by Credit Suisse B/H/S: 1/3/3. Harvey Norman’s interim report was a disappointment. Credit Suisse analysts point at the Australian franchisee segment where earnings reflected increasing costs and increasing competition. But Credit Suisse has upgraded to Neutral from Underperform post sharp sell-off post results release. The target price falls to $4 from $4.03. See downgrade.

Iluka Resources (ILU) was upgraded to Neutral from Underperform by Macquarie B/H/S: 3/3/1. A solid result from Iluka beat Macquarie on both earnings and free cash flow. The dividend increase is a surprise given the step-up in capex planned for 2018. The highlight was a positive outlook for zircon and rutile prices. Macquarie has materially upgraded earnings forecasts to reflect price guidance, noting Iluka’s current rutile contract price is well below spot. Target rises to $10.50 from $8.80.

Mirvac Group (MGR) was upgraded to Buy from Sell by Citi B/H/S: 4/2/1.  Citi has double upgraded to Buy from Sell, while bumping up the share price target to $2.35 from $2.16. Despite softer residential conditions, the analysts believe earnings certainty is improving with 90% of major apartment projects due for completion through to FY20 having been presold.  Earnings estimates have lifted by 9% and the analysts note Mirvac shares are now the cheapest among peers, despite “robust” growth prospects and with the company implementing a share buyback.

Ramsay Health Care (RHC) was upgraded to Buy from Neutral by Citi B/H/S: 2/5/0. Post interim report release and subsequent sell-off, Citi analysts have upgraded to Buy from Neutral, pointing out the shares have not been this “cheap” over the past five years. FY18-20 EPS forecasts have been lifted by 1%. Citi suggests the specific private health insurance affordability issues plaguing the sector are now well understood by investors, and this has been priced in accordingly. Price target moves to $78.50 from $74.50. DPS estimates have been reduced. See downgrade.

QBE Insurance (QBE) Credit Suisse was upgraded to Neutral from Underperform by Credit Suisse B/H/S: 4/3/1. QBE’s full year results were in line with expectations, having been pre-reported in January. The company has retained the $1 billion buyback despite the fall in earnings. The broker believes that with the company sitting at the low end of the capital target and a debt to equity position above 40%, management should focus on repairing the damaged balance sheet in the near-term. With QBE underperforming the market by -21% in the last twelve months the broker upgrades to Neutral from Underperform and raises the target to $10.20 from $9.85.

Spark Infrastructure Group (SKI) was upgraded to Neutral from Underperform by Credit Suisse B/H/S: 3/4/0. Full year results were ahead of Credit Suisse.  Guidance for growth in distributions was given as “at least CPI” through 2018-2020, in line with consensus forecasts but below the 4-5% plus delivered since 2011. With the stock now trading in line with DCF based valuation the broker upgrades to Neutral from Underperform and raises the price target to $2.45 from $2.40. See downgrade.

In the not so good books

Caltex Australia (CTX) was downgraded to Neutral from Buy by Citi and to Hold from Accumulate by Ord Minnett. B/H/S: 2/4/1. Full year results were broadly in line with December’s guidance and a little above Citi’s expectations. The company has announced plans to more than double own-operated stores by transitioning the 496 owned but franchised sites to Caltex operation stores by mid 2020. Management aims to deliver 10-15% EPS growth within 5 years. Citi increases the target price to $39.71 from $37.66.  Ord Minnett notes the retail-operating model is changing to corporate from franchise, with costs that will weigh on the earnings in the near term. Recent share price appreciation has reduced the size of the multiple uplift and Ord Minnett is also less confident regarding significant divestments. Rating is downgraded to Hold from Accumulate. Target is $37.50.

Harvey Norman (HVN) was downgraded to Neutral from Buy by UBS B/H/S: 1/4/3.  UBS found little to like in the first half result, which was softer than expected. Net debt was higher and the dividend disappointed. The broker believes earnings risk is now to the downside for the franchisee segment and downgrades to Neutral from Buy. Target is reduced to $4.10 from $5.77. See upgrade.

Ramsay Health Care (RHC) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 2/5/0. First half results were ahead of Ord Minnett’s forecast, mainly due to lower interest and tax expenses. The 57.5c dividend was 3% above the broker’s estimate. The broker estimates the company will have to boost its second half domestic EBIT by more than 11% to deliver the bottom end of its guidance range. Target drops substantially to $67.50 from $80. See upgrade.

Spark Infrastructure (SKI) was downgraded to Neutral from Outperform by Macquarie B/H/S: 3/4/0. Spark Infrastructure’s profit came in slightly ahead of Macquarie although composition was not as expected. While 2018 dividend guidance did not surprise, 2019-20 dividend growth guidance of “at least CPI” is well below the 5% plus pace of growth seen in the last seven years, the broker notes. This is a concern. Slowing dividend growth means Spark Infrastructure is no longer differentiated from other regulated assets, and market concern over rising rates leads to the broker to downgrade. Target rises to 2.67 from $2.65. See upgrade.

The above was compiled from reports on FN Arena. 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. 

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 regards to your circumstances.