In the good books

Ardent Leisure Group (AAD) was upgraded to Buy from Sell by Citi B/H/S – 2/3/2. Having stuck with a Sell rating for the past 12 months, Citi has now double-whammy upgraded to Buy. The immediate trigger that led to the change in view, was improving operating momentum for both Main Event and Theme Parks. In addition, point out the analysts, US tax cuts should also add to bottom line improvement. Target price jumps to $2.40 from $1.50.  H1 core net profits are anticipated to come out as a loss of -$2.2 million.

Aurizon Holdings (AZJ) was upgraded to Neutral from Underperform by Credit Suisse B/H/S – 1/4/2. Credit Suisse upgrades because of the weakness in the share price since the announcement of the QCA draft UT5 decision. Target is raised to $4.75 from $4.70. In the coal segment, the broker forecasts FY18 earnings to increase by 12% because of several Pacific National coal haulage contracts being up for renewal and the recent rebounding coal prices. Nevertheless, FY18 EBIT estimates are lowered by 3% because of a one-off impact to coal segment margins from the timing of revenue related to the cyclone in FY17.

Carsales.com (CAR) was upgraded to Neutral from Sell by UBS B/H/S – 3/3/2. The first half results were largely in line, although the outlook for SK Encar probably disappointed lofty buy side expectations, UBS suspects. UBS noted finance revenue was stronger and growth in Webmotors also accelerated. The broker downgraded the stock in December as the share price appeared to be factoring overly optimistic growth assumptions.  UBS views the issues with SK Encar as transient, although tapping Korea may take longer than anticipated. The broker returns the rating to Neutral from Sell and retains a $14 target. (See downgrades)

Magellan Financial Group (MFG) was upgraded to Add from Hold by Morgans B/H/S – 4/2/0.  First half results were broadly in line with Morgans’ expectations. The broker acknowledges current market volatility poses a short-term risk but on a 12-month view upgrades to Add from Hold. Target is reduced to $28.30 from $29.10. The company has announced two acquisitions that provide more capability in Australian equities and secure improved US distribution. The acquisitions are expected to be modestly accretive in the first year. Airlie Funds Management and Frontier Partners Group have been acquired for a combined consideration of US$15 million and 4.5 million in shares.

Macquarie Group (MQG) was upgraded to Add from Hold by Morgans B/H/S – 3/3/1. Management has upgraded FY18 guidance to 10% profit growth. Morgans notes third quarter business trends were solid with exceptional capital raising levels in infrastructure and real assets. The update reinforces the broker’s view on the medium-term growth profile. Morgans acknowledges rising bond yields are a risk but remains countered by the sizeable opportunities, such as US government infrastructure spending plans.  Target is raised to $109.33 from $97.43.

Shopping Centres Australasia Property Group (SCP) was upgraded to Neutral from Sell by Citi B/H/S – 0/4/1. Shopping Centres has lifted FY earnings guidance by 1.3% following its interim result which is a positive, Citi notes, but not unexpected. Net operating income growth remains reasonable, largely due to stock-specific factors. Organic growth could remain above-peer. Acquisitions helped drive earnings but ongoing accretion from acquisitions is set to slow, Citi suggests. But on the basis of the recent price pullback, the broker upgrades to Neutral. Target rises to $2.14 from $2.11.

Transurban (TCL) was upgraded to Add from Hold by Morgans B/H/S – 4/3/0.  Morgans believes, given the recent decline in the share price, value has emerged, with an estimated total return in excess of 10%.  The main short-term risks include material increases in bond yields and overpaying for the 51% of WestConnex. First half results will be released on February 13. Target is reduced to $12.62 from $12.65.

In the not-so-good books 

AGL Energy (AGL) was downgraded to Neutral from Outperform by Macquarie B/H/S – 4/3/0. Macquarie observes the tailwinds from electricity prices have faded and re-investment is somewhat uncertain as the market is rapidly changing in terms of its technology while retail competition is heightened. The broker considers the risk remains to the downside as AGL is more exposed than its peers to political risk. Rating is downgraded to Neutral from Outperform. Target is reduced to $24.05 from $25.40.

Carsales.com (CAR) was downgraded to Sell from Neutral by Citi and to Neutral from Outperform by Macquarie B/H/S – 3/3/2. Carsales has abruptly fallen out of favour at Citi following an interim report that, according to the analysts, shows a maturing core business in Australia, with margins under pressure. Citi has downgraded to Sell, reduced estimates by -4-9% and cut its price target by -17% to $12.50. Macquarie found the first half results positive and broadly in line but, given the absence of upgrade drivers relative to pre-result earnings forecasts, the broker envisages limited near-term valuation upside. Target reduced to $14.00 from $14.20.

Greencross (GXL) was downgraded to Neutral from Buy by UBS B/H/S – 0/4/0.  The company has provided a strong trading update and announced a new CEO. The broker notes the new CEO, Simon Hickey, does not have a traditional retail background but relevant experience in lift in consumer loyalty and cross selling. The broker believes medium-term risks are building and cuts its long-term store roll-out and margin profile. Target is reduced to $6.15 from $7.00.

Medibank Private (MPL) was downgraded to Neutral from Outperform by Macquarie B/H/S – 0/5/3.  Macquarie expects private health insurance will remain a key funding source for healthcare expenditure in Australia, despite the heightened political debate. Nevertheless, the potential margin risk and minimal upside to the target results in a downgrade to Neutral from Outperform. Target is $3.46.

NIB Holdings (NHF) was also downgraded to Neutral from Outperform by Macquarie B/H/S – 0/4/3. The broker downgrades for the same reasons it downgraded Medibank.  Target is $6.90. The broker also retains the view that ongoing structural change is required for the system to manage the underlying growth in claims.

The above was compiled from 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.