We might be halfway through the February reporting season, time-wise, but hardly one quarter through the number of Australian companies scheduled to report financial performance this month. Local stockbroking analysts are busy as bees upgrading and downgrading individual ASX-listed stocks.

The undeniable good news story is with analysts making amendments to earnings forecasts. Whereas the table for positive revisions shows large numbers, the flipside is hardly worth mentioning. Infigen Energy enjoyed the largest increase for the week, beating Mount Gibson, Woodside Petroleum, Insurance Australia Group, Mineral Resources, 3P Learning, and others.

Reporting season genuinely gathers steam in the week ahead.

In the good books

AWE LIMITED (AWE) was upgraded to Equal-weight from Underweight by Morgan Stanley. B/H/S: 0/4/1. Morgan Stanley upgrades given the corporate approaches for the company. Target price is upgraded to $0.95 from $0.45. Industry view: In-Line.

BREVILLE GROUP LIMITED (BRG) was upgrade to Buy from Hold by Ord Minnett and to Outperform from Neutral by Credit Suisse. B/H/S: 2/2/0. Ord Minnett is projecting robust growth for H2, and acceleration in FY19 on the entry into new markets and successful launch of new products. Even the prospect of increased spending on marketing and R&D cannot temper their enthusiasm. Ord Minnett double upgrades and target price jumps to $15.60 from $11. First half results were ahead of Credit Suisse estimates. The broker has reviewed its thesis and notes sales growth is accelerating and the company is successfully cycling periods of strong launches of new product. Target is raised to $13.50 from $12.70.

CIMIC GROUP LIMITED (CIM) was upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 1/2/2 Credit Suisse expects 2018 net profit at the top end of guidance. The company is guiding for net profit of $720-780 million, up 3-11% on 2017.  A new analyst has assumed coverage of the stock and the target is raised to $45 from $28. The broker notes the tender pipeline is up 10% on 2017 and cash conversion remains solid.

GOODMAN GROUP (GMG) was upgraded to Buy from Hold by Deutsche Bank. B/H/S: 4/3/0.  First half earnings were ahead of Deutsche Bank, with strong growth from the management division. The broker had assumed an upgrade to guidance but this was higher than expected. FY18 guidance is for operating earnings growth of 8.0%.  Deutsche Bank upgrades to Buy from Hold following the results and raises the target to $8.52 from $8.31.

HEALTHSCOPE LIMITED (HSO) was upgraded to Neutral from Sell by Citi. B/H/S: 2/3/2. Healthscope’s first half fell short of the broker on most estimates but Citi upgrades the stock to Neutral from Sell, noting the sharp retreat in the share price and the likelihood of an improved performance in the second half. Target price rises to $1.80 from $1.70.

INSURANCE AUSTRALIA GROUP LIMITED (IAG) was upgraded to Buy from Hold by Deutsche Bank. B/H/S: 2/6/0. First half results were ahead of Deutsche Bank forecasts. Lower claims costs and long-tail reserve releases were the primary drivers of the beat to estimates. The company is putting its Asian franchise up for review and the broker suggests a return to focus on the Australasian markets would be considered a positive. Rating is upgraded to Buy from Hold and the target to $7.80 from $7.00. See also IAG downgrade.

NEWCREST MINING LIMITED (NCM) was upgraded to Equal-weight from Underweight by Morgan Stanley and Upgrade to Buy from Neutral by Citi. B/H/S: 1/4/3.  Morgan Stanley upgrades following the quarterly production report. The upgrade is driven by the view that there is minimal downside and this provides valuation support for the equity. Target is reduced to $20.75 from $22.00.  Attractive industry view.  The dividend surprised Citi analysts as it was fully franked. They believe better operating times lie ahead, supported by a more constructive outlook for gold. Cadia and Lihir should support increased gold production to 2020. Target price jumps to $27.10.

ORIGIN ENERGY LIMITED (ORG) was upgraded to Accumulate from Hold by Ord Minnett and to Buy from Neutral by UBS. B/H/S: 4/4/0. Underlying, reported net profit fell some 13% short of what Ord Minnett analysts had pencilled in. But the interim report also revealed better-than-expected margins in the electricity portfolio on top of higher than expected sales volumes in the company’s gas portfolio. Ord Minnett takes the positive from the fact all parts of the business are showing improvement. Price target remains untouched at $9.65. No dividends are expected before FY20. Following the recent decline in the share price UBS upgrades to Buy from Neutral as it expects lower forecast debt levels will lead to dividend reinstatement in FY19. UBS retains its $10.40 target.

REA GROUP LIMITED (REA) was upgraded to Neutral from Underperform by Macquarie. B/H/S: 1/6/1 First half earnings were up 21.4%. The broker recently downgraded to Underperform on valuation grounds but notes valuations have come back to some extent and this becomes a more reasonable entry point. To turn positive Macquarie would need to witness upside that can be generated from the upcoming price review, as well as growth in adjacencies and new products. Upgrade to Neutral. Target is steady at $74.

SANTOS LIMITED (STO) was upgraded to Neutral from Sell by Citi. B/H/S: 3/3/2.  The outlook is strong and management has demonstrated capital discipline. The stock appears to be fair value on Citi’s oil price deck but there is value upside if oil prices can shift sustainably higher. The broker upgrades to Neutral from Sell. Target is steady at $5.13.

SUNCORP GROUP LIMITED (SUN) upgraded to Add from Hold by Morgans and to Outperform from Neutral by Credit Suisse. B/H/S: 6/1/1. First half cash net profit was below expectations. The main disappointment for Morgans was a 2% decline in underlying insurance margin. The broker downgrades FY18 estimates for earnings per share by 12%. While acknowledging the flaws in the result, Morgans believes this is the low point. Significant reinsurance protections also support the second half. The broker envisages some value returning to the stock and upgrades to Add from Hold. Target is reduced to $14.31 from $14.46. First half earnings were also below Credit Suisse forecasts. Credit Suisse has avoided buying the value appeal ahead of the re-set and earnings disappointment. Now this is over, the valuation is too hard to ignore and the rating is upgraded to Outperform from Neutral. $14.50 target maintained.

WESTERN AREAS NL (WSA) was upgrading to Outperform from Neutral by Credit Suisse. B/H/S: 2/0/5.  Credit Suisse has revised nickel-based earnings estimates higher and upgrades the stock to Outperform from Neutral. Target is raised to $3.40 from $3.15. The company reports its first half result on February 20.

In the not-so-good books

COMPUTERSHARE LIMITED (CPU) was downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 0/6/2. First half results beat Credit Suisse estimates. The result was supported by strong transaction activity and organic growth. The company has upgraded FY18 guidance to growth of 12.5%. Tax guidance suggests there will be minimal benefits to a lower US tax rate and, with the share price up 35% over the last year Credit Suisse considers the stock fair value. Rating is downgraded to Neutral from Outperform. Target is raised to $17.60 from $15.00.

CSL LIMITED (CSL) was downgraded to Hold from Add by Morgans. B/H/S: 4/3/0. First half results were ahead of expectations, supported by a strong turnaround in Seqirus as well as strength in the Behring business. Immunoglobulin growth also impressed Morgans, against very tough comparables. The broker increases net profit estimates for FY18-20 by up to 4%, mainly on the back of higher sales. While considering the stock a core holding, the broker downgrades to Hold from Add, suggesting the upside is limited at current levels. Target is raised to $156.00 from $138.40.

INSURANCE AUSTRALIA GROUP LIMITED (IAG) was downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 2/6/0.  First half net profit was ahead of Credit Suisse forecasts. The company has increased its insurance margin guidance to 15.5-17.5% of net earned premium. The broker envisages upside to earnings but suggests that consensus expectations are catching up to its forecasts. Rating is downgraded to Neutral from Outperform. Target is $7.50. See also IAG upgrade.

MYER HOLDINGS LIMITED (MYR) was downgraded to Sell from Hold by Deutsche Bank and Downgrade to Sell from Neutral by Citi. B/H/S: 0/2/4. It may be tough for retailers at present but Deutsche Bank’s channel checks suggest Myer is underperforming peers. There is no obvious solution to halt the decline, the balance sheet is under pressure, and too many stores mean a big leasing cost. Downgrade to Sell. Target falls to 45c from 65c. First half guidance suggests to Citi that earnings have declined further, driven by a loss of sales and contraction in gross margin from elevated discounting. The broker observes Myer is facing tough decisions regarding the appropriate strategic direction. With high operating leverage, any further deterioration could result in a breach of debt covenants. Rating is downgraded to Sell from Neutral. Target is reduced to 50c from 68c.

PRAEMIUM LIMITED (PPS) was downgraded to Hold from Add by Morgans. B/H/S: 0/1/0 Praemium delivered strong margin growth in the first half as revenues outpaced expenses and UK losses shrunk considerably, Morgans notes, as economies of scale kicked in. Higher marketing and technology spend lead to reduced earnings forecasts. Praemium’s separately managed account (SMA) technology is regarded as one of the best platforms available, but a solid valuation requires a high level of revenue growth, Morgans notes. On recent share price strength, the broker pulls back to Hold from Add. Target rises to 69c from 55c.

SOUTH32 LIMITED (S32) was downgraded to Underperform from Neutral by Macquarie and Downgrade to Reduce from Hold by Morgans. B/H/S: 1/2/5.  South32 reported in line with forecasts and announced a special dividend, but FY guidance proved a major negative, Macquarie suggests, due to increased costs. Unit costs across various operations were 10-16% higher than expected. Downgrade to Underperform. Target falls to $3.10 from $3.70. First half results were softer than Morgans expected. The deteriorating economics of the company’s main assets troubles Morgans. The broker is also concerned that the company is now re-thinking its entire regional operating strategy. The broker was surprised by the special dividend. Rating is downgraded to Reduce from Hold. Target is reduced to $2.97 from $3.53.

SG FLEET GROUP LIMITED (SGF) was downgraded to Neutral from Buy by Citi. B/H/S: 1/2/0. Incremental growth is now harder to come by, the broker suggests, ambiguity remains regarding insurance, the heavy commercial fleet is experiencing weakness, and private sector novation is beholden to consumer sentiment. Target falls to $4.32 from $4.85.

VICINITY CENTRES (VCX) was downgraded to Neutral from Outperform by Macquarie. B/H/S: 3/3/0. First half results were in line with Macquarie’s forecasts. Despite the stock offering compelling value, with a 6.1% free cash flow yield and trading -11% below NTA, the broker downgrades to Neutral from Outperform and lowers the target price to $2.92 from $3.02.

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.

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.