The Australian share market has started the new calendar year in pretty much the same fashion as it travelled through 2017; brokers are issuing more downgrades than upgrades while main indices continue to lag international peers, but underlying the trend in earnings estimates remains solid and positive, albeit mostly carried by miners and energy companies.
Plus ça change, plus c’est la même chose.
The table for positive changes to earnings estimates is heavily overweighted by resources stocks and it shows via big increases with iron ore miner Mount Gibson on top, followed by Ardent Leisure and then a whole raft of mining stocks. The flipside shows more variety, but also much smaller amendments, with Tabcorp leading the negative side, followed by Beach Energy, Michael Hill and Graincorp.
The week ahead brings us the first corporate financial results ahead of the busy February reporting season, alongside continued December quarter production updates from miners and oil and gas producers. It appears local investors are once again adopting a cautious approach while awaiting further developments.
In the good books
FLIGHT CENTRE LIMITED (FLT) was upgraded to Buy from Neutral by UBS. Buy/Hold/Sell: 2/2/4 . UBS lifts FY18-21 estimates for earnings per share by 5-10%. The broker is more confident in the 3-5 year gross profit targets. Estimates are also closer to the company’s target for 7% transaction growth and 2% pre-tax profit margin in FY20. On the medium-term view, the broker believes Flight Centre is well-placed to outperform and upgrades to Buy from Neutral. Target is lifted to $53.60 from $47.50.
OROCOBRE LIMITED (ORE) was upgraded to Neutral from Underperform by Macquarie and to Add from Hold by Morgans. Buy/Hold/Sell: 2/3/1. Although the company has solved funding problems for stage 2 and the hydroxide plant, with its placement to Toyota Tsusho along with an entitlement offer, Macquarie points out this comes with two large caveats. The first is that management broke a promise in 2017 that it would not raise capital. The second is the implied acknowledgement that stage 2 was underestimated. Still, the broker notes the placement at a premium highlights a belief that lithium prices will be higher for longer. Target is raised to $7.35 from $6.50. Despite recent share price strength Morgans also upgrades to Add from Hold. Target is lifted to $8.17 from $6.84.
See also ORE downgrade.
WHITEHAVEN COAL LIMITED (WHC) was upgraded to Outperform from Neutral by Credit Suisse. Buy/Hold/Sell: 3/2/3. While December quarter production missed expectations, Credit Suisse suggests this may have overshadowed the fact that FY19 and FY20 guidance was actually upgraded for Narrabri. The broker’s new thermal coal price estimates, up 17% in 2018 and 24% in 2019, have now materially affected the numbers being crunched for Whitehaven Coal. While a reversion in coal prices is a risk, with spot still well north of forecasts and more dividends to come, the broker moves back to Outperform from Neutral. Target is raised to $4.60 from $3.40.
See also WHC downgrade.
In the not-so-good books
APN OUTDOOR GROUP LIMITED (APO) was downgrade to Neutral from Buy by UBS. Buy/Hold/Sell: 3/3/0. The downgrade is motivated by trying to balance the positives (new experienced CEO and still positive industry growth) with the negatives of increasing competition for contracts and a slowing in industry growth recently. The company is scheduled to report 2017 results on Feb 20. Short term, UBS is not expecting much in terms of earnings growth as the company needs to absorb the loss of the Yarra Trams contract. Target remains $4.75.
OROCOBRE LIMITED (ORE) was downgraded to Neutral from Buy by Citi. Buy/Hold/Sell: 2/3/1. The company is raising $361 million through a $282 million strategic placement to Toyota Tsusho and $79 million from a one-for-20 accelerated renounceable entitlement offer. Toyota Tsusho will be a 15% shareholder, entitled to nominate one director and appointed as a sales representative for stage 2. Funds will be applied to an expansion of Olaroz. The share price appreciation has caused Citi to downgrade its rating to Neutral from Buy.The target is raised to $7.70 from $5.50.
See also ORE upgrade.
OZ MINERALS LIMITED (OZL) was downgraded to Hold from Add by Morgans and Neutral by UBS. Buy/Hold/Sell: 3/5/0. In the wake of the December quarter production numbers and higher copper prices, Morgans makes material upgrades to forecasts. The broker believes several approaching catalysts, including the anticipated receipt of the Carrapateena mining lease and an update on Prominent Hill’s long-term power strategy, have potential to create interest in coming months. The stock remains a preferred copper exposure but the broker downgrades to Hold from Add following recent price strength. Target rises to $9.40 from $8.87.
Performance during the December quarter has surprised in a positive sense and UBS analysts observe management has upgraded guidances for copper volumes, with costs surprising to the downside (which is a positive). UBS says it recently downgraded to Neutral from Buy as the shares are considered more fair value at current level. Price target is $9.73.
ST BARBARA LIMITED (SBM) was downgraded to Hold from Buy by Deutsche Bank. Buy/Hold/Sell: 2/2/1. Deutsche Bank notes commodities are trading well above historical real averages and marginal cost. Yet, global demand should continue to improve despite a softening in the Chinese property market. Deutsche Bank finds base metals more attractive than the bulk miners. Deutsche Bank raises the target to $3.40 from $3.20 and downgrades St Barbara to Hold from Buy on valuation.
VOCUS COMMUNICATIONS LIMITED (VOC) was downgraded to Underperform from Neutral by Macquarie. Buy/Hold/Sell: 1/6/1. Macquarie expects competition to remain intense across mobile and fixed telecoms. The broker observes the company has stabilised some parts of its operations but continues to operate in a highly competitive and capital-intensive market and this presents ongoing challenges. Target is lifted to $3.05 from $2.95.
WHITEHAVEN COAL LIMITED (WHC) was downgraded to Sell from Neutral by Citi. Buy/Hold/Sell: 3/2/3 December quarter production missed Citi’s estimates and the rating is downgraded to Sell from Neutral. Target is raised to $4.20 from $4.00 as a result of marking to market coal prices, offsetting lower FY18 production and higher costs for Narrabri. The main risk to the recommendation, in the broker’s view, is if thermal coal prices, which are at US$107/t, remain above Citi’s forecasts for US$89/t in 2018 and US$75/t in 2019.
See also WHC upgrade.
Earnings’ forecasts
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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