Upgrades:

APA Group (APA) Upgraded from Neutral to Sell by Citi: B/H/S:  3/2/2

Citi is cautious about Australian utilities because of macro and competitive headwinds that create uncertainty. These include any remaining political intervention risk, interest rates, the entry of Alinta into the market as well as commodity markets. For the regulated utilities, given the outlook is relatively benign and Citi is not materially bearish on interest rates, value appears to have emerged and APA is upgraded to Neutral from Sell. Target is raised to $8.18 from $8.01.

AP Eagers Limited (APE) Upgraded to Add from Hold by Morgans B/H/S:  1/2/1

While trading remains difficult, Morgans believes AP Eagers is now better placed to grow earnings in 2018 thanks to a restructured base business and likely increase in acquisitions, among other factors. Rating upgraded to Add ahead of results season. Target unchanged at $9.10.

Beacon Lighting Group Limited (BLX) Upgraded to Add from Hold B/H/S:  2/0/0

Morgans believes FY18 will mark a return to strong earnings growth for Beacon following a year impacted by the demise of Masters and subsequent stock clearance. It is of no surprise Beacon has stepped up its store rollout following what may be a once in a lifetime opportunity. Upgrade to Add. Target rises to $1.77 from $1.56.

Commonwealth Bank of Australia (CBA) Upgraded to Add from Hold by Morgans B/H/S:  1/5/2

Morgans believes earnings risk is to the upside for the majors over the next twelve months as regulatory risk subsides, bad debts remain benign and strong balance sheets present capital return opportunities. The broker has an Add rating now on all four, having upgraded CBA. Target rises to $81.50 from $80.00.

Credit Corp Group Limited (CCP) Upgraded to Add from Hold by Morgans B/H/S:  1/1/0

First half net profit grew 18.2% and full year guidance is confirmed at $62-64m, up 12-16%. Morgans considers the company’s growth strategies provide a solid and visible earnings outlook over FY18-21. Moreover, the group should be able to sustain a premium to historical PE given the growth profile as well as a substantial opportunity via the US business. Morgans upgrades to Add from Hold. Target is reduced to $23.60 from $23.80.

G.U.D Holdings (GUD Upgraded to Outperform from Neutral by Macquarie B/H/S:  2/2/1

GUD’s result beat Macquarie by 12% on earnings and 11% on revenue, thanks to a strong auto result and lower interest expense. Debt reduction is ongoing. GUD is well positioned to leverage its scale and leading position in auto, the broker suggests, and a large pipeline of acquisition targets supports earnings forecasts. A 5% discount to FY19 market PE is unjustified, Macquarie suggests. Upgrade to Outperform. Target rises to $13.50 from $11.36.

Incitec Pivot Limited (IPL) Upgraded to Neutral from Underperform by Credit Suisse B/H/S:  2/2/1

Credit Suisse suspects the story for Incitec Pivot could become more interesting mid-year with more certainty on Gibson Island and Australian explosives contract losses, as well as a more realistic assessment of fertiliser prices. Nevertheless, the broker finds the growth options not nearly as visible. Rating is upgraded to Neutral from Underperform on share price weakness. Target is raised to $3.67 from $3.49.

Lovisa (LOV) Upgraded to Add from Hold by Morgans B/H/S:  2/1/0

Morgans has rolled forward its earnings forecasts for Lovisa ahead of results season, leading to a target increase to $7.84 from $7.82. The recent share price pullback leads to an upgrade to Add.

Spark Infrastructure Group (SKI) Upgraded to Buy from Neutral by Citi B/H/S: 3/3/1

Citi is cautious about Australian utilities because of macro and competitive headwinds that create uncertainty. These include any remaining political intervention risk, interest rates, the entry of Alinta into the market as well as commodity markets. For the regulated utilities, given the outlook is relatively benign and Citi is not materially bearish on interest rates, value appears to have emerged. The broker prefers Spark Infrastructure in this segment and upgrades to Buy from Neutral. Target is reduced to $2.55 from $2.60.

Westpac Banking Corporation (WBC) Upgraded to Accumulate from Hold by Ord Minnett B/H/S:  5/3/0

Capital management is an emerging theme and this should assist Ord Minnett’s preferred banking stocks – Westpac and ANZ (ANZ). Westpac is upgraded to Accumulate from Hold. The sector faces challenges, such as competitive threats and stretched households, but the broker believes a strong market structure and improving economic environment will allow the banks to manage the pressures. Target is raised to $33.10 from $33.00.

Downgrades

Automotive Holdings Group (AHG) downgraded to Hold from Add by Morgans B/H/S:  5/2/0

Auto Holdings’ outlook is centred on the divestment of its cold logistics business, Morgans suggests, given there is a risk the divestment will not proceed, the broker has moved to Hold and applied a valuation discount. Target falls to $3.84 from $4.04.

AWE Limited (AWE) Downgraded to Neutral from Outperform by Credit Suisse B/H/S:  0/4/1

The company has received its third takeover bid, this time from Mitsui at $0.95 a share. The bid is conditional on the termination of the scheme with Mineral Resources ((MIN)). AWE is still evaluating the bid but Credit Suisse assumes it will move to a recommendation. The broker considers Mitsui the most credible and credentialed player to have bid for AWE at this stage. The broker believes AWE shareholders have now been handsomely rewarded for their patience and more value could be added by redeploying the money, rather than awaiting an improved or counter bid. The broker believes Senex Energy ((SXY)) offers this sort of value and has been surprised at the lack of reaction in the Senex share price to the heightened bid activity at AWE. Credit Suisse downgrades to Neutral from Outperform. Target is set at 95c.

Credit Corp Group Limited (CCP) Downgraded to Hold from Accumulate by Ord Minnett B/H/S:  1/1/0

First half net profit was slightly below Ord Minnett’s forecast. The company has retained guidance for net profit in FY18 of $62-64m, representing 12-16% growth. Ord Minnett is impressed by management’s positioning of the company as well as the diversity of the business and notes, while the earnings outlook is robust, the recent strength in the share price means the stock is now trading much closer to a market multiple. The broker downgrades to Hold from Accumulate. Target is raised to $22 from $21.

Sandfire Resources NL (SFR) Downgraded to Sell from Neutral by Citi B/H/S:  1/6/1

Sandfire’s Dec Q was solid, featuring an increase in copper production. This result and a grade increase in the second half should ensure guidance is met, Citi suggests. However the market is factoring in too much exploration success for the broker’s liking. With DeGrussa upside already priced in, Citi downgrades to Sell. Target falls to $6.80 from $7.10.

Super Retail Group Limited (SUL) Downgraded to Hold from Add by Morgans B/H/S:  5/2/1

Morgans has rolled forward its earnings forecasts for Super Retail ahead of results season, leading to a target increase to $9.58 from $9.00. The recent rally in the stock following Christmas leads the broker to pull back to Hold. Target price is $9.58 Current Price is $8.74 Difference: $0.84

Virgin Australia Holdings (VAH) Downgraded to Neutral from Outperform by Credit Suisse B/H/S:  0/1/2

Credit Suisse expects a strong first half when the company reports on February 28. The broker notes yields on HNA bonds spiked to 18% and share trading in seven of its 16 subsidiaries is suspended. As the company owns 19.8% of Virgin Australia, it could be a seller, Credit Suisse suggests. The broker downgrades to Neutral from Outperform and reduces the target to $0.25 from $0.26. Previously, Credit Suisse included a 33% probability the major holders of stock would take the company private at 29.5c per share but given the financial challenges at HNA, and at other major stakeholders, this appears less likely.

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