In the good books

Coca-Cola Amatil (CCL) Limited Upgraded to Hold from Lighten by Ord Minnett B/H/S: 2/5/1

Ord Minnett reviews the business operations prior to the upcoming investor tour to Indonesia. The broker notes the performance of the fast-moving consumer goods segment has slowed despite the fact Indonesia is a developing market with strong growth potential. The broker upgrades to Hold from Lighten because of the share price performance and valuation support. Target is raised to $8.25 from $8.00.

Nine Entertainment Co. Holdings (NEC) Upgraded to Outperform from Underperform by Macquarie B/H/S: 2/2/1

The company has upgraded its FY18 guidance for operating earnings to the upper end of consensus estimates of $204-230m, a rise of 11.1% at the high point. Macquarie suggests the second half will be a little trickier for the business, as it faces competition from a locally-hosted Commonwealth Games as well as the Winter Olympics. Still, the company is executing well and has strong momentum and Macquarie upgrades to Outperform from Underperform. Target is increased to $1.65 from $1.40.

Tabcorp Holdings Limited (TAH) Upgraded to Buy from Sell by Citi B/H/S: 3/0/1

Citi finds compelling upside in Tabcorp, even in the absence of a merger with Tatts ((TTS)). The broker upgrades to Buy from Sell on the back of upgrades to wagering growth assumptions following recent improvement in the trends. The broker now expects wagering growth to accelerate from FY19. Target is raised to $5.25 and $3.95.

Iluka Resources Limited (ILU) Upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 3/2/2

Credit Suisse was impressed with the investor briefing, which included asset upgrades and confirmed a disciplined approach to capital allocation. The broker believes the company is well placed to capitalise on recovery in mineral sands prices. Rating is upgraded to Outperform from Neutral. Target is raised to $11.10 from $9.90.

In the not-so-good books

Abacus Property Group (ABP) Downgraded to Hold from Buy by Ord Minnett: B/H/S: 0/1/1

Ord Minnett observes the stock has performed strongly since November 2016, rising more than 55%. The broker notes strong direct property markets are conducive to the company’s business and, unlike many listed peers, Abacus is willing to sell assets to crystallise gains.  Further strong profit realisations are expected in FY18 and the broker raises the target to $3.80 from $3.70

AWE Limited (AWE) Downgraded to Neutral from Buy by Citi B/H/S: 0/4/2

Waitsia 2P reserves have been upgraded by 78%, exceeding Citi’s expectations. The broker believes the fact the company is yet to contract its phase 2 gas is indicative of a competitive Western Australian domestic gas market and therefore finds it difficult to believe the large increase in 2P would contribute to a phase 3 development.  The broker suspects marketing efforts are progressing slower than originally anticipated. Rating is downgraded to Neutral/High Risk from Buy/High Risk as the value proposition appears to be less compelling. Target is $0.60.

CSL Limited (CSL) Downgraded to Neutral from Buy by UBS B/H/S: 5/2/0

UBS expects that trading post the FY17 result has been sufficiently positive to support revised market estimates. Yet, with the stock price closing the value gap, and despite the mark-up on a gain in exchange rates, UBS believes the metrics warrant a downgrade to Neutral from Buy. Target is raised to $147 from $141.

Elders Limited (ELD) Downgraded to Hold from Add by Morgans B/H/S: 0/1/0

FY17 results beat expectations on all key metrics. Morgans believes the company is now firmly on a path to sustainable earnings growth out to FY20. The balance sheet has been restored to a position of strength and a dividend has been declared for the first time since FY08. Management remains confident of delivering 5-10% operating earnings growth out to FY20. Morgans upgrades forecasts by 10%. Given the stock is now trading within 10% of the new target of $6.00, up from $5.05.

Galaxy Resources Limited (GXY) Downgrade to Equal-weight from Overweight by Morgan Stanley B/H/S: 1/3/0

Recent moves in the share price now incorporate most of the opportunities on a risk-weighted basis, Morgan Stanley believes. Despite downgrading the stock to Equal-weight from Overweight the broker remains constructive on the industry, at least for the short-term. Attractive industry view retained. Target is raised to $3.80 from $3.00.

Healthscope Limited (HSO) Downgraded to Hold from Buy by Ord Minnett B/H/S: 3/3/1

In the light of weak data from APRA, Ord Minnett believes Healthscope will face greater margin pressure than previously expected. The broker reduces earnings estimates to reflect a weak start to the year and downgrades to Hold from Buy. Target is reduced to $1.95 from $2.00.

Incitec Pivot Limited (IPL) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 3/3/1

FY17 results were solid and Credit Suisse believes the $300m buyback should also provide some near-term support for the share price. Nevertheless, the broker considers the stock expensive, in a fertiliser market that is likely to weaken in FY18 amid company-specific headwinds. Rating is downgraded to Underperform from Neutral. Target is raised to $3.49 from $3.29.

Motorcycle Holdings Limited (MTO) Downgraded to Hold from Add by Morgans B/H/S: 0/1/0

The company recently acquired Cassons, an Australian importer and distributor of motorcycle apparel and accessories. Morgan Stanley believes the deal stacks up well by virtue of the accretion to earnings alone. The broker likes the fact that acquisition diversifies earnings away from motorcycle sales and provides the ability to gain wholesale margin via a vertical integration. Rating is downgraded to Hold from Add, as the stock has been duly rewarded by the market after this strongly accretive deal.  Target is raised to $5.41 from $4.37.

Orocobre Limited (ORE) Downgraded to Hold from Add by Morgans B/H/S: 3/2/1

Morgans interprets the stronger share price as a response to stronger lithium carbonate equivalent pricing amid expectations for a tighter market and short covering. The broker notes the company, with a 66.5% interest in the Olaroz lithium brine project, was the most shorted stock listed on the ASX through August/September 2017. The broker downgrades to Hold from Add, given the share price strength. Target is raised to $5.85 from $5.36.

Rea Group Limited (REA) Downgraded to Neutral from Buy by Citi B/H/S: 1/6/1

Earnings momentum has accelerated for REA Group and this has -predictably- triggered a rally in the share price, but Citi analysts nevertheless believe it has been too hard, too soon. While maintaining their $80 price target (the highest in the FNArena universe), the rating has been pulled back to Neutral from Buy. The analysts point out developer revenues grew modestly in 1Q as weaker market conditions were offset by the need for developers to advertise for longer periods to sell their projects. The same dynamic is anticipated for Residential revenues ahead. Target price is $80.00 Current Price is $76.41 Difference: $3.59

Rio Tinto Limited (RIO) Downgraded to Hold from Accumulate by Ord Minnett B/H/S: 5/3/0

Ord Minnett reviews its forecasts for the iron ore sector. The broker notes global growth is at its strongest level in seven years and Chinese data, although off the highs, remains robust. Despite being positive the broker downgrades it’s rating to Hold from Accumulate following Rio Tinto’s 25% re-rating in the year to date. The target is $75 and unchanged.

Saracen Mineral Holdings Limited (SAR) Downgraded to Sell from Neutral by Citi B/H/S: 1/0/1

Citi suggests the price appreciation has more than factored in the strength of the past year and downgrades to Sell from Neutral based on valuation. The broker expects limited production growth until mid 2019 and no sustained material improvement in costs. Target is raised to $1.38 from $1.35.

South32 Limited (S32) Downgraded to Equal-weight from Overweight by Morgan Stanley B/H/S: 1/6/1

Higher costs and lower metallurgical coal production have resulted in material cuts to Morgan Stanley’s estimates. FY18 is reduced by -8% and FY19 by -12%. As a result the broker now considers the stock fully valued and lowers the rating to Equal-weight from Overweight. Target is reduced to $3.40 from $3.50. Industry view is Attractive.

Xero Limited (XRO) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 1/1/3

Highlights from the first half included strong subscriber growth in Australia and continued ramp up in the UK. Credit Suisse is surprised that the company will consolidate its listing to the ASX. NZX trading will cease at the end of January. While adopting more optimistic forecast assumptions, Credit Suisse is still concerned the valuation is well shy of the current price and suspects the market is ascribing significant value to long-dated growth. Credit Suisse downgrades to Underperform from Neutral. Target rises to NZ$29.80 from NZ$23.50. Current Price is $27.65. Target price not assessed.

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