In the good books

COMMONWEALTH BANK OF AUSTRALIA (CBA) Upgrade to Neutral from Sell by Citi .B/H/S: 0/7/1

The Q1 update was better than expected and Citi has pushed up its rating to Neutral from Sell. Target is raised to $76.75 from $76.50. The analysts are now of the view Australia’s number one bank looks to be in good shape, with enough capital momentum to absorb any likely penalty. See downgrade below.

UPGRADES

ECLIPX GROUP LIMITED (ECX) Upgrade to Buy from Neutral by Citi .B/H/S: 6/0/0

Citi notes the company continues to transform into a diversified financial services business, growing its B2B and B2C platforms. One lingering concern is that the diversification impresses complexity and reduced visibility. The broker upgrades to Buy from Neutral and increases the target to $4.82 from $4.25.

JANUS HENDERSON GROUP PLC. (JHG) Upgrade to Buy from Neutral by Citi .B/H/S: 4/1/0

It appears earnings missed expectations in the trading update but Citi analysts are of the view the combination of better flows and the strong performance of equity markets at present offers plenty of compensation. In addition, targeted merger synergies have been lifted to US$125m (still below Citi’s forecast of US$130m) by management and the analysts assume the market will see this as a positive. Citi sees Janus Henderson offering superior EPS growth vis-a-vis peers. Upgrade to Buy from Neutral. Target price lifts to US$39, which converts to $50.75 for Australian investors.

JAMES HARDIE INDUSTRIES N.V. (JHX) Upgrade to Buy from Neutral by Citi .B/H/S: 4/2/0

Citi analysts have decided to grant James Hardie the benefit of the doubt. The EBIT margin surprised in the face of cost headwinds, but competitors have been reporting solid volume growth, point out the analysts. If the stars align this year, this company’s margin may well surprise to the upside in FY19, suggest the analysts. Rating upgraded to Buy from Neutral. Target price lifts to $23 from $20.10.

VIRGIN AUSTRALIA HOLDINGS LIMITED (VAH) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/0/2

Credit Suisse observes capacity discipline appears to be resuming in the domestic airline market. The broker expects a rational approach to continue until the Virgin Australia balance sheet is solid. No decision on privatisation has been reached. The broker ascribes a two third probability to a privatisation outcome and upgrades to Outperform from Neutral. Target is raised to $0.26 from $0.20.

DOWNGRADES

ALTIUM LIMITED (ALU) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/2/0

Credit Suisse has downgraded to Neutral from Outperform while bumping up its price target to $12 from $9.50. The analysts explain the downgrade has been inspired by the incredibly strong share price rally in recent weeks.

COCHLEAR LIMITED (COH) Downgrade to Sell from Neutral by Citi .B/H/S: 0/3/3

Citi analysts agree with the market’s view there is ongoing upside bias to this year’s profit outlook, but the share price is simply too high. Hence the downgrade to Sell from Neutral, justified as “due to sky high valuation”. Citi highlights there are some risks still, and these are currently not accounted for in the share price rally. Price target lifts to $160 from $155.

COMMONWEALTH BANK OF AUSTRALIA (CBA) Downgrade to Hold from Add by Morgans .B/H/S: 0/7/1

CBA’s result showed an expansion in net interest margin despite the drag from the levy. Morgans has nevertheless reduced forecast earnings due to subdued loan growth. Capital stood at 10.1% at the end of the period. The sale of the life business will provide a boost but as the bank faces a possibly hefty fine post the Austrac investigation, “a cynic might suggest”, to use the broker’s words, the bank is deliberately slowing loan growth in order to reach APRA’s 10.5% requirement. $80 target retained, downgrade to Hold.

INGHAMS GROUP LIMITED (ING) Downgrade to Neutral from Buy by Citi .B/H/S: 4/2/0

Citi is now anticipating weaker poultry volume growth over the next 12 months supported by the view that red meat seems poised to take back market share from poultry given lower prices for red meat. On that basis earnings estimates have been pared back by -1-2% and the rating has been pulled back to Neutral from Buy. Target price drops -10c to $3.65.

MACQUARIE ATLAS ROADS GROUP (MQA) Downgrade to Hold from Add by Morgans .B/H/S: 1/4/0

Following Mac Atlas’ solid share price run, Morgans now pulls back to Hold, while noting this week’s APRR bond issue suggests the fund will be able to continue to access cheaper funding through to 2019. The next catalyst will be the French CPI result, which determines APRR toll increases. Target rises to $6.27 from $6.13.

MURRAY RIVER ORGANICS GROUP LIMITED (MRG) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

The difficult FY17 season has taken its toll on Murray River. Following a stocktake, the company will write-down -$4.3m of the value of its inventory. Morgans understands high-priced clusters suffered quality issues due to the weather and other factors. The result is a material reduction in the broker’s forecast earnings and a more conservative view going forward. Downgrade to Hold. On the positive side, an ex-Costa Group COO will take over as CEO. Target rises to 45c from 43c.

SANTOS LIMITED (STO) Downgrade to Sell from Neutral by UBS and Downgrade to Neutral from Buy by Citi .B/H/S: 4/2/2

UBS observes 2018 production guidance is marginally below 2017 while capital expenditure guidance is up 17% at the midpoint. The company is expecting a broadly flat output from its five key assets. Following the strong share price rally, Citi has pulled back its rating to Neutral from Buy. The analysts do highlight Santos remains their favourite exposure in the sector. Citi see potential blue-sky value of $6.47 from de-risking growth and delivering further cost-out, but also suggests this is likely to be a multi-year process. In the near term, the analysts continue to see risk to the price of crude oil. Target lifts to $4.71 from $4.30.

XERO LIMITED (XRO) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 1/2/1

The company’s first half results were in line with Macquarie’s forecasts. Xero has also announced its intention to de-list from the NZX. The company intends to focus its liquidity on one market, and the broker observes this should make trading the shares easier. Following a period of strong price appreciation the broker downgrades to Underperform from Neutral. An aggressive set of valuation assumptions does not generate the valuation that justifies a positive stance, Macquarie believes. Target is increased to NZ$30 from NZ$23.

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.

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.