In the good books

1. Aurizon Holdings (AZJ) was upgraded to Neutral from Sell by Citi and to Equal-weight from Underweight by Morgan Stanley

First half results revealed a decline in earnings from continuing operations of -16%. Citi forecasts underlying EBIT for the non-network business towards the mid-point of management’s guidance range of $390-430m. Citi revises FY19 estimates to reflect the fact Aurizon has chosen to account for the implementation of the UT5 decision in FY19, rather than extend the regulatory uncertainty further. The broker expects an 18% lift in underlying EBIT in FY20. As a result of the clearer outlook for the network earnings, the broker lifts its rating to Neutral from Sell and raises the target to $4.40 from $3.80.

As regulatory uncertainty recedes Morgan Stanley suspects the focus will now shift to the company’s legal and capital structure.

The broker envisages a modest upside risk from re-basing earnings. The company appears to have accepted the UT5 final decision and the broker expects FY19 consensus earnings estimates will be downgraded and, instead, FY20 and FY21 will be upgraded. Morgan Stanley upgrades to Equal-weight from Underweight and raises the target to $4.50 from $4.35. Industry view: Cautious.

See downgrade below.

2. Charter Hall Long WALE REIT (CLW) was upgraded to Hold from Lighten by Ord Minnett

First half results were ahead of estimates. The company has extended its lease to Inghams for the portfolio of chicken processing facilities to 25 years from 16 years. Ord Minnett estimates the asset’s capitalisation rate should firm to 6.5% from 7.25% on acquisition. This adds $0.07 to the net tangible assets per security and increases the weighted average lease expiry. As a result, Ord Minnett raises the rating to Hold from Lighten and the target to $4.25 from $4.10. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.

3. Lendlease (LLC) was upgraded to Buy from Neutral by UBS

UBS upgrades Lend Lease to Buy from Neutral, believing the stock to be undervalued given risks have fallen on troublesome projects. It also notes the company is not reliant on Australian residential markets given its global profile and institutional capital partners for all asset classes. UBS expects an announcement regarding the engineering business when the interim results are published on Friday.

4. Northern Star Resources (NST) was upgraded to Accumulate from Hold by Ord Minnett

Ord Minnett believes the market concern around grades is not a major issue and Kalgoorlie operations should reach FY19 guidance. Moreover, medium-term production opportunities could push Kalgoorlie towards 400,000 ounces of gold per annum. The broker also notes the recent update on Pogo, with December quarter mining rates up 22%, suggests the upside potential is greater than initially assumed. The broker upgrades to Accumulate from Hold and raises the target to $10.00 from $8.50.

5. Vocus Group (VOC) was upgraded to Overweight from Equal-weight by Morgan Stanley

Morgan Stanley has become bullish on the potential for market share gains in the Australian enterprise segment of Vocus. The broker considers Vocus a turnaround story, upgrading to Overweight from Equal-weight. While the broker acknowledges the enterprise segment is smaller, it is less competitive and offers sustainable higher margins than the consumer segment. Target is raised to $4.00 from $2.90. Industry view is In-Line.

In the not-so-good books

1. Amcor (AMC) was downgraded to Neutral from Outperform by Credit Suisse

First half results demonstrate to Credit Suisse that operations are on track. The broker maintains FY20 and FY21 estimates unchanged. FY19 estimates for earnings per share are reduced by -3% because of the delay in the closure of the Bemis transaction, relative to earlier expectations.

The recent rally in the share price has closed out excessive near-term returns, in the broker’s view, although fundamentals appears solid. Credit Suisse downgrades to Neutral from Outperform and raises the target to $14.90 from $14.80.

2. Aurizon Holdings (AZJ) was downgraded to Neutral from Outperform by Macquarie

First half results were ahead of expectations. The company has resolved the uncertainty around UT5 which Macquarie notes delivers a strong FY20 outlook, while lowering FY19 estimates. The broker considers the stock is trading at fair value and surprise on the upside is limited and downgrades to Neutral from Outperform. Target is reduced 4.5% to $4.45. See upgrades above.

3. Bendigo and Adelaide Bank (BEN) was downgraded to Sell from Neutral by Citi, to Underperform from Neutral by Credit Suisse, and to Sell from Neutral by UBS

Citi was disappointed with the first half result, which was weak despite a low bad debt expense. Revenue challenges are starting to mount, in the broker’s view. Meanwhile cost growth is unable to adjust to the slower revenue environment. The broker lowers FY19-21 cash estimates for earnings per share by -5-11%. Rating is downgraded to Sell from Neutral and the target lowered to $9.50 from $11.25.

Credit Suisse downgrades earnings estimates by up to -10% across the forecast horizon on the back of the first half results. The broker believes the bank will struggle to achieve earnings growth in the near term, given revenue pressures. Credit Suisse downgrades to Underperform from Neutral and reduces the target to $10.00 from $11.50.

Bendigo and Adelaide Bank’s first-half result missed the broker by 2% and UBS notes underlying trends deteriorated. Net interest margins remain under pressure, retail and wholesale deposits fell, gross loans were down, and costs were up. UBS downgrades earnings per share -4%/-9%/-8% across FY19/20/21. The stock is downgraded to Sell from Neutral.

4. Challenger (CGF) was downgraded to Sell from Hold by Deutsche Bank

Slowing sales, falling margins and mounting concerns regarding asset quality have caused Deutsche Bank to sharply revise forecasts lower. The broker reduces the target to $7.00 and downgrades to Sell from Hold.

5. Cochlear (COH) was downgraded to Equal-weight from Overweight by Morgan Stanley

The share price has risen 24% since November and is now trading around 12% above Morgan Stanley’s target. As the valuation does not adequately cover the short-term risks Morgan Stanley downgrades to Equal-weight from Overweight and raises the target to $176 from $175. The broker remains positive on the longer-term outlook, given the eventual evolution of the referral channel to a more retail setting, but notes short-term risks exist, such as a likely weighting to the second half for earnings, which implies a tough hurdle for FY19 guidance. In-Line industry view.

6. Downer EDI (DOW) was downgraded to Neutral from Outperform by Credit Suisse

First half net profit was below Credit Suisse forecasts. The broker is perplexed about the change in segment reporting, finding the rationale and lack of advance notice a problem. Credit Suisse lowers FY19 estimates by -7%, largely because of higher financing and tax expenses. Management also appears cautious on the potential pace of improvement at the Spotless business. Credit Suisse reduces the target to $7.40 from $8.25 and downgrades to Neutral from Outperform.

7. Flight Centre (FLT) was downgraded to Hold from Add by Morgans

Ahead of Flight Centre’s result release, Morgans notes recent data points to slowing demand for travel. The travel agent will not be immune to weaker discretionary spending and the broker notes weakness comes at a time cost pressures are mounting. The broker has decided to “err on the side of conservatism” and shift its forecast to the lower end of guidance, and downgrade to Hold from Add. Target falls to $47.75 from $51.00.

8. GPT (GPT) was downgraded to Neutral from Outperform by Macquarie

Macquarie downgrades to Neutral from Outperform after the 2018 result. The target is raised to $5.99 from $5.95. While attracted to the earnings growth in 2019 and the strong balance sheet, which is supported by the potential sale of MLC, the broker points to the difficult retail environment and limited shareholder returns. The broker observes the company is increasing its weighting to logistics but retail will still remain over 40% of capital.

9. Pact Group (PGH) was downgraded to Underperform from Neutral by Macquarie and to Reduce from Hold by Morgans

First half operating earnings (EBITDA) are now expected to be $110m and FY19 guidance is now lowered to $230-245m versus 245m previously. The company has had a challenging start to the year which includes significant cost headwinds and weaker demand conditions in some sectors.

Macquarie notes there appears to have been limited benefit from price reductions that have recently occurred in resin. The broker downgrades to Underperform from Neutral, highlighting concerns about the base business, and reduces the target to $3.40 from $3.72.

First half operating earnings (EBITDA) were -5% below Morgan’s forecasts. Management has downgraded guidance, affected by the uncertainty surrounding the speed with which revenue and efficiency projects can be delivered and the rate that input costs can be recovered.

The aspect of most concern to Morgans is that resin prices have moved in the company’s favour over the past four months, which implies the underlying business remains very weak. The broker suggests investors avoid the stock until the company can demonstrate more stable earnings, and downgrades to Reduce from Hold. Target is lowered to $3.01 from $3.24.

10. Stockland (SGP) was downgraded to Sell from Neutral by UBS

UBS has downgraded Stockland to Sell from Neutral ahead of its first half result, which the broker expects will reflect the slowdown in the residential, retail and retirement markets. The broker sees no respite in the market situation and expects deterioration across all core business through FY19. Target price falls to $3.60 from $3.74.

11. Spark Infrastructure Group (SKI) was downgraded to Hold from Accumulate by Ord Minnett

The Federal Court has found in the Australian Taxation Office’s favour regarding the litigation with Victoria Power Networks. Ord Minnett believes the biggest negative is a downgrade to 2019 dividend guidance. This likely reflects the broader issue, in the broker’s view, of distribution network providers funding growth opportunities in unregulated assets while maximising cash returns to investors.

Rating is downgraded to Hold from Accumulate on the target trimmed to $2.50 from $2.55. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.

12. Super Retail Group (SUL) was downgraded to Hold from Add by Morgans

First half results appear ahead of forecasts but overshadowed by further wage underpayments issues, which Morgans notes are significant. The full result is due on February 14. The broker lowers estimates by -1-2% in the forecast years and also lowers capital expenditure assumptions. The broker recognises the undemanding valuation but awaits further clarity on the incoming CEO’s strategy. Rating is downgraded to Hold from Add and the target raised to $8.56 from $8.54.

The above was compiled from reports on FN Arena. 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.