In the good books
- Altium (ALU) was upgraded to Hold from Sell by Ord Minnett
First half results were very strong, supported by perpetual licence sales, particularly Altium Designer in China. Ord Minnett found operating leverage clearly evident. The broker notes management’s confident outlook regarding the FY20 revenue target of $200m. The broker materially upgrades cash flow forecasts and lifts the rating to Hold from Sell. Target is raised to $26.51 from $17.70.
- Baby Bunting (BBN) was upgraded to Outperform from Neutral by Macquarie
Macquarie found the first half results solid and in line with expectations. The likelihood of an upgrade has been reduced, although the broker believes the upper end of guidance is achievable. FY19 EBITDA guidance of $25-27m is reiterated. Macquarie upgrades to Outperform from Neutral and considers the recent weakness a buying opportunity. Target is raised to $2.65 from $2.25.
- Blackmores (BKL) was upgraded to Hold from Reduce by Morgans
Blackmore’s first-half result fell shy of the broker, thanks to a weak performance from China and a deterioration in second-quarter and third-quarter sales. Management guided to a weaker second half and Morgans slashes forecasts -12.9%, -13.4% and -14% across FY19/FY20/FY21. Target price falls to $86 from $107. Morgans upgrades to Hold from Reduce given the sharp retreat in the share price and notes the stock is still trading at a premium multiple to international peers despite its lower growth outlook. See downgrade below.
- Healius (HLS) was upgraded to Add from Hold by Morgans
Healius returned a soft first-half result, thanks to external conditions and one-offs but management guided to a strong second-half recovery. The broker spies several green shoots in the result and increases earnings forecasts for FY19-FY21 in anticipation of productivity initiatives and an improving earnings trajectory (pending market trends). The stock is upgraded to Add from Hold. Target price rises to $3.15 from $2.90.
- Link Administration (LNK) was upgraded to Accumulate from Hold by Ord Minnett
First half net profit was weaker than Ord Minnett expected. The broker believes there could be positive surprises in the near term, as PEXA gains traction and becomes a meaningful contributor. Moreover, pending legislation is likely to lead to super funds spending more on implementing regulatory changes. The broker upgrades to Accumulate from Hold and raises the target to $8 from $7.70. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan. See downgrade below
- 1300 Smiles (ONT) was upgraded to Add from Hold by Morgans
1300 Smiles’ solid first-half result met the broker. Morgans notes the stock is on track for FY19 and leaves forecasts unchanged but upgrades to Add from Hold noting the retreat in the share price. Target price is steady at $6.85.
- Seven West Media (SWM) was upgraded to Buy from Neutral by UBS
UBS suspects the market was ready for a softer TV ad market but a -5% decline in metro TV in the half and acceleration into January was worse than feared. Cost-outs only go part of the way and the broker has downgraded forecasts. UBS remains cautious on further downside risk but does note comparables will be easier in the FY given the cost of cricket is less than last year’s costs of Winter Olympics and tennis. Despite caution, the broker notes Seven West’s share price has halved from its peak on weaker ad sales and valuation suggests an upgrade to Buy from Neutral. Target falls to 60c from 80c.
- Virtus Health (VRT) was upgraded to Add from Hold by Morgans
Virtus Health’s first-half report outpaced the broker. Morgans eases net profit after tax forecasts -3.8%, -3.3% and -2.8% across FY19/FY20/FY21 to reflect lower margin assumptions, changing revenue mix and a higher capital expenditure interest charge, leaving Morgans sitting below consensus. Target price falls to $4.60 from $4.75. Morgans upgrades to Add from Hold, given the stock is trading at a -10% discount to valuation.
In the not-so-good books
- Abacus Property Group (ABP) was downgraded to Neutral from Buy by Citi
On Citi’s assessment, reported EPS proved a disappointment, but market consensus was positioned much lower. The underlying suggestion here is that Citi’s forecast was too high, but elsewhere peers would have received Abacus’ financial performance as a solid beat. The analysts remain firm supporters of management’s new strategy. But they also believe the share price has rallied too strongly, hence the downgrade to Neutral from Buy. Target falls to $3.87 from $3.91. Citi analysts explain their valuation remains largely immune from the reduction in forecasts, because higher asset values assist their Net Asset Value (NAV) valuation, largely offsetting lower earnings estimates.
- Arena REIT (ARF) was downgraded to Neutral from Outperform by Macquarie
First half results were in line with Macquarie’s estimates. FY19 distribution guidance has been reaffirmed. The broker notes management has executed on its strategy, while underlying conditions for the child care segment are benefiting from a change in the regulatory funding model. However, given limited returns, the broker downgrades to Neutral from Outperform. Target is reduced to $2.69 from $2.75.
- Blackmores (BKL) was downgraded to Neutral from Outperform by Macquarie
Macquarie was disappointed with the first half result, noting margins contracted. Guidance suggests this is likely to continue in the near term. The broker observes the company’s China business is in a state of flux and sales trends are weakening despite the stronger marketing investment. Leverage to structural tailwinds remains supportive and the broker envisages scope for improved execution. Rating is downgraded to Neutral from Outperform. Target is reduced to $95 from $150. See upgrade above
- Bank of Queensland (BOQ) was downgraded to Neutral from Outperform by Credit Suisse
The bank’s trading update has indicated cash earnings are likely to be in the range of $165-170m in the first half. The weaker-than-expected update is driven by a reduction in non-interest income. Credit Suisse was more disappointed with the outlook commentary for the second half, as market conditions are expected to remain challenging amid increased costs from regulatory requirements. The broker downgrades FY19-20 earnings estimates by -10-12%. Rating is reduced to Neutral from Outperform. Target is lowered to $9.69 from $11.40.
- Cochlear (COH) was downgraded to Neutral from Buy by Citi and to Underperform from Buy by Credit Suisse
Citi analysts found the interim release a “mixed” result. The key surprise is the impact felt by the launch of the AB HiResUltra3D Cochlear Implant in the USA by competitor Sonova. The analysts MedEl (another competitor) has had an MRI compatible product for years and it had little impact in the US market. Citi does anticipate a response from Cochlear through development of its own MRI compatible product. In the meantime, the analysts expect Cochlear to arrest further market share losses with existing products and marketing efforts. Estimates have been lowered by -2%-3%. Price target drops -5% to $190. Recommendation downgraded to Neutral from Buy. First half sales were below Credit Suisse estimates, affected by competition. The broker expects market share losses and increased competition will heat up in the second half and into FY20. Unit sales growth is expected to recover to around 6% in FY20. Factoring in weaker implant sales growth Credit Suisse reduces estimates by -2% for FY19. In an environment where the company is losing share and the stock is considered overvalued, Credit Suisse downgrades to Underperform from Neutral. Target is reduced to $168 from $195.
- Coles Group (COL) was downgraded to Lighten from Hold by Ord Minnett
First half results were below Ord Minnett’s forecasts with weak like-for-like sales growth and rising costs of doing business. As a result, the broker downgrades to Lighten from Hold. The challenges the retailer faces are worse than the broker had feared and several of these are structural. Target is reduced to $11.00 from $12.25.
- Domain Holdings (DHG) was downgraded to Neutral from Outperform by Macquarie
First half results were robust, given the weaker listings environment, Macquarie notes. Nevertheless, there are risks in the near term and the broker downgrades to Neutral from Outperform. Macquarie reduces FY19 estimates by -1.2% and raises FY20 estimates by 3.3%. Target is raised to $2.60 from $2.50.
- GWA Group (GWA) was downgraded to Neutral from Buy by Citi and to Neutral from Outperform by Credit Suisse
It’s not about you, it’s about the cycle and our concerns, such seems to be the message from Citi analysts post interim report release. The analysts make minor adjustments to forecasts only, but lower longer term forecasts out of concern about the housing cycle in Australia. The analysts do note, acquired Methven strengthens GWA’s innovation focus, with the NZ company carrying three of the six patented shower technologies globally, and GWA’s geographic footprint expands as well, but Citi prefers to wait on how all of this plays out. Downgrade to Neutral from Buy. Target drops to $3.26 from $3.69. FY19 guidance for a similar second half is in line with Credit Suisse estimates. The broker liked the first half result as bathrooms & kitchens revenue grew 2.6% in a flat market. Cash flow conversion was strong and the interim dividend was increased by 6%. The broker considers the stock fairly valued and downgrades to Neutral from Outperform. Target is reduced to $3.65 and $3.75.
- Helloworld (HLO) was downgraded to Hold from Add by Morgans
Helloworld’s first-half result met the broker and FY19 guidance for strong earnings growth was reiterated. Cash flow was weaker than expected. Morgans rates the stock and management well but downgrades to Hold from Add noting there is less than 10% upside to the target price. Target price rises to $5.85 from $5.75.
- Link Administration (LNK) was downgraded to Sell from Hold by Deutsche Bank
It is Deutsche Bank’s view that reported results were broadly in-line with expectations, but there was also weakness in the Australian operations. On that observation, the analysts have decided to downgrade to Sell from Hold, while cutting the price target to $6.30 from $7.20. Regulatory changes affecting funds management in Australia, among other factors, have Deutsche Bank worried about margin pressure in Australia over the next three years. See upgrade above.
- NIB Holdings (NHF) was downgraded to Underperform from Neutral by Credit Suisse and to Hold from Add by Morgans
First half results beat Credit Suisse estimates. FY19 guidance is increased, with underlying operating profit expected to be at least $195m. Given the recent recovery in the share price Credit Suisse downgrades to Underperform from Neutral, believing the PE premium is not justified. While management is doing a solid job in generating earnings growth, the broker believes the further away target margins become, the more risk there is of a correction. Target is steady at $4.90. NIB Holdings’ first-half result pleased the broker, thanks to a strong contribution from the Australian Residential Health Insurance business and upgraded 2019 guidance. Morgans increases FY19 earnings per share 1% but cuts FY20/FY21 by -7% to reflect more conservative margin estimates for ARHI. Target price eases to $6.18 from $6.37 and rating downgraded to Hold from Add, the broker noting the stock is trading at a relatively fair price-earnings multiple of 18x, thanks to recent share price weakness.
- Sandfire (SFR) was downgraded to Underperform from Neutral by Credit Suisse and to Neutral from Outperform by Macquarie
First half net profit was less than expected, largely because of higher exploration expenditure. FY19 guidance is unchanged. Gold prices remain above cost assumptions and support higher gold credits against copper costs, the broker observes. Credit Suisse downgrades to Underperform from Neutral on valuation grounds and reduces the target to $6.15 from $6.75. First half earnings were below Macquarie’s estimates because of higher exploration expense. The company is actively looking for acquisitions to solve its limited mine life and in the absence of a deal Macquarie struggles to find a positive catalyst. A lack of exploration success at DeGrussa is also a concern and the broker downgrades to Neutral from Outperform. Target is reduced to $7.80 from $8.10.
- Smartgroup (SIQ) was downgraded to Neutral from Outperform by Credit Suisse
While the company has demonstrated growth in novated leasing despite the weakness in new car sales, revenue growth in the 2018 results was weaker than Credit Suisse expected. The broker believes the company can continue to grow earnings but will carry reduced sales of extended warranties. Credit Suisse reduces estimates for earnings per share by -6% for 2019-20. Rating is downgraded to Neutral from Outperform and the target lowered to $9.50 from $12.10.
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.