In the good books
- Australian Finance Group (AFG) was upgraded to Outperform from Neutral by Macquarie
First half net profit was in line with Macquarie’s estimates. The broker considers the valuation is now attractive as political/regulatory risk appears to have eased. Forecasts reflect probable broker remuneration changes as well as negative mortgage settlement activity extending through FY20. Macquarie assumes mortgage settlement activity remains negative until FY21, which drives downgrades to estimates of earnings per share of -26.3% in FY20. Rating is upgraded to Outperform from Neutral and the target is raised to $1.48 from $1.17.
- Automotive Holdings Group (AHG) was upgraded to Neutral from Underperform by Macquarie
First half results were weaker than Macquarie expected. While the broker envisages downside risk to guidance concerns over the balance sheet have diminished as costs are being controlled. FY19 net profit guidance is revised lower, to $52-56m. The company expects a second half recovery but the earnings skew is inconsistent with history, in the broker’s view. Macquarie upgrades to Neutral from Underperform, given the improved balance sheet. Target is raised to $1.95 from $1.50.
- FlexiGroup (FXL) was upgraded to Buy from Hold by Deutsche Bank
Cash net profit fell sharply in the first half, largely because of an impairment in the vendor finance book. Certegy was a highlight while cards continue to be a drag, Deutsche Bank observes. Still, despite profit declines, the company appears to be entrenched in consumer finance and should generate more cash than listed finance peers that are valued on significantly higher multiples, in the broker’s view. Given strong valuation support and the upside risk from new initiatives the broker upgrades to Buy from Hold. Target is $1.80.
- Myer (MYR) was upgraded to Neutral from Sell by UBS
Myer has underperformed the index by -18% over the past three months, UBS notes, due to market concern over weak Christmas trading. Yet retail company reports this season suggest that while tough, Christmas was not as bad as feared. Moreover, Myer is making good progress on handing back floor space and landlords are becoming more prepared to accept rental reductions. And most importantly, Myer has not provided a trading update (Read: profit warning). UBS thus upgrades to Neutral. Target unchanged at 38c.
- Treasury Wine Estates (TWE) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett reviews its valuation of Treasury Wine Estates, noting since the first half result the share price has fallen -11.7%. Yet significant earnings (EBITS) growth is forecast. Now, cash conversion and the concerns over the agricultural cycle are better reflected in the share price. As the risk/reward equation is more attractive the broker upgrades to Accumulate from Hold. Target is steady $17.50. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
- WiseTech Global (WTC) was upgraded to Buy from Neutral by Citi
Citi’s upgrade to Buy from Neutral following a -24% fall in the share price over the past seven days. In addition, the analysts believe the latest acquisition (of Containerchain) “appears to be highly strategic” for the company. Forecast FY19 revenue growth of $114m (51%) is split 23% organic and 28% acquisitive, the analysts explain, Target price lifts to $21.31 from $21.09.
In the not-so-good books
- Appen (APX) was downgraded to Neutral from Buy by Citi and UBS
Appen’s 2018 financial performance seems to have beaten expectations, but Citi, in firm reference to the 75% share price rally year-to-date, downgrades to Neutral from Buy. The analysts have added 18%-20% to forecasts. The combination Appen-Leapforce has potential to become the ultimate “winner” in the global race for analytics, state the analysts. Target price lifts to $23.29 from $17.31. Citi analysts add the suggestion that management’s guidance for 2019 might yet prove conservative. DPS estimates have been lowered.
Appen delivered an exceptionally strong result in UBS’s view, 10% above forecast. FY19-21 guidance has been upgraded by 10-20% and thereafter in excess of 20%. The broker believes FY19 guidance looks conservative on current momentum, noting the company’s leading market position will allow it to leverage accelerating global investment in AI. That said, the broker has raised its target to $24 from $16 but downgrades to Neutral from Buy, noting the stock has gained 90% in a quarter compared to a 30% increase in sector multiple.
- Charter Hall Group (CHC) was downgraded to Hold from Accumulate by Ord Minnett
First half results were in line with Ord Minnett’s forecasts. Ord Minnett estimates funds management operating margins rose by 770 basis points over the past 12 months, to 57%. The potential for increasing economies of scale is relatively strong, the broker suggests. The share price has risen 18% over the past four weeks in anticipation of stronger earnings and now appears fair value. Rating is downgraded to Hold from Accumulate. To reflect higher forecast medium-term earnings because of a reduced need for external capital, as well as a higher operating margins, the target is raised to $9.00 from $8.75. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
- Caltex Australia (CTX) was downgraded to Hold from Buy by Deutsche Bank
Deutsche Bank observes convenience store targets are looking tougher to attain. The broker expects the current low fuel price will support retail fuel margins and refining margins will eventually revert. However, the departure of the general manager of convenience makes the broker less confident about the uplift target from the transformation. The broker believes Viva Energy ((VEA)) is a better way to play the thematic as it has market share opportunity. Rating is downgraded to Hold from Buy. Target is reduced to $27.50 from $28.00.
- G8 Education (GEM) was downgraded to Hold from Add by Morgans
2018 results were in line with guidance. Morgans observes occupancy in the year to date is up around 2% but excess supply continues to make for a challenging market. The company has reiterated a medium-term occupancy target of 81%. Morgans downgrades to Hold from Add as the total shareholder returns are under 10%. Target is raised to $3.16 from $3.04.
- Huon Aquaculture Group (HUO) was downgraded to Hold from Buy by Ord Minnett
First half operating earnings (EBITDA) were below Ord Minnett’s forecasts. FY19 volume guidance of 20,000t is unchanged. Guidance requires flat production costs for the second half, which the broker suspects could be challenging. Ord Minnett reduces FY19 and FY20 earnings forecasts by -24% and -14% respectively. The broker believes the company is well invested, but there are risks to forecasts from higher production costs in the near term and lower wholesale prices in the longer term. Rating is downgraded to Hold from Buy. Target is lowered to $4.40 from $5.41. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
- Kelly Partners Group Holdings (KPG) was downgraded to Hold from Add by Morgans
First half net profit was weaker than expected. The Sydney CBD business underperformed. The company has provided net profit guidance for FY19 of $4m. Morgans downgrades to Hold from Add, suspecting management has contained the underperforming business but will need to deliver on guidance and organic growth into FY20 to restore confidence. Target is reduced to $1.08 from $1.65.
- Speedcast International (SDA) was downgraded to Neutral from Outperform by Credit Suisse
2018 results were in line with downgraded expectations. Credit Suisse expects the company will need to deliver some organic growth in 2019 in order to obtain a re-rating. The broker, which changes analyst coverage with this report, is also concerned about elevated gearing and downgrades to Neutral from Outperform. The broker is pleased the company has acknowledged investor reservation and committed to de-leveraging. Target is reduced to $3.70 from $5.50.
- Stockland (SGP) was downgraded to Hold from Accumulate by Ord Minnett
First half funds from operations were well below Ord Minnett’s forecasts, driven by weaker residential earnings and retail operating income. The broker downgrades forecasts by -3.5% in FY19 and -6% in FY20, based on lower assumed residential and retail earnings. Because of uncertainty and risks with additional asset sales and re-positioning of the portfolio, the broker downgrades to Hold from Accumulate. Target is reduced to $3.80 from $4.30. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
- Spark Infrastructure Group (SKI) was downgraded to Underweight from Equal-weight by Morgan Stanley
Morgan Stanley believes compressed regulatory returns and tax uncertainty have reduced the stock’s relative appeal and downgrades to Underweight from Equal-weight. The 2018 performance was in line with the broker’s estimates but the risks are considered skewed to the downside going forward. Target is reduced to $2.28 from $2.43. Industry view is Cautious.
- Superloop (SLC) was downgraded to Hold from Buy by Deutsche Bank
Deutsche Bank is concerned the continued lack of sales momentum on Superloop’s HK and Australian networks is concerning. Management’s plans to focus on the core network and broadband businesses is a step in the right direction, find the analysts, but also a step back, nevertheless. Deutsche Bank has downgraded to Hold from Buy. The analysts suggest it will take time for this company to demonstrate traction on the new strategy. New price target of $1.28 compares with $2.80 in August last year.
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.
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