The final week of the February reporting season saw one deviation from prior months: total Hold/Neutral ratings for ASX-listed entities is now the largest group for the eight stockbrokerages monitored daily by FNArena.
This, of course, is the direct result of stockbroking analysts issuing decisively more downgrades than upgrades in their ratings for such stocks, with the index up double-digit percentage since late December, of which some 6% (incl dividends) were added in February.
For the week ending Friday 1 March 2019, FNArena counted 25 downgrades versus seven upgrades, taking the total tallies to respectively 43.06% Hold/Neutral ratings and 42.26% Buy ratings, with the remaining 14.68% on Sell. Only two of the seven upgrades did not move to Buy.
Only five of the 25 downgrades moved to Sell, and for some it was one of a number of downgrades received. Plenty of stocks received multiple downgrades during the week, ranging from Appen, Atlas Arteria, and OZ Minerals, to Ramsay Health Care. In all cases share prices went up and financial results have been released.
Among the fresh Sell ratings, we find NextDC, Costa Group, OZ Minerals, Seek, and Spark Infrastructure.
As is usual practice during reporting season, many amendments to consensus earnings forecasts, be it negative or positive, are nothing short of ginormous. NextDC, Atlas Arteria, Unibail-Rodamco-Westfield and Rio Tinto grabbed the honours on the positive side, whereas the heaviest reductions fell down upon Perseus Mining, Galaxy Resources, Automotive Holdings, and Spark Infrastructure.
This week will see the February flood of broker research come to a sudden and immediate stand still. Investors will continue to focus on macro events, while stocks going ex-dividend will continue to populate the calendar.
In the good books
- MICHAEL HILL INTERNATIONAL LIMITED (MHJ) was upgraded to Add from Hold by MorgansB/H/S: 3/1/0
First half results were ahead of forecasts. Morgans senses a change in momentum after a prolonged period of the company missing expectations, and makes material upgrades to forecasts for FY20 and FY21. The broker believes the cost-cutting program will underpin two years of solid growth and upgrades to Add from Hold. Target is raised to $0.78 from $0.62.
In the not-so-good books
- ATLAS ARTERIA (ALX) was downgraded to Hold from Add by Morgans, to Neutral from Buy by UBS, and to Neutral from Outperform by Credit SuisseB/H/S: 2/4/0
Morgans found no major surprises in the results as toll revenue had already been published. The broker was hoping for news about the removal of the Eiffarie debt amortisation, as this accounts for 8-9c per security of its FY20-21 distribution forecast. Of most concern to Morgans is a potential change of legislated tax rate reductions in France. The broker downgrades to Hold from Add, given recent strength in the share price. Target is reduced to $6.64 from $6.74.
2018 results revealed a doubling of cash flow that more than covered the distribution. UBS expects 2019 will be a year of transition as there are a number of traffic disruptions and temporarily elevated corporate costs. Guidance is for a 25% rise in the 2019 distribution to $0.30 per security, which reflects an expected 10% increase in cash flow from APRR. UBS downgrades to Neutral from Buy, given a period of strong outperformance and insufficient upside to valuation. Target is reduced to $6.90 from $7.10.
Credit Suisse lowers 2020 distribution growth forecasts to 10% from 23%, estimating there is a significant risk that Dulles Greenway may not pass the one-year debt test in December 2019. This would prevent distributions until 2021. Credit Suisse downgrades to Neutral from Outperform, having removed the option value for a favourable long-term toll regulation deal for Dulles Greenway. Target is lowered to $7.15 from $7.50.
- AUSTRALIA & NEW ZEALAND BANKING GROUP (ANZ) was downgraded to Neutral from Outperform by MacquarieB/H/S: 4/4/0
ANZ’s focus on expense management in a tough revenue environment and its leading capital position provide support, but Macquarie sees downside risk to forecasts given challenging revenue conditions, ongoing market share losses and RBNZ capital requirement uncertainty. The broker’s forecasts have been trimmed. Recent relative outperformance has taken ANZ back to its five-year PE average and its dividend yield down to a sector-low 5.8%. Macquarie downgrades to Neutral from Outperform, retaining a $28 target.
- COSTA GROUP HOLDINGS LIMITED (CGC) was downgraded to Lighten from Hold by Ord MinnettB/H/S: 3/1/0
2018 net profit was ahead of Ord Minnett’s forecast. The company may have a strong market position and good growth opportunities but the broker finds guidance for 30% growth in 2019, off a depressed year, below expectations. Forecasts for 2019 and 2020 are reduced by -5% and -2%, respectively. The broker believes the exposure to the uncertainties of agricultural supply/demand is not reflected in the premium valuation and downgrades to Lighten from Hold. Target is reduced to $4.69 from $4.74.
- CROMWELL PROPERTY GROUP (CMW) was downgraded to Hold from Accumulate by Ord MinnettB/H/S: 0/2/1
First half operating profit was below Ord Minnett’s forecast because of lower rental income and higher corporate costs. The company has maintained earnings guidance for FY19 of not less than 8c per share. Over time, Ord Minnett expects capital to be realised in the company’s office portfolio as assets are re-positioned and re-deployed into aged care or into Europe via co-investment. This is an opportunistic strategy that the company believes is justified by higher returns, although it carries increased complexity that the broker believes will not appeal to some investors. Rating is downgraded to Hold from Accumulate. Target rises to $1.13 from $1.10.
- NEXTDC LIMITED (NXT) was downgraded to Sell from Hold by Deutsche BankB/H/S: 4/2/1
Deutsche Bank observes the business is increasingly exposed to a concentration of buyers, lower returns on invested capital and an unpredictable sales cycle. Sales velocity appears to have decreased because of the more complex nature of hyper-scale contracts. The company is also incurring significant expenditure to achieve its growth ambitions, and this is leading to elevated debt and interest levels in the short term. The broker downgrades to Sell from Hold. Target is $5.50.
- OZ MINERALS LIMITED (OZL) was downgraded to Hold from Buy by Deutsche Bank, to Underperform from Neutral by Credit Suisse, and to Hold from Add by Morgans B/H/S: 3/4/1
2018 results beat Deutsche Bank estimates, driven by lower depreciation & amortisation. The broker had expected more detail on the progress at Carrapateena, given its importance in the portfolio. In updating 2019 assumptions and its views on copper, the broker observes the stock has outperformed peers and the copper price, downgrading to Hold from Buy. Target is $11.
Profit was less than Credit Suisse expected. The broker observes forensic analysis is required to unravel the company’s circuitous accounting. This diverts attention from cash and the outlook and Credit Suisse wonders how the board understands the accounts as presented. The broker notes Brazil is not yet materialising and the concentrate treatment plant project has been shelved. Credit Suisse downgrades to Underperform from Neutral. Target is $9.
Results were in line with expectations. Morgans observes the company continues to prudently manage its growth options. The focus is on re-affirming the construction schedule and budget for Carrapateena. Upside to the broker’s valuation has been reduced following a strong run up in the share price and the rating is downgraded to Hold from Add. Upon the full de-risking of Carrapateena the stock offers upside to valuation, the broker assesses. The target is raised to $11.40 from $10.75.
- RAMSAY HEALTH CARE LIMITED (RHC) was downgraded to Hold from Buy by Deutsche Bank and to Neutral from Buy by CitiB/H/S: 1/6/1
First half results pleased Deutsche Bank, demonstrating the Australian business can achieve decent revenue growth and margin expansion, while European profitability is improving.
The broker expects the company to benefit from increased tariffs in France and the UK, amid synergies from the Capio acquisition. The broker downgrades to Hold from Buy on valuation. Target is $64.90.
Ramsay delivered a solid result, in line with Citi’s forecast. Revenue growth in Australia suggests Ramsay continues to take market share and by continuing to invest in hospital capex, the company is attracting more doctors and driving market share gains, the broker notes. France surprised to the upside and weakness in the UK reduced in the Dec Quarter. Capio integration is now the focus, Citi believes, but could take time. On recent share price strength, the broker pulls back to Neutral from Buy. Target rises to $65.00 from $61.25.
- SEEK LIMITED (SEK) was downgraded to Sell from Neutral by UBSB/H/S: 2/3/2
First half results were in line with expectations and UBS envisages inherent risk to the second half if Australasian job volumes and the macro environment in China worsen. The broker cuts underlying estimates for earnings per share by -10% and downgrades to Sell from Neutral, reducing the target to $17.00 from $18.50.
- UNIBAIL-RODAMCO-WESTFIELD (URW) was downgraded to Hold from Accumulate by Ord MinnettB/H/S: 0/3/1
Ord Minnett has reassessed the prospects for the company. The focus on prime shopping centres in wealthy catchments is likely to mean the business is a long-term winner but the broker envisages few near-term catalysts in a tough retailing environment. Ord Minnett downgrades to Hold from Accumulate and lowers the target to $12.60 from $13.00. The broker notes 2019 earnings growth guidance was lowered for several reasons. The company is aiming to sell EUR4bn in property and the broker is unsure how much was incorporated in guidance.
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.
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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