In the good books
1. Charter Hall Group (CHC) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett raises estimates, expecting operating margins in funds management to increase to 53% over the next five years. The broker believes the potential for increased economies of scale is strong and the company also enjoys a favourable portfolio composition. Charter Hall is also becoming more capital efficient and there should be enough cash to sponsor the growth of the funds business. Rating is upgraded to Accumulate from Hold and the target is raised to $9.75 from $9.00. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
2. Cochlear (COH) was upgraded to Buy from Neutral by Citi
Citi downgraded to Neutral on February 20, but has now used a general sector update to reverse that decision on the basis of share price weakness that has gone too far, in the analysts’ view. Underpinning the decision to upgrade to Buy from Neutral is the prediction (conviction?) that the market share issue in the Americas will be resolved, and implant growth will resume in 2H20. Target price lifts to $198 from $190 on slightly higher forecasts.
3. Fortescue Metals Group (FMG) was upgraded to Buy from Hold by Ord Minnett
Ord Minnett raises assumptions for iron ore prices and now expects the disruption to Vale’s production to last for around three years, post the most-recent tailings dam disaster and the acceleration of government shutdowns of a number of dams. The broker believes the stars now align for lower-grade iron ore, with compressed discounts in a rising market. Spot prices for the Fortescue blend are US$70/t, only a -17% discount to the 62% iron benchmark. The broker believes investors can still make money buying the stock, despite a strong rally in the year to date. This leads to an upgrade to Buy from Hold and an increase in the target to $7.30 from $6.70. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
4. Nufarm (NUF) was upgraded to Buy from Hold by Deutsche Bank
After upgrading to Hold in January Deutsche Bank has now upgraded Nufarm to Buy, as the stock is now trading at a -16% discount to valuation. The broker’s valuation does not yet ascribe any value to Omega-3 canola and some delay for the acquired earnings to flow has also been allowed. Nufarm is now trading at a -23% discount to the 10-year average of the one-year forward relative operating earnings (EBITDA) multiple, and at a -20% discount on a relative PE multiple basis.
 5. Shopping Centres Australasia Property Group (SCP) was upgraded to Neutral from Underperform by Credit Suisse
Following the decline in the share price Credit Suisse now believes the stock is trading at fair value and upgrades to Neutral from Underperform. Target is steady at $2.25.
 6. Village Roadshow (VRL) was upgraded to Outperform from Neutral by Macquarie
Macquarie finds positive momentum as the company turns around its business and executes on key initiatives. In theme parks, price increases and channel management drove a 34%-plus increase in ticket yield, offsetting declines in attendance. Stronger second half earnings are also expected in cinema. The broker assesses the stock is “under-owned” at an institutional level because of historical governance concerns. Hence, there is an opportunity for incremental buying over time, supported by restoration of the balance sheet. Macquarie upgrades to Outperform from Neutral and raises the target to $3.80 from $2.00.
In the not-so-good books
1. ANZ Bank (ANZ) was downgraded to Neutral from Buy by Citi
Citi analysts have used a general sector review to downgrade ANZ Bank to Neutral from Buy, with a slightly reduced price target of $30 (-50c). Earnings estimates have been lowered. Citi’s updated view is now that ANZ Bank is facing a prolonged period of revenue weakness. This, coupled with a likely pause in capital returns, implies the bank lacks positive catalysts on a 12 month view, explain the analysts. Citi’s sector pecking order is now Westpac (WBC) and National Australia Bank (NAB) on top as most preferred, followed by ANZ Bank and CommBank (CBA).
 2. CIMIC Group (CIM) was downgraded to Neutral from Outperform by Macquarie
Macquarie downgrades to Neutral from Outperform as the stock is now trading close to its target. The broker believes the share price has also caught up with the traditional correlation to earnings. Target is raised to $50.90 from $50.26. Macquarie forecasts growth of 8% in FY19 and believes this is attractive, considering the broader market is challenged. The broker believes the recent difficulties in the sector have strengthened the company’s competitive position. CIMIC is also cooperating with the US Department of Justice in relation to possible breaches of its code of ethics. This first emerged in 2011 and an Australian Federal Police investigation has been ongoing since 2012. Macquarie suspects the US development may expedite potential AFP outcomes.
 3. Rio Tinto (RIO) was downgraded to Neutral from Buy by UBS
Rio Tinto’s balance sheet is in a strong position and the company is committed to returning free cash flow to shareholders. In this regard, UBS believes increased dividends are more likely than share buybacks, given the 15% cap imposed on the Chinalco holding approaches as buybacks are undertaken. The stock has rallied 23% in the year to date, supported by a strong iron ore price and a solid 2018 result. UBS does not consider the stock expensive by long-dated standards but it is fully valued. Rating is downgraded to Neutral from Buy and the target raised to $94 from $88. The main risk to the broker’s call is the iron ore market and further disruptions in Brazil as a result of the Vale tailings dam failure in January.
 4. Smiles Inclusive (SIL) was downgraded to Hold from Add by Morgans
There were grim faces at Smiles Inclusive after a disappointing first half result. Integration issues, practice underperformance and a lack of management oversight have brought loan covenants into question, Morgans notes. The bank is now working with the company. With the CFO departing and CEO stepping down its an unsettling time for investors and while the broker has taken on board lowered FY guidance, previously assumed further acquisitions have been removed from valuation modelling until the broker is confident the business is back on track. Target fall to 14c from $1.01. Downgrade to Hold from Add.
 5. Senex Energy (SXY) was downgraded to Lighten from Hold by Ord Minnett
Ord Minnett has reviewed the company’s assets and finds them of lower quality relative to other CSG assets. Well flow rates at the Western Surat Gas Project, in particular, are expected to be only 200-250gj/d per well versus the average in the area of 700gj/d per well. Capital expenditure is to be deployed on a compression plant and pipeline and the broker questions the economic viability of the project. Ord Minnett does not find much corporate appeal in Senex Energy and downgrades to Lighten from Hold. Target is reduced to $0.34 from $0.40. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
6. Tabcorp Holdings (TAH) was downgraded to Lighten from Hold by Ord Minnett
Ord Minnett downgrades earnings estimates, driven by weakness in the company’s wagering division. The broker notes growth in lotteries is being offset by persistent competition in wagering and the point of consumption tax (POCT) will reduce industry turnover in wagering revenue. The integration with Ubet systems is also taking longer than anticipated. Ord Minnett downgrades to Lighten from Hold and reduces the target to $4.20 from $4.50. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
7. Vicinity Centres (VCX) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse takes a more conservative view and continues to envisage a tightening of cap rates across DFO assets in the company’s portfolio. Regional, sub-regional and neighbourhood centres are expected to also experience heightened levels of scrutiny from valuers, nevertheless, and expansion of cap rates is factored in across the tail of the portfolio. Rating is downgraded to Neutral from Outperform and target reduced to $2.67 from $3.00.
The above was compiled from reports on FNArena. 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.
