In the good books
1. Appen (APX) was upgraded to Buy from Neutral by Citi
Following the proposed acquisition of Figure Eight Citi upgrades to Buy from Neutral. The broker believes this is a complementary acquisition that will provide the technology, platform and expertise to enable material scale and improved productivity. The Figure Eight business was loss-making in FY18 and the broker’s estimates for FY19 operating earnings (EBITDA) drop -8%. although FY20 and FY21 estimates are increased by 6% and 30% respectively. Citi raises the target to $28.04 from $23.29.
2. IPH (IPH) was upgraded to Outperform from Neutral by Macquarie
Macquarie believes IPH is well-positioned in the three-way merger tussle, as the Qantm (QIP) merger deal with Xenith (XIP) remains subject to a number of hurdles. Importantly, there is the opportunity for a competing proposal should it emerge and Macquarie calculates there is material accretion potential. The broker upgrades to Outperform from Neutral and raises the target to $7.10 from $6.00. The broker factors in earnings upgrades driven by FX and a multiple re-rating, with M&A risk skewed to the upside.
3. The Star Entertainment Group (SGR) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse believes the stock could soon break out of its trading range. The broker upgrades FY21 estimates for operating earnings (EBITDA) by 2% and FY22 by 5%. The stock has been trading at a discount to fair value because of the impending opening of Crown Sydney. Credit Suisse also believes Star Entertainment’s multiple will expand to 9.0x from 8.5x for its domestic casinos, including Brisbane, as investor confidence in the prospects of new capacity grows. The broker believes the stock is inexpensive and upgrades to Outperform from Neutral. Target is raised to $5.50 from $5.15.
In the not-so-good books
1. Australia and New Zealand Banking Group (ANZ) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse points out ANZ’s recent announcement, that it may have been too conservative in its approach to mortgage lending, has been interpreted by some that this is an inflection point for growth. The broker suggests this is not the case and the earliest there is likely to be a change is at the end of FY19. The broker also suspects the bank may pause capital management, and it may be less than expected. Credit Suisse assesses the next initiative is not likely until FY20 and decreases buyback estimates by $1.5bn. Earnings estimates are downgraded by -3-8% over the forecast period and the target reduced to $28 from $30. Rating is downgraded to Neutral from Outperform.
2. Santos (STO) was downgraded to Neutral from Buy by UBS
As the stock is up 24% in the year to date, UBS downgrades to Neutral from Buy. The fact the company operates around 80% of its forecast production growth provides confidence that it will achieve a target of over 100mmboe by the end of 2025. However, the broker believes the risk/return profile is now largely reflected in the current price. Estimates for earnings per share through 2019-21 are reduced to reflect a lower oil price outlook. Target is reduced to $7.00 from $7.20.
3. Woodside Petroleum (WPL) was downgraded to Neutral from Buy by UBS
UBS downgrades Woodside to Neutral from Buy, believing growth in a more subdued oil price environment is now factored into the share price. The broker forecasts oil prices to remain at US$70/bbl to the end of 2024. The broker reduces net asset valuation by -5% to reflect fewer growth opportunities and lower cash flow associated with producing assets. Target is lowered to $35.25 from $37.30.
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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