In the good books

1. ELDERS (ELD) was upgraded to Hold from Reduce by Morgans

The impact of the prolonged drought, low wool volumes and increased costs have meant a weak first half result is likely and Elders has downgraded FY19 guidance to underlying EBIT of $72-75m. This is not a surprise to Morgans, given the severity of the drought and the impact of Queensland’s floods, and a steep fall in cattle prices has been noted. In light of the adverse conditions, if guidance is achieved, this will be a reasonable outcome, in the broker’s view. Tough trading conditions are somewhat factored into the stock and the broker upgrades to Hold from Reduce. Target is reduced to $6.30 from $7.80. Should the Nutrien takeover bid for Ruralco (RHL) proceed, Elders will be competing with a much larger peer group and this, potentially, removes the corporate appeal that was previously attached to the valuation, in the broker’s view. Morgans reduces FY19 and FY20 forecasts by -12.2% and -11.9% respectively.

2. NOVONIX (NVX) was upgraded to Speculative Buy from Add by Morgans

Morgans has introduced a new rating category, Speculative Buy, for companies where there is potential for significant opportunity but that also carry significant risk. The broker believes the upside potential for Novonix is compelling, but it has not yet sold its anode material or produced in large scale. There are a number of issues the company will need to overcome in order to realise its potential. The broker upgrades to Speculative Buy from Add and raises the target to $0.75 from $0.54.

3. SG FLEET GROUP (SGF) was upgraded to Equal-weight from Underweight by Morgan Stanley

Morgan Stanley observes the stock has sold off substantially since its AGM in October. The broker believes the business has sufficient levers to meet earnings expectations and a cost reduction strategy into the second half and FY20 should alleviate some of the top-line and margin pressure. Positive catalysts, nevertheless, are some way off and the broker’s upgrade to Equal-weight from Underweight is centred on valuation. New vehicle sales continue to be disappointing, particularly in NSW and Victoria. Target is $2.60. Industry view is In-Line.

 

In the not-so-good books

1. COMMONWEALTH BANK OF AUSTRALIA (CBA) was downgraded to Underperform from Neutral by Macquarie

Following a broader market re-rating, Macquarie finds the bank sector looking increasingly attractive on a relative basis. The sector is offering healthy dividend yields and supportive relative valuations. Nevertheless, the broker continues to find the current fundamental outlook challenging and retains forecasts that are below consensus. Macquarie finds it difficult to have a more constructive view until external conditions improve. The broker downgrades Commonwealth Bank to Underperform from Neutral on a relative valuation basis. Target is $69.

2. NEW HOPE CORPORATION (NHC) was downgraded to Neutral from Outperform by Credit Suisse

First half results missed expectations because of costs. Credit Suisse suspects investors are concerned that the syndicated loan the company has acquired is a signal for lower capital returns going forward. The company has entered into a $600m secured loan facility to fund future growth projects. The broker was disappointed with the operating performance as unit costs increased in Queensland because of reduced feed available to wash plant and decreased yields. New South Wales operations were also disappointing in terms of costs, affected by elevated fuel costs and increased repair & maintenance. Credit Suisse downgrades to Neutral from Outperform, given the strong rally in the share price. Target is $4.

3. RURALCO HOLDINGS (RHL) was downgraded to Hold from Add by Morgans

In light of the Nutrien takeover bid for Ruralco, Morgans downgrades to Hold from Add and raises the target in line with the offer price of $4.40, from $3.60. Ruralco has entered into a scheme of arrangement with Nutrien, a global agribusiness, the parent company of Landmark and the largest player in Australia’s rural services industry. Based on Morgans’ forecasts the offer price implies an FY19 enterprise value/EBITDA multiple of around 8.8x. Ruralco will report its first half result on May 14 and has guided to a flat outcome.

4. SYDNEY AIRPORT HOLDINGS (SYD) was downgraded to Hold from Buy by Deutsche Bank

The share price is up over 16% since January, supported by long bond yields, strong passenger growth in January and a positive draft report from the Productivity Commission. Deutsche Bank expects the stock to underperform, as the airport cycles last year’s strong international passenger growth, downgrading to Hold from Buy. Target is reduced to $7.50 from $7.75.

5. WAGNERS HOLDING COMPANY (WGN) was downgraded to Hold from Add by Morgans

The company has advised that its largest cement customer, Boral ((BLD)), has issued a pricing notice. Morgans observes this is significant, given the take-or-pay contract is a cornerstone of Wagner’s earnings profile in a volatile south-east Queensland construction market. The broker notes the south-east Queensland cement market is highly concentrated and assumes the third-party providing the lower quote to Boral might be Cement Australia. If so, this will support the view that demand conditions are weaker than expected, in the absence of major infrastructure projects and a slowdown in residential activity. The company has suspended cement deliveries to Boral for six months as the dispute is addressed. Morgans downgrades to Hold from Add and reduces the target to $3.04 from $3.38.

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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