Most of the action among securities analysts, so it seems, is about deciding which share price movement triggers a downgrade or upgrade in rating. The share market itself has been hesitating about which direction next, but underneath some of the volatility that has risen to the surface lately might be explained by some of the analysts’ decisions.
For the week ending Friday 22 March, FNArena registered 7 upgrades for individual ASX-listed entities, and 11 downgrades.
Worth pointing out: many of the upgrades have a whiff of “surely this share price cannot stay this low (or lower) forever” to it. Car leasing has two representatives through SG Fleet and EclipX Group among the week’s upgrades. Only two upgrades did not move past Hold/Neutral.
On the negative side (downgrades), Sigma Healthcare stands out with two downgrades, but there are otherwise plenty of companies that released financial results after the February reporting season. More bad news means Wagners Holding is in there too, as is Sydney Airport, and Cochlear.
A little more colour is visible in the table for positive revisions to earnings estimates with Automotive Holdings leading the pack (after months of downgrades), followed by oOh!media, Megaport, TPG Telecom, and New Hope Corp. Negative revisions fell upon NextDC, Sigma Healthcare, ExclipX Group, Nufarm, and Caltex Australia.
Bond markets and other macro-economic events have investors’ attention as the end of March/Q1 approaches. This also implies local banks’ results are drawing nearer too.
In the good books
1. ECLIPX GROUP LIMITED (ECX) was upgraded to Buy from Neutral by Citi B/H/S: 2/2/0
The company has retracted prior guidance for net profit to be broadly in line with FY18 and disclosed that, for the five months to February, net profit was down -42%. Notwithstanding the headwinds, Citi believes EclipX is oversold and upgrades to Buy/High Risk from Neutral. The broker expects an improvement in the second half, amid some of the commercial contract extensions ceasing, cost savings being realised and the company’s normal skew to the second half. Divestment of Grays and Right2Drive has been flagged. Meanwhile, McMillan Shakespeare (MMS) refused a request to extend the merger negotiations deadline. Citi does not believe this will be an end to consolidation, although it may result in other interested parties entering the fray. The broker reduces the target to $1.29 from $2.38.
2. HEALIUS LIMITED (HLS) was upgraded to Buy from Hold by Deutsche Bank B/H/S: 3/2/1
Deutsche Bank notes market conditions have become more challenging and this has led to a downgrade to FY19 guidance. Still, the company is making some progress in its transformation, in the broker’s view. There is a high number of GP additions as well as margin expansion in imaging. Given the 16% total shareholder return implied by forecasts the broker upgrades to Buy from Hold. Deutsche Bank also expects the share price will be supported if another takeover proposal is announced. Target is $3.01.
3. NUFARM LIMITED (NUF) was upgraded to Add from Hold by Morgans B/H/S: 6/1/0
Cash flow in the first half was significantly worse than Morgans expected and the company’s balance-sheet position remains of concern. The extent of the revision to guidance was also worse than the broker expected. European acquisitions are now not expected to achieve their original earnings guidance until FY20. Yet, following severe weakness in the share price the broker upgrades to Add from Hold. Another tough half-year is anticipated and Morgans acknowledges short-term catalysts are limited. Target is reduced to $6.30 from $6.85. The broker believes the current share price undervalues the existing business and provides no value for the Omega-3 seeds project.
See downgrade below
4. RESMED INC (RMD) was upgraded to Buy from Hold by Deutsche Bank B/H/S: 4/2/1
The second quarter result was weaker than Deutsche Bank expected, although the core US sleep & respiratory care market continues to grow at solid rate of 9%. The broker notes sales weakness can be attributed to rest-of-world devices because of a high comparable period, and slower upgrades to tele-monitored devices in France and Japan. The broker believes the business has a large opportunity to grow from the increased awareness and further penetration of the sleep apnoea market. The broker upgrades to Buy from Hold. Target is US$125.
In the not-so-good books
1. BRICKWORKS LIMITED (BKW) was downgraded to Hold from Buy by Deutsche Bank B/H/S: 0/4/0
First half earnings (EBIT) were ahead of Deutsche Bank’s expectations, largely from better-than-expected property earnings. While remaining positive on the medium-term outlook for property development, Deutsche Bank believes there is unlikely to be significant revaluations from FY20 onwards. Investment in building products in North America is likely to support earnings in the long-term, although the broker also considers significant upside is unlikely in that space in the next three years. Deutsche Bank downgrades to Hold from Buy. Target is $18.60.
 2. COCHLEAR LIMITED (COH) was downgraded to Sell from Hold by Deutsche Bank B/H/S: 1/2/4
While services revenue growth remains strong, Deutsche Bank expects growth will slow in the second half as N7 upgrades move through the typical product cycle. The broker also forecasts lower expense ratios will be needed if the company is to achieve the lower end of its FY19 guidance range. A patent dispute with a competitor also looms, which may lead to a large payment of damages. Rating is downgraded to Sell from Hold. Target is $157.
3. ERM POWER LIMITED (EPW) was downgraded to Hold from Add by Morgans B/H/S: 2/1/0
Since the company announced its first half result, it has outperformed the broader market index. Morgans believes share price strength has been principally driven by the re-start of the share buyback and increase in the dividend outlook. The broker downgrades to Hold from Add, as a result of share price strength. The company has reserved $60m for investment in its energy solutions business in addition to the $18m paid for Greensense, Lumaled and Out Performers. However, while the segment contributes $0.11 to valuation, Morgans points out it is yet to develop a track record of earnings growth. The company also highlights that the Oakey power station will have increasing value by providing firming capacity to offset the increasing penetration of renewables into the Queensland generation mix. Target is raised to $1.90 from $1.81.
4. NUFARM LIMITED (NUF) was downgraded to Hold from Buy by Ord Minnett B/H/S: 6/1/0
Ord Minnett notes, while first half operating earnings were in line with expectations, the underlying net loss of -$11.5m was below forecasts. The interim dividend is suspended temporarily in order to manage cash flow. A poor weather outlook in Australasia and supply issues in Europe continue to dog the stock. Glyphosate is also of concern, because of the recent Bayer court case progressing to the second phase. Ord Minnett reduces estimates for earnings by -30% for FY19 and by -26% for FY20. This leads to a downgrade to Hold from Buy and a reduced target, cut to $4.50 from $7.25.
See upgrade above.
5. SIGMA HEALTHCARE LIMITED (SIG) was downgraded to Sell from Neutral by UBS and to Sell from Neutral by Citi B/H/S: 0/0/4
Underlying earnings (EBIT) were ahead of guidance in FY19, although UBS notes earnings quality was affected by restructuring costs and weak cash conversion. The company has indicated FY20 underlying operating earnings (EBITDA) will be $55-60m. UBS makes material upgrades to FY21-22 estimates, reflecting the incorporation of Project Pivot. Project Pivot is the company’s $100m cost reduction program, of which around $60m is expected to come from the transition of Chemist Warehouse and the remaining $40m from operating efficiencies. The company is a quality operator but UBS does not believe the stock warrants a premium to market. Rating is downgraded to Sell from Neutral and the target reduced to $0.45 from $0.58.
Post the release of FY19 financials, Citi has downgraded to Sell/High Risk from Neutral/High Risk. Price target falls to $0.52. The company’s guidance towards more capex has led to reduced forecasts. The analysts see the biggest risk to their Sell rating in the potential of a higher bid to shareholders. Otherwise, execution risks are seen as high, with management aiming to take out $100m in costs out of the business. The reported financials were labelled as largely in-line. On adjusted basis, the operational performance as actually a smidgen better than expected, admit the analysts. Cash conversion, however, was weak.
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 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.
