Total downgrades for individual ASX-listed entities continue to outnumber upgrades among the eight stockbrokerages monitored daily by FNArena, even as the share market struggles to advance close to its 2018 peak.
For the week ending Friday 29 March 2019, FNArena counted 7 upgrades being outnumbered by 9 downgrades. Not helping the numbers, gold miner St Barbara received three upgrades during the week, so in terms of individual stocks receiving upgrades and downgrades, the gap is more pronounced than it appears.
In particular, when we consider Sandfire Resources received 2 upgrades during the week. On the opposite end of the ledger, no such double downgrades are present.
Most of the activity revolves around mining and energy companies with each of Independence Group, Mount Gibson, Oil Search, Origin Energy and Woodside Petroleum receiving a downgrade.
Earnings estimates are experiencing large amendments each way. Companies enjoying large boosts to forecasts include Superloop, Galaxy Resources, Western Areas, Suncorp and Challenger. Oversized reductions have fallen upon Pilbara Minerals, Sigma Healthcare, EclipX Group, and, in more moderate fashion, St Barbara and Westpac.
In the good books
1. SANDFIRE RESOURCES NL (SFR) was upgraded to Neutral from Sell by UBS B/H/S: 2/4/2
Upgrades to commodity price estimates have driven a 5% upgrade to the valuation of Sandfire Resources. UBS observes the valuation is very sensitive to near-term commodity assumptions because of the 3-4 years of remaining mine life at DeGrussa. Management is trying to extend life through regional exploration. While the stock now trades in line with UBS’s valuation, the broker suggests there is risk of M&A. Rating is upgraded to Neutral from Sell and the target raised to $7.00 from $6.70.
In the not-so-good books
1. INDEPENDENCE GROUP NL (IGO) was downgraded to Neutral from Buy by UBS B/H/S: 1/4/1
UBS observes the shares have gained around 30% since the start of the year, underpinned by higher nickel prices and a solid operating performance in the December quarter. While downgrading to Neutral from Buy the stock remains the broker’s preferred nickel exposure, trading on a 15-20% free cash flow yield for FY20-21. The broker suggests exploration success could be very accretive but for now the stock is fair value. Target is raised to $5.00 from $4.90.
2. ORIGIN ENERGY LIMITED (ORG) was downgraded to Neutral from Buy by Citi B/H/S: 4/4/0
Following changes to retail electricity pricing and the associated impact on energy market earnings, Citi downgrades to Neutral from Buy. The broker believes the stock valuation correctly reflects a US$55/bbl long-term oil price. Lower revenues are expected to be offset by the -$100m reduction in costs from FY18-21, as churn rates increase and costs to acquire customers become cheaper. The broker needs more clarity on margin compression and the quantifiable impact on profitability for FY19 and beyond. Target is reduced to $7.42 from $8.62.
3. ORICA LIMITED (ORI) was downgraded to Lighten from Hold by Ord Minnett B/H/S: 2/4/1
Ord Minnett has reviewed the production and earnings outlook for the company, noting production delays at Burrup are expected to continue. Utilisation rates at the Yarwun plant remain critical to meeting increased ammonium nitrate requirements from BHP Group (BHP), as anti-dumping provisions create a tight market. Ord Minnett suspects costs may increase, as a result, in order to meet contracted customer demands. The broker reduces earnings forecast for FY19 by -6.4% and by -5.7% for FY20. Rating is downgraded to Lighten from Hold and the target reduced to $16.20 from $17.15.
4. OIL SEARCH LIMITED (OSH) was downgraded to Sell from Neutral by Citi B/H/S: 4/3/1
The company may be demonstrating a focus on maximising value from current assets but Citi downgrades to Sell from Neutral because of weaker macro conditions in LNG. The broker believes the next 12 months will still provide potential for positive catalysts, such as the gas agreement in early April and exercising the Alaskan option. Target is reduced to $7.64 from $7.91. The broker now includes a benefit from late-life gas that provides production backfill for PNG LNG and Papua LNG.
5. WOODSIDE PETROLEUM LIMITED (WPL) was downgraded to Sell from Neutral by Citi B/H/S: 3/4/1
Citi believes Woodside Petroleum is in a difficult position in a crowded LNG market. Something has to give, and investors may be disappointed. Any farming down of Scarborough and Pluto T2 is likely to be sold at a risk-adjusted price and the broker suspects consensus still values the project at current equity interest levels. Citi does not expect Scarborough to reach its FID target of 2020. The company appears adamant it will not farm down at a discount to fair value, implying investors could take on the full brunt of the marketing risk. If Browse were to move forward in a timely manner then new equity is likely required and/or the pay-out ratio reduced, in the broker’s view. Citi downgrades to Sell from Neutral and reduces the target to $31.12 from $34.30.
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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