Investors wondering as to why the Australian share market has found adding more gains a tough ask since mid-February need not look any further than at last week’s tally for recommendation upgrades and downgrades by the eight stockbrokers monitored daily by FNArena.
For the week ending Friday 5 April 2019, FNArena registered only four upgrades, and three of those stopped at Neutral/Hold. There were nine downgrades, and four of those went to Sell.
One week is not a great indicator, but within the context as is, this one might prove its value to prove a point: right up here, many stocks start suffering from a lack of oxygen.
Equally noteworthy: many a bond proxy has seen its share price rally hard in 2019, but analysts seem rather reluctant in downgrading their ratings.
A lot is happening in terms of positive revisions for earnings estimates, though it’s predominantly a resources-led affair, with ResMed, Ansell and Graincorp notable exceptions. The flipside reveals many more industrial names, but Pilbara Minerals suffered the most, followed by EclipX Group, Senex Energy, Incitec Pivot, and Kathmandu Holdings.
With resources companies preparing to start releasing quarterly production updates, the centre of attention might well remain theirs, but then Bank of Queensland ((BOQ)) is likely to announce a cut to its interim dividend and this might awaken a few to the dangers that come with a weak domestic economy; or at least certain parts of it.
In the good books
In the not-so-good books
- COMPUTERSHARE LIMITED (CPU) was downgraded to Underperform from Neutral by MacquarieB/H/S: 0/5/2
Following the recent move in global bond yields, Macquarie revises its margin income forecasts. More dovish commentary from the central banks suggest margin income growth could moderate. The broker envisages downside risk to consensus estimates and the current multiple. With a more subdued margin income outlook, less incremental benefit from cost reductions and the cessation of the impact of the fixed fee revenue in the UK Macquarie currently forecasts a -1% decline in FY21 management earnings. Rating is downgraded to Underperform from Neutral and the target reduced to $16.50 from $19.00.
- GENEX POWER LIMITED (GNX) was downgraded to Hold from Add by MorgansB/H/S: 0/1/0
The company has updated capital expenditure guidance to around $250m for the K2-Hydro project. This is $25m above Morgans’ prior assumptions. The Jemalong project could be constructed in FY20, subject to project financing, which would put a strain on the company’s cash flows and add to the need for equity capital. Given how important the K2-Hydro project is to the valuation, and the uncertainty regarding concessional funding, Morgans downgrades to Hold from Add. The company has indicated it will know more about the availability of a grant by the end of April. Target is reduced to $0.25 from $0.30.
- SCENTRE GROUP (SCG) was downgraded to Underperform from Neutral by MacquarieB/H/S: 1/3/2
Amid soft retail conditions for landlords because of cyclical and structural headwinds and the company’s “heavy” balance sheet, Macquarie downgrades to Underperform from Neutral. The broker recently visited Westfield Miranda shopping centre and notes the centre has hoardings on around 4% of space. Lease expiries from the 2014 development are staggered between November 2019 and 2021. The company would not be drawn on potential pricing, with lease negotiations currently in place, and Macquarie suspects downside risk to rents, given the structurally challenged retail conditions. Target is reduced to $3.52 from $3.69.
- SPEEDCAST INTERNATIONAL LIMITED (SDA) was downgraded to Underperform from Neutral by MacquarieB/H/S: 0/3/1
Macquarie observes a deterioration in the core business drove multiple downgrades in FY18 and this has created downside risk to earnings in FY19. Limited disclosure reduces confidence. The broker believes sustained delivery of organic revenue and earnings growth at a group level, as well as cash generation, are required to be more positive. The broker downgrades to Underperform from Neutral. Target is reduced to $2.85 from $3.00. Low free cash flow raises concerns about the stability of the dividend.
- VIVA ENERGY REIT (VVR) was downgraded to Hold from Accumulate by Ord MinnettB/H/S: 2/1/0
Ord Minnett considers the more-aligned partnership between Viva Energy (VEA) and Coles (COL) is a positive for Viva Energy REIT, as the new agreement provides certainty of retail operator until 2029, and lower bond yields should also be supportive in the near term. Viva Energy REIT has a secure income stream from long-leased assets and the broker believes it is well-positioned to grow the portfolio through further acquisitions. Ord Minnett expects growth in earnings per share of 3.5% in 2019 and 3.1% in 2020. The broker downgrades to Hold from Accumulate and maintains a $2.40 target.
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. 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.
