In the good books

1. DOMAIN HOLDINGS AUSTRALIA (DHG) was upgraded to Neutral from Underperform by Macquarie

At Macquarie’s conference, Domain provided a March Q update which saw weak revenues but improved yields. The new CEO is pursuing cost-outs and moving to a more segmented approach of smaller geographical zones rather than state-based pricing. The company is also looking to monetise the “unreplicable” digital database of major shareholder Nine Entertainment (NEC). Macquarie agrees FY19 remains challenging but sees strong earnings growth in FY20, hence now the share price has pulled back to the broker’s $2.70 target, rating upgraded back to Neutral having been downgraded to Underperform early in April.

See downgrades below.

2. HEALIUS (HLS) was upgraded to Neutral from Underperform by Credit Suisse

Amid reports a private equity consortium is working on a bid for Healius, Credit Suisse notes the speculation involves selling of the diagnostic imaging operations to one party and the rump of the operation to another. Credit Suisse estimates a break-up value of $3.80 a share. On a fundamental basis, there is significant earnings risk with headwinds from labour costs and execution risk from strategic initiatives. However, in the short term, the share price is likely to be supported by the prospect of M&A. Credit Suisse upgrades to Neutral from Underperform and raises the target to $3.10 from $2.35.

3. INDEPENDENCE GROUP (IGO) was upgraded to Outperform from Neutral by Macquarie and to Buy from Neutral by UBS

In the wake of Independence Group’s March Q report, Macquarie upgrades to Outperform. Overall production was strong thanks to record levels at Nova and consistency at Tropicana. Work on the Downstream Sulphate Study should be completed by year-end. The DSS offers the potential for the miner to secure higher concentrate payability terms for Nova, the broker believes. Exploration results are encouraging and could provide for material upside. Target rises to $5.10 from $4.90.

March quarter production was well ahead of forecasts and UBS upgrades to Buy from Neutral. The broker believes that the -10% decline in the share price in April, because of a lower nickel price, has created an opportunity to obtain exposure to a high-quality low-cost producer. Target is steady at $5.

4. OCEANAGOLD CORPORATION (OGC) was upgraded to Neutral from Underperform by Credit Suisse

A very weak production outcome for Haile in the March quarter was offset by strong outcomes for Didipio and Macraes. 2019 guidance is unchanged. The company has had exploration success at Martha with an underground target, defined as a potential 5-8mt at 4-6g/t gold for around 1.0-1.5m ounces. Credit Suisse upgrades to Neutral from Underperform and maintains a $4.20 target.

5. PILBARA MINERALS (PLS) was upgraded to Hold from Lighten by Ord Minnett

Ord Minnett notes recent improvements in recovery have been offset by delayed sales and higher cost guidance. Pilgangoora produced 52,000t, although sales were lower at 38,600t. The project generated negative operating cash flow, despite $8.5m in payments falling into this quarter. Ord Minnett upgrades to Hold from Lighten, as the share price has fallen -30% from its peak in the last month. Target is reduced to $0.65 from $0.70. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.

6. REGIS RESOURCES (RRL) was upgraded to Neutral from Sell by UBS

UBS found the March quarter production numbers consistent. Management expects production at the upper end of guidance of 340-370,000 ounces and at the lower end of all-in sustainable costs of $985-1055/oz. Nevertheless, the broker notes the share price has fallen -17% since its peak in February because of the decline in the Australian dollar gold price. Rating is upgraded to Neutral from Sell and the target reduced to $4.80 from $5.20.

In the not-so-good books

1. BEACH ENERGY (BPT) was downgraded to Sell from Neutral by Citi

Citi recommends investors take profits in Beach Energy, considering the good news is more than reflected in the current share price. The broker downgrades to Sell from Neutral, premised on a US$55/bbl long-term oil price. At a US$70/bbl long-term oil price the broker’s valuation increases to a level largely in line with the current share price, so limited upside is envisaged unless investors are taking a more bullish view on oil. The broker reduces the target to $1.80 from $1.87.

2. DOMAIN HOLDINGS AUSTRALIA (DHG) was downgraded to Hold from Accumulate by Ord Minnett, to Underperform from Neutral by Credit Suisse and to Reduce from Hold by Morgans

Ord Minnett expects continued weakness in new real estate listings until after the federal election on May 18. The broker reduces earnings estimates, now expecting declines of -16% in the second half of FY19. Rating is downgraded to Hold from Accumulate and the target lowered to $3.15 from $3.25. Ord Minnett now expects Domain to generate $350.4m in revenue in FY19. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.

The company’s trading update has reflected a weak listings environment. Revenue growth from digital business has been flat in the March quarter. Because of weak top-line trends Domain is taking further action on costs. Credit Suisse points out weakness in the current year’s turnover is usually expected to be countered by a pick-up in the following year because of weak comparables, but data from the US/UK market suggests this is not necessarily the case. The broker downgrades to Underperform from Neutral and reduces the target to $2.30 from $2.40.

The March quarter update showed depth listings fell -13%. This was offset by yield improvements but revenue growth from all sources was below Morgans’ expectations. The broker considers near-term growth constrained until listings volumes recover. Rating is downgraded to Reduce from Hold and the target lowered to $2.19 from $2.25. See upgrade above.

3. MIRVAC GROUP (MGR) was downgraded to Lighten from Hold by Ord Minnett

In the wake of the quarterly updates from real estate investment trusts, Ord Minnett considers Mirvac is a good business and well-run, albeit fully valued. Pressure is envisaged for residential earnings beyond FY20, as sales rates have slowed noticeably. The broker downgrades its rating to Lighten from Hold. Target is raised to $2.65 from $2.55. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.

4. NUFARM (NUF) was downgraded to Hold from Add by Morgans

The company’s presentation highlighted a number of potential downside risks, Morgans observes. FY19 guidance is maintained but, given the downside risk, the broker revises forecasts lower. Nufarm has acknowledged new weather-related headwinds in Australasia and North America as well as supply disruptions that are affecting the European portfolio. Morgans downgrades to Hold from Add and reduces the target to $5.50 from $6.30. The broker is concerned that, if the company cannot restore the balance sheet, another equity raising will be required.

5. ORICA (ORI) was downgraded to Neutral from Buy by UBS

Orica is the world’s leading supplier of mining explosives, UBS notes, and as such is late-stage leveraged to mining cycle recovery. But the ammonium nitrate market is over-supplied, restricting price growth despite explosives demand growth and hence that leverage is undermined. The stock price is up 10% year to date to a point the broker considers is fairly discounting the outlook. Hence while lifting its target to $19.20 from $18.86, UBS pulls back to Neutral.

6. REDBUBBLE (RBL) was downgraded to Reduce from Add by Morgans

The company continues to struggle with the severe loss of unpaid customer traffic because of the changes to the Google search algorithm. Morgans expects conditions to remain tough for the next 12-18 months. Guidance for earnings and cash flow has been downgraded as the costs of a higher share of paid traffic continue to impact. Morgans downgrades its rating to Reduce from Add and lowers the target to $0.67 from $1.27.

7. REA GROUP (REA) was downgraded to Lighten from Hold by Ord Minnett

Ord Minnett expects weakness in new real estate listings will continue until after the federal election on May 18. A decline of -10% is expected for second half earnings. Revenue of $909.3m is estimated for FY19. The broker downgrades to Lighten from Hold and reduces the target to $74 from $76. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.

8. SUPER RETAIL GROUP (SUL) was downgraded to Neutral from Buy by UBS

Trading in the March quarter was mixed, UBS observes, with sales better and the margin outlook softer. The broker reduces estimates for earnings per share by -2-4% and downgrades to Neutral from Buy. The main negative was a continuation of the margin pressure in BCF. The outlook is less certain too, with some signs of softening expenditure at retailers directly exposed to housing. Target is reduced to $8.50 from $8.70.

9. SOUTHERN CROSS MEDIA GROUP (SXL) was downgraded to Neutral from Buy by UBS

The share price has risen 25% since its recent lows and, hence, UBS downgrades to Neutral from Buy on valuation grounds alone. The overall advertising market remains soft, the broker observes, although the company is winning share from metro radio peers, given audience strength and its digital stack strategy. The company has guided to flat FY19 costs growth. UBS raises the target to $1.25 from $1.20.

10. SENEX ENERGY (SXY) was downgraded to Neutral from Buy by Citi

The company has indicated that the Surat Basin will incur most of the capital expenditure from FY19-21, at the expense of drilling in the Cooper Basin. Citi believes the balance sheet should have been capable of continuing to support expenditure in the Cooper Basin, and is disappointed. The broker forecasts lower and deferred levels of activity in the Cooper Basin, which materially reduces earnings estimates by over -50% for FY20/21. Rating is downgraded to Neutral/High Risk from Buy/High Risk and the target lowered to $0.41 from $0.48.

11. VOLPARA HEALTH TECHNOLOGIES (VHT) was downgraded to Lighten from Buy by Ord Minnett

Ord Minnett observes a continuation of solid momentum in the fourth quarter cash flow report. FY20 guidance has now been issued, signalling at least 10% penetration. The broker believes the market has moved too far and, suspecting consensus earnings reductions, downgrades to Lighten from Buy. Target is raised to $1.54 from $1.18.

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.