In the good books
1. PLATINUM ASSET MANAGEMENT (PTM) was upgraded to Hold from Sell by Ord Minnett
The stock has underperformed the Small Ordinaries index by -19% despite its international fund rising 13% and Ord Minnett upgrades to Hold from Sell on valuation. The broker raises the target to $4.77 from $4.72.
2. RESMED INC (RMD) was upgraded to Buy from Neutral by UBS
UBS upgrades estimates for earnings per share by 5% and increases the rating to Buy from Neutral. Results in the March quarter were well ahead of expectations. Mask growth stood out and new products and re-supply performed well. The broker believes the success of Brightree and opportunities from recently-released analytics means market saturation will not occur in the short to medium term. Target is raised to US$119 from US$109.
In the not-so-good books
1. GRAINCORP (GNC) was downgraded to Reduce from Hold by Morgans
Long Term Asset Partners has withdrawn its $10.42 bid for Graincorp following due diligence that left LTAP disappointed. Morgans finds it concerning that initial operating assumptions were not met. Graincorp’s de-merger proposal may provide some share price support, but with at least two more tough years ahead for grains, Morgans moves to Reduce from Hold ahead of the company’s result release on Thursday. Target falls to $7.90 from $9.30.
2. HARVEY NORMAN HOLDINGS (HVN) was downgraded to Neutral from Outperform by Macquarie
Macquarie acknowledges Harvey Norman is executing well in its global business, shielding it from weaker domestic outcomes. Property is also resilient. Given the rally in the share price and a sharp slowing in shopping centre sales, the broker suspects the risks are building. Rating is downgraded to Neutral from Outperform. Target is $4.20. The company is successfully pivoting the business to enjoy a greater proportion of earnings from offshore. Still, Macquarie believes the underlying business may start to struggle.
3. HUB24 (HUB) was downgraded to Sell from Neutral by Citi
Citi continues to believe HUB24 will be a beneficiary of the structural shift towards specialist providers and triple its market share in the next five years. However, because of a 25% increase in the share price since the first half result, the broker downgrades to Sell from Neutral. Target is lowered to $13.35 from $13.60. The broker does not believe the current share price reflects the downside risk to revenue margins from competition and operating earnings (EBITDA) margin from the ongoing need to invest in the platform to support growth.
4. JB HI-FI (JBH) was downgraded to Neutral from Outperform by Macquarie
Macquarie suspects the buy case for the stock will likely become harder. The business is considered a well-run retailer capitalising on gaming, smart home and a shorter PC replacement cycle, in order to offset structural & cyclical headwinds. Nevertheless, the stock has rallied, and the bulk of catalysts have now played out, so the broker downgrades to Neutral from Outperform. Target is reduced to $25.83 from $28.80.
5. JANUS HENDERSON GROUP (JHG) was downgraded to Neutral from Outperform by Macquarie
Janus Henderson’s March Q result fell short of the broker, with net outflows continuing to disappoint and fee margins also lower. Macquarie had seen value in the stock for some time and a re-rating had been underway, but with no sign of flow momentum improving the broker now pulls back to Neutral. The stock is trading at a -25% discount to the five-year average PE and some -42% discount to listed fund managers but Macquarie sees limited scope for outperformance from here. Target falls to $36.00 from $39.50.
6. MAGELLAN FINANCIAL GROUP (MFG) was downgraded to Hold from Buy by Ord Minnett
Ord Minnett notes strong absolute returns have benefited global fund managers. Magellan Financial has rallied, returning 87% in 2019, following a 16% absolute return in its global fund, strong retail and institutional net flows. The stock has now run past fundamental value and Ord Minnett downgrades to Hold from Buy. Target is raised to $40.33 from $34.34.
7. MACQUARIE GROUP (MQG) was downgraded to Hold from Accumulate by Ord Minnett
FY19 net profit was slightly ahead of Ord Minnett’s forecast. The result was more heavily reliant on lower-quality items than the broker expected, with gains on sale and performance fees contributing 30% of net operating income in the second half. Hence, the broker is not surprised the FY20 outlook commentary was disappointing. Based on Ord Minnett’s estimates, valuation is only fair for a stock trading on a forecast 15x FY20 PE multiple and with lower quality earnings mix than in recent years. Rating is downgraded to Hold from Accumulate and the target lowered to $130 from $133. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
8. NICK SCALI (NCK) was downgraded to Sell from Neutral by Citi
Downward pressure from declining house prices are intensifying with plenty of profit downgrades being issued by small cap companies being impacted. Analysts at Citi don’t think Nick Scali will remain immune either. The analysts have reduced estimates by -4%-5%. Target price falls to $5.35 from $5.60. Downgrade to Sell from Neutral.
9. NETWEALTH GROUP (NWL) was downgraded to Accumulate from Buy by Ord Minnett
While there is limited valuation headroom, Ord Minnett believes the federal election brings a potentially significant catalyst for the platform sector. Labor’s proposed ban on franked credit refunds will affect the self-managed super (SMSF) sector, where around 30% of assets are in pension phase and therefore benefiting from refunds. Pooled superannuation vehicles managing tax as a single entity can use pension member franking credits to offset accumulation member taxes. Many platform superannuation funds have a structural tax advantage over SMSFs. While other superannuation funds will also be able to leverage this benefit, the broker observes only platforms come with many of the investment management freedoms afforded an SMSF. Ord Minnett observes the leading specialist platforms are winning more than their fair share of industry churn while incumbent businesses are losing flows to industry funds. The broker estimates the company could double its superannuation assets with pension transitions and still be able to offer pension members refunds of their credits. Should this occur there could be 30-40% upside for the Netwealth target. Rating is downgraded to Accumulate from Buy and the target raised to $9.57 from $8.14.
10. TABCORP HOLDINGS (TAH) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse is reducing the rating to Neutral from Outperform and considers FY20 likely to be a ‘no growth’ year. Higher depreciation has reduced FY20-21 forecasts for earnings per share by around -3%. Lower wagering revenue projections have also shaved -1-2% off estimates. The broker points out Tabcorp had the opportunity to update investors at the investor forum on April 30 and, not only did it not disclose revenue, cautioned against intense competition. Target is steady at $5.05.
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.