Buy, Hold, Sell – What the Brokers Say

Founder of FNArena
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The Australian share market continues to suffer from falling earnings forecasts and out-of-season corporate results releases from banks, agricultural producers and chemical companies, thus far, have simply continued to contribute to the negative underlying trend.

With macro matters and US equities supporting risk assets at elevated levels, it should not surprise stockbroking analysts are issuing more than twice as many downgrades in recommendations for individual ASX-listed stocks than they are issuing fresh upgrades. No surprise also most downgrades are hitting companies reporting out-of-season corporate results, a profit warning, or both.

For the week ending Friday 10 May 2019, FNArena registered 9 downgrades and 20 upgrades for ASX-listed stocks by the eight stockbrokers monitored daily. Reductions in earnings estimates far outweigh increases.

Operational updates will continue to flow in during the week ahead, DuluxGroup (DLX), and Xero (XERO).

In the good books

  1. ADELAIDE BRIGHTON LIMITED (ABC) was upgraded to Hold from Sell by Deutsche BankB/H/S: 0/5/2

Deutsche Bank analysts have responded to the company’s pre-AGM profit warning by upgrading their rating to Hold from Sell, while reducing the price target to $3.60 from $4 in line with reduced forecasts. While disappointing, the analysts now believe this is in the share price.

See downgrades below.

  1. ALUMINA LIMITED (AWC) was upgraded to Neutral from Sell by UBSB/H/S: 2/3/0

UBS forecasts a US11.9c per share dividend in 2019. This is well down on 2018, which was driven by a very high, yet unsustainable, pricing environment. The broker envisages a longer-term dividend of US11-12c per share based on a US$350/t alumina price that will support the share price, assuming free cash flow is returned to shareholders. UBS considers the outlook now more balanced and moves to a Neutral rating from Sell. There is potential downside risk in the alumina price should Alunorte reach full capacity in the current quarter. Target is steady at $2.20.

  1. ERM POWER LIMITED (EPW) was upgraded to Add from Hold by MorgansB/H/S: 3/0/0

Morgans believes the stock is back into buying territory, and upgrades to Add from Hold. The broker forecasts an 11% total shareholder return on a 12-month horizon. Upside potential exists if gross margins for Business Energy Australia are in the mid-upper range of guidance, or if the energy services division can increase its earnings faster than forecast. The broker assumes the Neerabup power station will be refinanced in the first half of FY20. Target is reduced to $1.86 from $1.90.

  1. EVOLUTION MINING LIMITED (EVN) was upgraded to Accumulate from Hold by Ord MinnettB/H/S: 1/4/3

Ord Minnett reviews its valuation, noting the share price has fallen more than -20% from its January highs and has underperformed the ASX gold sector. Outside of supportive mark-to-market valuations, the broker notes Evolution Mining is reaching a net cash position and should deliver improvements to operations at Cowal in the next 12 months. Ord Minnett does not believe the share price correlates with fundamentals and upgrades to Accumulate from Hold. Target is steady at $3.50.

  1. GRAINCORP LIMITED (GNC) was upgraded to Hold from Reduce by MorgansB/H/S: 3/1/0

First half results were poor and materially below Morgans’ forecasts. Seasonal conditions are below average on the east coast of Australia leading into the 2019/20 winter cropping season which will affect FY20 earnings. The business is also currently affected by unfavourable trading positions which have reduced operating earnings (EBITDA) by -$40m. The company has not provided FY19 earnings guidance. While the de-merger may unlock value in the malt business, Morgans believes that, in the absence of a derivative instrument, the new GrainCorp will trade at a material discount. Rating is upgraded to Hold from Reduce, after share price weakness, and the target is reduced to $7.57 from $7.90.

  1. ORICA LIMITED (ORI) was upgraded to Neutral from Sell by CitiB/H/S: 0/7/0

First half results have cleared any doubts about the company’s operating leverage, Citi acknowledges. Strong growth was driven by higher volumes, improved product mix and better manufacturing. Market conditions are improving and price/cost headwinds fading. However, the broker notes further delays with Burrup. Burrup remains a swing factor, with a negative impact on cash flow forecast by the company in FY19 of -$40-45m. Burrup’s operating earnings (EBITDA) are forecast to be $45m in FY21.Citi upgrades to Neutral from Sell and raises the target to $20 from $16.

See downgrade below.

  1. TPG TELECOM LIMITED (TPM) was upgraded to Accumulate from Hold by Ord MinnettB/H/S: 2/1/3

The ACCC opposes the merger between TPG Telecom and Vodafone Australia (HTA). The regulator cited an already very concentrated mobile and fixed broadband industry as well as its belief there is a real chance the company will roll out a mobile network if the proposed merger does not proceed. Ord Minnett agrees with the two companies’ legal analysis and believes the case has a better chance of being approved in court. Rating is upgraded to Accumulate from Hold and the target raised to $6.90 from $6.50.

In the not-so-good books

  1. ADELAIDE BRIGHTON LIMITED (ABC) was downgraded to Neutral from Outperform by Credit Suisse and to Sell from Neutral by CitiB/H/S: 0/5/2

The company has provided maiden 2019 guidance, indicating net profit will be down -10-15%. Adelaide Brighton cited a weak residential environment, import competition and competitive pressure in Queensland. Credit Suisse notes the dispute between Boral (BLD) and Wagners (WGN) appears to have had an impact. The company, and others, responded by lowering price expectations to protect volumes. The dividend yield provides some store of value, in the broker’s view. Rating is downgraded to Neutral from Outperform and the target lowered to $3.90 from $5.00. The company has warned of a -10-15% drop in 2019 earnings. Softening demand for residential construction materials, increased competition from cement imports and increasing competition in Queensland were cited.

Citi notes the acceleration in the downturn in the residential market, particularly in NSW and Victoria, appears to have caught the company by surprise. The downgrade to expectations comes just 2.5 months after the 2019 outlook described a stable demand environment. Citi downgrades to Sell from Neutral and reduces the target to $3.50 from $4.50.

See upgrade above.

  1. COCA-COLA AMATIL LIMITED (CCL) was downgraded to Underperform from Neutral by MacquarieB/H/S: 0/5/3

Macquarie downgrades to Underperform from Neutral following the recent re-rating of the share price above its target, which is steady at $8.15. The broker believes Australian beverages remain susceptible to a number of headwinds such as competition and sugar issues, and more investment in price is likely. The broker expects more money will need to be spent to meet growth targets and forecasts $10-20m per annum expenditure over the next three years. Indonesian volumes have improved but Macquarie notes this can be attributed to the cycling of undemanding comparables.

  1. CSR LIMITED (CSR) downgraded to Underperform from Neutral by Credit Suisse and to Hold from Buy by Deutsche BankB/H/S: 0/4/3

FY19 net profit was in line with guidance. Credit Suisse believes the downturn in building activity is only just beginning and volume declines are likely to accelerated during the year. History points to significant operating leverage for the company. The broker also believes it will be challenging to maintain earnings for aluminium, given the second half step up in coal, alumina and other costs. The broker downgrades to Underperform from Neutral, maintaining a target of $2.90.

FY19 net profit was broadly in line with Deutsche Bank’s expectations. No quantitative guidance was provided for FY20, as is usually the case. Management has indicated that building products volumes in April are consistent, although there are mixed economic signals which make it difficult to predict activity in FY20. Deutsche Bank believes risk is to the downside for building product margins. Aluminium earnings are expected to remain depressed until at least FY21. The broker downgrades to Hold from Buy and reduces the target to $3.60 from $3.80.

  1. MYER HOLDINGS LIMITED (MYR) was downgraded to Sell from Neutral by UBS B/H/S: 0/2/3

UBS notes the stock price has lifted around 58% in the year to date as the new CEO executes well and delivers on early commitments. The broker’s analysis of lease expiry suggests a significant opportunity, resulting in 10-33% upgrades to earnings per share. Still, the market remains, in the broker’s opinion, overly optimistic on the size of potential upgrades and the pace at which the new strategy can be executed. Hence, the broker downgrades to Sell from Neutral. Target is raised to $0.59 from $0.47.

  1. ORICA LIMITED (ORI) was downgraded to Neutral from Outperform by Credit SuisseB/H/S: 0/7/0

Credit Suisse found several positives in the company’s first half results. The broker was pleased with the recovery in the Latin American performance, while noting the take-up of electronic and wireless blasting solutions appears to be accelerating and, potentially, validating the technology. There is also prospective upside from product rationalisation initiatives and management appears more confident in the price environment. The broker also welcomes the absence of any “worse” news on Burrup. Credit Suisse considers the stock is fair value and downgrades to Neutral from Outperform. Target is raised to $19.24 from $19.08.

See upgrade above.

  1. PUSHPAY HOLDINGS LIMITED (PPH) was downgraded to Lighten from Hold by Ord MinnettB/H/S: 2/0/0

FY19 revenue was in line with expectations. The deceleration in the back book suggests to Ord Minnett that either the company is finding it harder to increase online penetration or revenue churn is having an impact. As such, with growth becoming increasingly reliant on signing new customers, amid significant leadership changes, the risks are now considered outweighing the rewards. Rating is downgraded to Lighten from Hold. Target is reduced to $3.27 from $3.47.

  1. QANTAS AIRWAYS LIMITED (QAN) was downgraded to Neutral from Outperform by MacquarieB/H/S: 2/4/1

Qantas increased revenues in the March Q, reflecting the timing of Easter. Macquarie sees revenue per available seat-kilometre growth easing into FY20 given lower corporate travel, the impact from the election and a weaker domestic consumer. The broker’s forecast is below consensus and Macquarie sees RASK risk skewed to the downside. Downgrade to Neutral. Target falls to $5.75 from $6.25.

  1. QBE INSURANCE GROUP LIMITED (QBE) was downgraded to Sell from Hold by Deutsche BankB/H/S: 7/0/1

Recent share price recovery has been followed up with a downgrade to Sell from Hold at Deutsche Bank with an $11.80 price target. Direct reason is the expectation of a more prolonged housing downturn in Australia, which should lead to a spike in lenders’ insurance claims. QBE’s LMI business is the second largest in Australia, the broker explains. It generated $100m of insurance profit in FY18, representing approximately 17% of Australian insurance profit or 8% of group earnings.

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

 

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