For the week ending Friday 17 May 2019, FNArena registered only 7 upgrades in recommendations for ASX-listed stocks against 22 downgrades against a background of more disappointments than upward surprises from the local out-of-season results season, and a slew of profit warnings from predominantly small and mid-cap companies.
Only one of the 8 stockbrokers still carries more Buy-rated stocks than either Hold/Neutral or Sell and one wonders whether this can be partially explained by the fact Ord Minnett has 5 ratings for stocks of which two — Buy and Accumulate — are being treated as a ‘Buy’ in FNArena’s data assessment.
In what can only be a positive signal, all 7 upgrades moved to Buy. On the negative side of the week, all of Mayne Pharma, St Barbara, Sydney Airport and Xero received multiple downgrades.
Few companies are enjoying positive revisions to earnings expectations and CYBG, Xero and Flight Centre all stood out during the week. Plenty of negative adjustments form the offset with the week delivering large reductions to forecasts for Mayne Pharma, Adelaide Brighton, Reliance Worldwide and St Barbara. With exception of gold miner St Barbara, which announced an acquisition not liked by everyone, these reductions all followed a profit warning by the companies involved.
The market’s fundamental dilemma continues this week as a (no doubt) positively received federal election result battles with ongoing out-of-season profit reports, AGM updates and, no doubt, further profit warnings.
Investors live through interesting times.
In the good books
1. DEXUS PROPERTY GROUP (DXS) was upgraded to Buy from Neutral by Citi B/H/S: 1/3/1
Citi upgrades to Buy from Neutral and raises the target to $14.10 from $12.02. This reflects recent transaction activity and increased longer-term office re-leasing spreads because of a longer office cycle. The broker believes a re-rating is likely to continue in a low interest rate environment, given the solid growth profile and high degree of distribution sustainability.
In the not-so-good books
1. GWA GROUP LIMITED (GWA) was downgraded to Sell from Hold by Deutsche Bank B/H/S: 0/4/1
Deutsche Bank expects falling home sales and listings data to affect earnings from FY20. While alterations and additions are more stable than new construction, this is closely linked to new home listings and sales. The broker does not expect the decline to reverse in the near term and envisages similar, although not as negative, risks in New Zealand. Rating is downgraded to Sell from Hold. Target is $2.85.
2. MAYNE PHARMA GROUP LIMITED (MYX) was downgraded to Neutral from Buy by Citi B/H/S: 0/3/1
Citi had expected a more stable generic pricing environment would eventually lead to a recovery in trading but this is not the case for the start of the second half. As a result of incorporating heightened deflationary pressures, the broker reduces FY19-21 estimates for earnings per share by -63% and -55% respectively. Rating is downgraded to Neutral/High Risk from Buy and the target lowered to $0.60 from $0.95. The company will review the carrying value of its generic business and development assets at the full year results in August.
3. ST BARBARA LIMITED (SBM) was downgraded to Underperform from Neutral by Credit Suisse and to Underperform from Neutral by Macquarie B/H/S: 2/1/2
St Barbara will acquire Canadian gold producer, Atlantic Gold. Credit Suisse observes exploration success is needed to create value, assessing the CAD802m price is a 28% premium to the valuation. The company has been assessing potential acquisitions over the past two years and Atlantic Gold is the first to meet criteria. While it withstands due diligence it falls short on value considerations, the broker suggests. Nevertheless, the assets look good, adding long life and low-cost gold production. Credit Suisse downgrades to Underperform from Neutral and reduces the target to $2.72 from $3.30.
The primary asset from the acquisition is the Moose River gold mine the primary asset. Given the 39% premium St Barbara paid, plus some C$300m in capital required to lift production at Moose River, Macquarie downgrades to Underperform. Target falls to $2.70 from $3.40.
4. SYDNEY AIRPORT HOLDINGS LIMITED (SYD) was downgraded to Hold from Add by Morgans B/H/S: 2/2/4
The share price has surged 20% since mid January. Morgans points out government bond rates falling to historical lows and the market appetite for yield were probably the key drivers. Weakness in short-term traffic growth appears to have been disregarded by the market. The broker downgrades to Hold from Add as the share price has compressed the total return potential. Morgans notes significant valuation upside exists if the market starts to factor in a lower-for-longer interest rate scenario. Target rises to $7.61 from $7.55.
5. XERO LIMITED (XRO) was downgraded to Sell from Neutral by UBS and to Lighten from Buy by Ord Minnett B/H/S: 1/2/2
The company has achieved positive free cash flow in FY19, which UBS suggests is representative of the end of a loss-making start-up period as Xero becomes a self-funding business. While comfortable with the growth prospects and supportive of the strategy, the broker believes the valuation has overshot the level at which there is a fair risk/reward trade-off for investors. Particularly in the context of a 10% re-rating on an essentially in-line result. Rating is, therefore, downgraded to Sell from Neutral. Target is raised to $50 from $47.
The company reported a FY19 normalised net loss of -NZ$27.1m, weaker than Ord Minnett expected. Excluding the UK, the broker suspects investors may have shifted their focus to the US where growth was less than 10% half on half. This is typically more than 20%. Ord Minnett downgrades to Lighten from Buy and increases the target to $53 from $49. The broker remains concerned that the stronger-than-expected growth in the UK could be a one-time benefit.
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.