In the good books
- COMPUTERSHARE (CPU) was upgraded to Neutral from Underperform by Macquarie and to Hold from Lighten by Ord Minnett
Macquarie notes most of the information in the investor briefing dealt with near-term implications of UK mortgage services. The broker anticipates consensus expectations, which were too optimistic on both margin income and UK mortgage services, will converge with its earnings forecasts. Following delays in completing the migration of clients from the legacy UKAR platform the company has confirmed this will result in an additional $35m in costs in FY20. Following the response in the share price, Macquarie upgrades to Neutral from Underperform. Target is raised to $17.00 from $16.50.
The company has maintained FY19 guidance at its investor briefing, although highlighted some risks from UK mortgage services. An improvement in the US mortgage servicing business is expected. Ord Minnett considers guidance achievable and upgrades to Hold from Lighten. Target is steady at $16.50. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
- MEDIBANK PRIVATE (MPL) was upgraded to Hold from Lighten by Ord Minnett
Ord Minnett observes the Coalition win in the 2019 federal election removes the downside risk from Labor’s proposed 2% cap on premium rates. The broker still believes margins will fall but now at a slower rate. The broker upgrades to Hold from Lighten and raises the target to $3.05 from $2.30. The broker expects the incoming government will allow premium rate increases that are only modestly behind claims inflation, even with increasing efforts by health insurers to offset those costs. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
- NATIONAL AUSTRALIA BANK (NAB) was upgraded to Overweight from Equal-weight by Morgan Stanley
Morgan Stanley believes National Australia Bank offers a sound retail and business bank performance and better capital generation, as well as more flexibility following the decision to cut the dividend and partially underwrite the reinvestment plan. The result of the federal election now lowers the tail risks in relation to credit quality, the mortgage market and regulatory environment and the broker upgrades to Overweight from Equal-weight. Target is raised to $25.70 from $25.10. Industry view: In-line.
- RAMSAY HEALTH CARE (RHC) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett’s main concern was a challenge to industry profitability posed by plans by the Labor Party for caps of 2% for two years to premiums. The broker is now confident the pricing environment will be more benign and raises domestic margin forecasts. As there are fewer challenges in Australian business and improved tariffs in the UK and France, the broker considers the outlook has improved. Rating is upgraded to Accumulate from Hold and the target raised to $75 from $60. This stock is not covered in-house by Ord Minnett. Instead, the broker white-labels research by JP Morgan.
- QANTAS AIRWAYS (QAN) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse believes an outright election win, as opposed to a hung parliament, is a positive for corporate travel demand, which has been weak in the run-up. Qantas will also benefit from Virgin Australia’s ((VAH)) plans to cut capacity, which will be positive for Qantas domestic and Jetstar, some 70% of earnings. Lower risk of industrial action, with Labor failing to get up, is another positive. Put it all together and Credit Suisse upgrades to Outperform. Target rises to $6.40 from $6.00.
- STOCKLAND (SGP) was upgraded to Outperform from Neutral by Macquarie
Despite the recent rally in the stock, Macquarie notes it is trading at a -30% discount to the A-REIT sector. While not expecting the spreads to close completely, the broker believes the stock is supported, given residential headwinds have largely passed. Rating is upgraded to Outperform from Neutral, as recent macro changes have led to a reduction in downside risks. Target is increased by 25% to $4.48.
- VIRGIN AUSTRALIA (VAH) was upgraded to Neutral from Underperform by Credit Suisse
Virgin has noted domestic demand has weakened and failed to much recover post the Easter period. Virgin’s outlook appears worse, Credit Suisse notes, than was provided in last week’s Qantas ((QAN)) update. Virgin is responding by reducing capacity, which is a positive for Qantas, but does have the potential to drive higher per unit revenue. The broker upgrades to Neutral, retaining an 18c target.
In the not-so-good books
- ALS (ALQ) was downgraded to Neutral from Buy by Citi and to Sell from Hold by Deutsche Bank
Citi found the FY19 results solid as margins in life sciences were better than expected and there was double-digit growth in commodities. However, the broker downgrades to Neutral from Buy, maintaining concerns around the weak trends in geochemistry which is still the company’s largest business and 44% of group earnings (EBIT). The broker does not expect the second half margin improvement in life sciences to be repeated. Target is reduced to $8.25 from $8.60.
Deutsche Bank observes that, over the last few years, the company has benefited from a recovery in global minerals drilling expenditure. However, the rate of growth has slowed. Geochemistry volume growth was flat in the second half. The broker downgrades to Sell from Hold and reduces the target to $6.57.
- AMP (AMP) was downgraded to Sell from Neutral by Citi
Citi envisages material risk, that there will be minimal capital returns from AMP and the road to releasing value will be difficult. The broker believes the adviser industry is likely to transform to one dominated by salaried advisers and away from the aligned model that makes up 90% of the company’s adviser base. A new business model could require significant investment and take time to be profitable. Citi downgrades to Sell/High Risk from Neutral. Target is $1.90.
- IOOF HOLDINGS (IFL) was downgraded to Sell from Neutral by UBS
UBS believes the structural shake-up has only just begun and, while IOOF continues to enjoy greater stability versus the rest of the sector, momentum is likely to come under increasing pressure if its elevated contemporary platform pricing is not addressed. UBS acknowledges there is less reliance on higher-margin legacy products but believes platform earnings could compress by -25% over five years. Rating is downgraded to Sell from Neutral and the target lowered to $5.05 from $5.80.
- JAMES HARDIE INDUSTRIES N.V. (JHX) was downgraded to Neutral from Buy by UBS
UBS believes the risk/return is now more balanced and downgrades to Neutral from Buy. US housing starts have commenced 2019 on a weaker footing while Australian detached housing approvals are falling. The broker suspects restoring above-market growth could take longer than previously expected, while the company has toned down its targets for FY20. Target is reduced to $19.60 from $20.20.
- NRW HOLDINGS (NWH) was downgraded to Sell from Hold by Deutsche Bank and to Neutral from Buy by UBS
The company has won the contract for Koodaideri. Deutsche Bank believes the win was already factored in and, although the contract size is close to forecasts, at $150m over 80 weeks it is likely to be a disappointment to consensus expectations. The broker marginally reduces revenue forecast for FY20 because of the current outlook and the expectation the company will face capacity constraints. Rating is downgraded to Sell from Hold and the target is steady at $2.31.
UBS upgrades FY20 revenue estimates by 5%. The broker expects a further $200m in contracts will be won and delivered over the year. The 80% gain in the share price in the year to date means UBS downgrades to Neutral from Buy. Target is raised to $3.10 from $2.55.
- TECHNOLOGYONE (TNE) was downgraded to Lighten from Hold by Ord Minnett
First half results were in line with expectations and Ord Minnett notes momentum is clearly building across both software-as-a-service and in the UK. SaaS metrics were particularly strong and signal the company continues to enjoy larger customers migrating to its cloud offering. The main drawback for the broker is cash flow, which likely reflects lower upfront cash payments from customers migrating to SaaS. Valuation is now considered stretched and the rating is downgraded to Lighten from Hold. Target is raised to $6.70 from $6.10.
- WOOLWORTHS (WOW) was downgraded to Lighten from Hold by Ord Minnett
The share price of Woolworths is now well above Ord Minnett’s discounted cash flow valuation, with the PE multiple high at 26.6x FY19 estimates and 24.9x at FY20 estimates for 6.3% and 7.0% growth in earnings per share, respectively. The $1.7bn off-market buyback has been supportive, and may remain so, but the broker suggests there could be some weakness to follow, as investors reassess. Rating is downgraded to Lighten from Hold and the target raised to $31 from $30. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
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.