For the week ending Friday 24 May 2019, FNArena registered no less than 14 upgrades in recommendations for individual ASX-listed stocks and 18 downgrades. Not unexpected, the tally represents value seen opening up on a change in forecasts (same government, unexpected) and increasing valuation constraints as share prices continue to rise.
Hence it would be pleasing to note for most investors only four out of the 14 upgrades stopped at Neutral/Hold. On the flipside, 13 of the 18 downgrades sank the recommendation to Sell. It truly is a bifurcated market indeed.
Computershare was the sole recipient of more than one upgrade during the week (one to Neutral only). On the flipside, AGL Energy, ALS ltd, NRW Holdings and TechnologyOne all received two downgrades. Woolworths received three, all went to Sell.
There’s more good news from valuation adjustments and earnings estimates updates.
For once, or so it appears, the pendulum has swung towards more positive amendments. It has been a long while (ironically, this coincides with the local index potentially having peaked for the time being).
On the positive side for adjustments to valuations and price targets, Xero, CSR, Medibank Private and Adelaide Brighton all enjoyed noticeable increases. The negative side is characterised by smaller reductions and only three companies are worth mentioning: Computershare, ALS ltd and St Barbara.
A similar pattern has formed in forecast changes with Xero, Aveo Group, James Hardie and ALS ltd leading the pack on the positive side, and with only three companies worth pointing at on the negative side: Virgin Australia, Incitec Pivot, and St Barbara.
Out of season reporting results remain on the calendar in the week ahead, while profit warnings continue to feature as well.
In the good books
1. ADELAIDE BRIGHTON LIMITED (ABC) was upgraded to Outperform from Neutral by Macquarie B/H/S: 1/4/2
Earnings forecasts for Adelaide Brighton have been trending lower recently, Macquarie notes, on concerns over a falling housing market. But on a combination of the surprise election win, a likely RBA rate cut and APRA’s plan to reduce the mortgage serviceability threshold, confidence should be restored and this will filter into housing. Thus Macquarie now sees greater upside risk to earnings, particularly in FY20. Upgrade to Outperform from Neutral. Target rises to $4.80 from $3.70.
2. ANSELL LIMITED (ANN) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 4/4/0
Raw material prices have eased. Raw materials account for around 60% of the company’s cost of goods sold. Credit Suisse expects Ansell will achieve only a modest benefit in the second half but forecasts a benefit of around 5% for the first half of FY20. The broker suspects the company will miss its 3-5% organic growth target in FY19, given indications that demand has moderated. While wary of a subdued macro economy, Credit Suisse still expects 13% growth in earnings per share in FY20 and upgrades to Outperform from Neutral. Target is raised to $27.50 from $24.00.
3. CHARTER HALL LONG WALE REIT (CLW) was upgraded to Buy from Hold by Ord Minnett B/H/S: 1/1/1
Ord Minnett has conducted a review of the company’s portfolio and notes the exposure to a shift in demand for long-weighted lease expiry assets in Australia. The broker anticipates a flight of capital to these assets in a low interest-rate environment. The main leasing risk in the portfolio is the Metcash (MTS) facility in Perth, which Ord Minnett considers is materially over-rented. The broker would prefer the risk to be mitigated via a sale of the asset but notes it is one of the better located sites in Perth and has development potential. Rating is upgraded to Buy from Hold and the target lifted to $5.25 from $4.25.
4. COMPUTERSHARE LIMITED (CPU) was upgraded to Hold from Lighten by Ord Minnett B/H/S: 0/7/1
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.
5. CSR LIMITED (CSR) was upgraded to Outperform from Neutral by Macquarie B/H/S: 1/3/3
Earnings forecasts for CSR have been trending lower recently, Macquarie notes, on concerns over a falling housing market. But on a combination of the surprise election win, a likely RBA rate cut and APRA’s plan to reduce the mortgage serviceability threshold, confidence should be restored and this will filter into housing. Thus Macquarie now sees greater upside risk to earnings. Upgrade to Outperform from Neutral. Target rises to $4.70 from $3.40.
6. ILUKA RESOURCES LIMITED (ILU) was upgraded to Buy from Neutral by Citi B/H/S: 5/1/0
Citi has upgraded to Buy from Neutral on the belief that de-stocking has ended and producers like Iluka can look forward to increased prices. Plus if Sierra Rutile can deliver, there should be substantial upside through significantly increased output volume, estimated at circa 40% potential. Citi has lifted earnings forecasts by 6%-7% for the years ahead. AUD/USD forecasts have been reset at 0.70 and 0.73 respectively for this calendar year and next. Price target improves to $11 from $10.40.
7. SUPER RETAIL GROUP LIMITED (SUL) was upgraded to Overweight from Equal-weight by Morgan Stanley B/H/S: 3/5/0
Morgan Stanley believes the company has the opportunity to move the focus back on productivity after some value-destructive acquisitions. The broker considers the automotive business undervalued and pressures overstated. Super Retail is post a significant capital expenditure cycle and should deliver strong free cash flow, in Morgan Stanley’s view. Rating is upgraded to Overweight from Equal-weight. Target is raised to $10.00 from $8.20. Industry View: Cautious.
In the not-so-good books
1. AGL ENERGY LIMITED (AGL) was downgraded to Underperform from Neutral by Macquarie and to Sell from Buy by UBS B/H/S: 0/2/6
Macquarie lowers earnings expectations across the gas division to reflect a step up in gas costs. Meanwhile, wholesale electricity faces a structural challenge, with the LREC contribution dropping towards zero. Macquarie believes AGL does not justify a long-term market PE premium, especially as earnings are vulnerable to technology changes. Rating is downgraded to Underperform from Neutral and the target lowered to $19.99 from $20.67.
UBS remodels its view on AGL and downgrades to Sell from Buy. The broker has identified issues that will erode earnings by around -$500m. Despite growth opportunities that add back $150m, net operating earnings (EBITDA) are expected to decline by -$380m over FY19-23. The broker remains bearish on the company’s earnings outlook relative to Origin Energy (ORG). The broker acknowledges that, despite the weakening fundamentals, it is possible the share price will be supported by yield investors. Target is reduced to $21.00 from $22.70.
2. COLES GROUP LIMITED (COL) was downgraded to Neutral from Buy by Citi B/H/S: 0/5/2
German competitor Kaufland is looking to start a battle for its share of the Australian households’ groceries spending and Citi thinks this will act as the catalyst for a resumption of an industry-wide private label price war. The analysts have, in anticipation, lowered long term margin assumptions for the incumbents Woolworths and Coles. This leads to lowered forecasts, and a lower valuation. Price target for Coles drops to $13 from $13.40. Recommendation is downgraded to Neutral from Buy.
3. EVOLUTION MINING LIMITED (EVN) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 1/4/3
Gold has been a relatively strong performer among the metals in the past six weeks, although Ord Minnett assesses the short-term outlook is mixed. US/China trade tensions are re-emerging at a time when the US dollar is strengthening. Australian gold stocks continue to outperform because of solid cash flow, strong balance sheets and a weakening Australian dollar. However, Ord Minnett downgrades Evolution Mining to Hold from Accumulate based on valuation. Target is steady at $3.50.
4. NORTHERN STAR RESOURCES LTD (NST) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 1/3/3
Gold has been a relatively strong performer among the metals in the past six weeks, although Ord Minnett assesses the short-term outlook is mixed. US/China trade tensions are re-emerging at a time when the US dollar is strengthening. Australian gold stocks continue to outperform because of solid cash flow, strong balance sheets and a weakening Australian dollar. The broker downgrades Northern Star to Hold from Accumulate on valuation. Target is $9.80.
5. OIL SEARCH LIMITED (OSH) was downgraded to Underperform from Neutral by Credit Suisse B/H/S: 2/4/2
Credit Suisse believes PNG LNG expansion volumes will be contracted well below what the market is valuing. The broker suspects contractual price reviews may be pursued more aggressively by buyers. The country risk profile could also be back to the fore, given recent political instability. Credit Suisse assesses the departure of CEO Peter Botten could cause a de-rating event for the stock. Amid scepticism about the upside in Alaska, Credit Suisse downgrades to Underperform from Neutral on the basis of a softer LNG contracting environment. Target is reduced to $6.96 from $7.33.
6. SONIC HEALTHCARE LIMITED (SHL) was downgraded to Sell from Neutral by UBS B/H/S: 3/4/1
With declining organic revenue growth rates in several regions and rising costs, UBS notes the company has relied on acquisitions to boost revenue and earnings growth. Current forecasts capture an improving margin profile but the broker’s revised valuation results in the rating moving to Sell from Neutral. UBS points out the market is applying a large multiple to Australian pathology. Target is raised to $24.90 from $24.00.
7. TECHNOLOGYONE LIMITED (TNE) was downgraded to Sell from Neutral by UBS B/H/S: 0/2/1
First half results were affected by material accounting changes. UBS is comfortable with guidance because of the stronger second half contributions from consulting and on-premises business, in addition to the momentum in high-quality SaaS revenue. The broker expects 15% compound growth in earnings per share from FY19-21. However, valuation appears stretched and the rating is downgraded to Sell from Neutral. Target is raised to $7.00 from $5.60.
8. WOOLWORTHS LIMITED (WOW) was downgraded to Sell from Neutral by Citi B/H/S: 0/4/3
German competitor Kaufland is looking to start a battle for its share of the Australian households’ spending on groceries and Citi thinks this will act as the catalyst for a resumption of an industry-wide private label price war (See Coles downgrade above). The price target for Woolworths falls to $28.75, the recommendation is downgraded to Sell from Neutral.
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.
