In the good books
1. AGL ENERGY (AGL) was upgraded to Neutral from Underperform by Credit Suisse
Credit Suisse expects the company’s retail gross margins to bottom in FY20 and net margins to bottom in FY19. AGL Energy is expected to report FY19 net profit of $1.01bn, just below the mid-point of guidance. The broker upgrades to Neutral from Underperform as the stock has underperformed its historical correlation to bonds and utility peers. Target is raised to $19.20 from $18.30.
2. NEW HOPE CORPORATION (NHC) was upgraded to Add from Hold by Morgans
Morgans observes sharply weaker seaborne thermal coal prices have contributed to a correction in the stock of almost -40%, attributing the weakness to tepid demand, poor producer discipline and some fuel switching into LNG. The broker believes, while the stock may temporarily be in the “too hard basket”, significant value is on offer. The broker considers the market value ignores the non-cash producing assets and the potential recovery in the coal price. Rating is upgraded to Add from Hold. Target is reduced to $3.37 from $3.80.
3. ORIGIN ENERGY (ORG) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse upgrades to Outperform from Neutral as the stock has underperformed electricity and Brent futures as well as its peers in energy. Margins are expected to bottom in FY20. The broker expects a strong result, at the top end of guidance, when Origin Energy reports on August 22. Target is increased to $8.50 from $7.55.
4. SPEEDCAST INTERNATIONAL (SDA) was upgraded to Neutral from Underperform by Macquarie
Operational issues continue to dog SpeedCast, as evidenced by a -12% earnings guidance downgrade for FY19. Leverage is now an issue, with debt covenants at risk, Macquarie notes. There is thus a risk an equity raising will be required, however there is also a chance SpeedCast could now be itself corporate target having made over 15 acquisitions since 2012. It would depend on whether another player is prepared to take on the debt, but given SpeedCast’s lower valuation, Macquarie upgrades to Neutral. Target falls to $2.25 from $2.85.
In the not-so-good books
1. INDEPENDENCE GROUP NL (IGO) was downgraded to Underperform from Neutral by Credit Suisse
Credit Suisse finds the environment for base metal demand challenging, given US/China tensions and tariffs elsewhere, as well as the deterioration in global economic conditions. The broker downwardly revises estimates for nickel, alumina and aluminium and only lifts copper forecasts, largely because of supply factors. Independence Group is downgraded to Underperform from Neutral while the target is reduced to $4.00 from $4.10.
2. MONADELPHOUS GROUP (MND) was downgraded to Neutral from Buy by UBS
UBS updates its database for iron ore capital expenditure, now estimating total investment in Western Australia could be around US$21bn. This expenditure is expected to be delivered through FY19-22. The broker downgrades Monadelphous to Neutral from Buy on valuation grounds as the share price has increased around 40% over the past 12 months. Target is steady at $19. The broker also updates FY21/22 forecasts for earnings per share, reducing FY21 by -10% and increasing FY22 by 5%, while re-profiling iron ore construction forecasts, given increased visibility.
3. NETWEALTH GROUP (NWL) was downgraded to Underperform from Neutral by Macquarie
Citi lowers fourth quarter net flow forecasts, envisaging risk to organic flows from ongoing adviser disruption. FY20 net flows are expected to be underpinned by the transition from ANZ Private. In the wake of the reduction to the Reserve Bank’s cash rate, the broker envisages potential that Netwealth, as well as other platform providers, will need to lower its cash margin in order to provide clients with a better rate. Neutral rating maintained. Target is reduced to $7.80 from $8.05.
4. PERSEUS MINING (PRU) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse increases gold price forecasts, given the recent momentum based on a confluence of supportive macro economic and geopolitical factors. The broker now estimates gold to average US$1327/oz in 2019, rising to US$1350/oz in 2020. The broker downgrades Perseus Mining to Neutral from Outperform and raises the target to $0.59 from $0.57.
5. RAMSAY HEALTH CARE (RHC) was downgraded to Hold from Accumulate by Ord Minnett
Ord Minnett is comfortable with expectations for mid-single-digit growth from the Australian operations, to be boosted over the next couple of years by the acquisition of Capio. However, forecast for FY19 and FY20 are lowered following a review of the expected timing and interest costs arising from the Capio acquisition. Rating is downgraded to Hold from Accumulate and the target is steady at $75. Revised earnings forecasts imply 7% growth in earnings per share in FY20 and FY21, driven by the domestic business. This stock is not covered in-house by Ord Minnett. Instead, the broker white-labels research by JP Morgan.
6. TELSTRA CORPORATION (TLS) was downgraded to Neutral from Buy by UBS
UBS assesses investors are pricing in a future improvement in mobile earnings. The stock may continue to outperform, the broker acknowledges, on relative yield in a low-interest rate environment. However the metrics for mobile in the short-term still reflect the destructive pricing in the industry experienced until early 2019. UBS lifts the target to $4.00 from $3.60 and downgrades to Neutral from Buy as the stock appears fairly valued.
The above was compiled from reports on FNArena. 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.