IN THE GOOD BOOKS
1. A2 MILK (A2M) was upgraded to Buy from Neutral by UBS
UBS believes a2 Milk is in a unique position, with a differentiated premium brand that is well regarded yet under-penetrated in the largest and most profitable infant milk formula market globally. The main risk is further regulation and greater disruption from changes in Chinese e-commerce laws. Still, A2 Milk is considered well positioned to mitigate the risks. The broker upgrades to Buy from Neutral. Target is raised to NZ$17.50 from NZ$14.00.
2. FLIGHT CENTRE (FLT) was upgraded to Buy from Neutral by Citi
Citi believes the retail outlook is improving for the first time in four years on the back of tax cuts, rate cuts, lower cost of living and a stabilising housing market. The broker still anticipates some weak earnings reports from the sector ahead of such improvement, and believes downside risk provides buying opportunities.
Flight Centre upgraded to Buy on an improving domestic backdrop, and strong growth in corporate and international leisure. Target rises to $49.20 from $42.30.
3. GOLD ROAD RESOURCES (GOR) was upgraded to Outperform from Neutral by Macquarie
Macquarie upgrades to Outperform from Neutral. The company recently poured its first gold at Gruyere and, despite some delays to commissioning, the broker has moved the target to the blended mix used for producers. Target is raised to $1.40 from $1.05.
4. HARVEY NORMAN HOLDINGS (HVN) was upgraded to Neutral from Sell by Citi
Harvey Norman upgraded to Neutral from Sell (see comments from Citi on the outlook for retail under Flight Centre). Target rises to $4.00 from $3.20.
5. JB HI-FI (JBH) was upgraded to Neutral from Sell by Citi
JB Hi-Fi upgraded to Neutral from Sell (see comments from Citi on the outlook for retail under Flight Centre). Target rises to $27.80 from $21.10.
6. PREMIER INVESTMENTS (PMV) was upgraded to Neutral from Sell by Citi
Premier Investments upgraded to Neutral from Sell (see comments from Citi on the outlook for retail under Flight Centre). To be more positive the broker needs to see evidence of success for the Smiggles wholesale rollout strategy. Target rises to $16.40 from $15.50.
7. SANDFIRE RESOURCES NL (SFR) was upgraded to Neutral from Underperform by Credit Suisse
Credit Suisse concludes the acquisition of MOD Resources ((MOD)) is accretive and raises the target to $6.75 from $6.40. Sandfire Resources has agreed to a 45% premium, in cash and scrip for the company, which owns the undeveloped T3 copper project in Botswana. The broker expects the company to deliver at the top end of production guidance in the June quarter. Rating is upgraded to Neutral from Underperform.
8. ST BARBARA (SBM) was upgraded to Neutral from Underperform by Macquarie
The broker upgrades St Barbara to Neutral from Underperform and raises the target to $3.10 from $2.50. The broker assumes a cautious view on the larger Australian gold producers.
IN THE NOT-SO-GOOD BOOKS
1. ADELAIDE BRIGHTON (ABC) was downgraded to Lighten from Hold by Ord Minnett
Given continued weakness in residential approvals data in April and May, Ord Minnett believes the second half result will underperform estimates. Net profit in 2019 is now expected to fall -17%. Trading multiples remain elevated and the broker downgrades to Lighten from Hold. The target is lowered to $3.90 from $4.00. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
2. ALUMINA (AWC) was downgraded to Underperform from Neutral by Macquarie
Macquarie downgrades the outlook for alumina prices, which has a significant impact on its earnings outlook for Alumina Ltd. The broker now envisages downside risk to consensus expectations for both the dividend and earnings. Rating is downgraded to Underperform from Neutral, although an 8% dividend yield should provide some downside protection. Target is $2.00.
3. COMMONWEALTH BANK OF AUSTRALIA (CBA) was downgraded to Neutral from Outperform by Credit Suisse and to Sell from Neutral by Citi
Credit Suisse now incorporates a lower net interest margin to account for the lower cash rate. The broker downgrades to Neutral from Outperform because of the recent strong performance in the bank’s share price. Earnings forecasts are reduced but lower long-term bond yields are now assumed in the three-year model for the target, and the target has increased to $79 from $76 as a result.
Commonwealth Bank is challenged, Citi believes, as it offsets the headwinds from lower portfolio returns. Its leading market position in mortgages and deposits, however, provides a platform for actively re-pricing. As the leader in retail banking, Commonwealth Bank is well-placed to reap the benefits from the easing of front book competition, in the broker’s view. Nevertheless, the stock has run hard and is fully priced. Rating is downgraded to Sell from Neutral. Target is raised to $73.25 from $70.50.
4. EVOLUTION MINING (EVN) was downgraded to Underperform from Neutral by Macquarie
Macquarie maintains its forecasts for gold prices although moderates its AUD/USD expectations, with the net result a modest upgrade for gold forecasts, to $1667/oz, in Australian dollar terms for the next five years. The broker downgrades Evolution Mining to Neutral from Outperform, assuming a cautious view on the larger Australian gold producers. Target is raised to $4.30 from $3.90.
5. GALAXY RESOURCES (GXY) was downgraded to Neutral from Outperform by Macquarie
The cost of production for spodumene producers remains important over the short to medium term, given pressure on margins created from the softer pricing environment. Macquarie now expects 6% lithium spodumene prices to fall to US$550/t towards the end of 2019. The broker downgrades Galaxy Resources to Underperform from Neutral. Target is $1.20.
6. MAGELLAN FINANCIAL GROUP (MFG) was downgraded to Sell from Neutral by UBS
The business continues to enjoy considerably stronger net flows relative to peers but UBS suspects this growth driver is moderating. With the shares up 135% in 2019 to date, the broker notes the FY20 dividend yield outlook is compressed to 3.5%, notwithstanding the increased pay-out policy. Valuation metrics appear increasingly stretched and UBS downgrades to Sell from Neutral. Target rises to $42.00 from $35.50.
7. MEDIBANK PRIVATE (MPL) was downgraded to Underperform from Neutral by Macquarie
Macquarie assesses Medibank Private needs to continue outperforming industry claim trends to maintain its lofty margins. The broker believes gross margins and investment returns will be very strong in the second half. However, the stock appears overpriced at current levels and the rating is downgraded to Underperform from Neutral. Target is raised to $3.05 from $2.85.
8. NORTHERN STAR RESOURCES (NST) was downgraded to Neutral from Outperform by Macquarie
The broker assumes a cautious view on the larger Australian gold producers and downgrades Northern Star to Neutral from Outperform. Target is raised to $11.60 from $10.30.
9. REGIS RESOURCES (RRL) was downgraded to Neutral from Outperform by Macquarie
The broker downgrades Regis Resources to Neutral from Outperform and raises the target to $5.70 from $5.60. The broker envisages the upcoming production/earnings and FY20 guidance cycle a potentially risky period.
10. SOUTH32 (S32) was downgraded to Underperform from Neutral by Macquarie
Macquarie cuts alumina and base metal price forecasts which have a negative impact on the earnings outlook for South32. The broker downgrades to Underperform from Neutral. The weaker price outlook translates to -12% and -30% reductions to FY20 and FY21 forecasts, respectively. Target is reduced to $2.70 from $3.20.
11. SARACEN MINERAL HOLDINGS (SAR) was downgraded to Neutral from Outperform by Macquarie
The broker downgrades Saracen Mineral to Neutral from Outperform and raises the target to $3.80 from $3.30. The broker envisages the upcoming production/earnings and FY20 guidance cycle a potentially risky period.
12. SANDFIRE RESOURCES NL (SFR) was downgraded to Neutral from Outperform by Macquarie
Macquarie has reduced base metal price forecasts, which has driven material downgrades to the more leveraged base metal stocks. As a result, the broker downgrades Sandfire Resources to Neutral from Outperform. The stock has consistently outperformed the copper price over the past 18 months. Target is reduced to $7.10 from $8.00.
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.