The good news: stockbroking analysts continue to upgrade recommendations for individual ASX-listed stocks. The flip side: they also continue to issue more downgrades than upgrades.
For the week ending Friday,12 July 2019, FNArena counted nine upgrades against 17 downgrades. Among the stocks receiving upgrades, we find a few retailers, a2 Milk and small cap miners. Among the downgrades, we find numerous gold miners, Commbank (twice) and more miners.
Investors should note: both downgrades for CommBank shares moved to Sell. Evolution Mining equally received two downgrades during the week, alongside a number of other small cap gold miners.
The positive side of revisions to earnings estimates has Fortescue Metals in pole position, followed by Healius, Orocobre, Insurance Australia Group, and OceanaGold. Reductions tend to be larger with the week’s biggest cuts reserved for Galaxy Resources, followed by Nearmap, Michael Hill International, OZ Minerals and Alumina ltd.
With only two weeks left before August, analysts are starting to update and review their modelling and assumptions ahead of corporate earnings reports, soon to be unleashed upon Australian investors. In the shorter term, quarterly production reports from miners and energy producers will require attention.
In the good books
1. EBOS GROUP LIMITED (EBO) was upgraded to Add from Hold by Morgans B/H/S: 1/2/0
Ebos recently raised NZ$175m to reduce gearing ahead of further acquisitions and organic growth, and Morgans notes the company has delivered 12% compound annual earnings growth over the past four years, with 10% forecast for the next two, partly driven by the new CWG supply agreement. Upgrades to FY20-21 earnings forecasts lead to a target increase to $24.07 from $20.43. This takes forecast total shareholder return to over 10%, which on Morgans’ scale prompts an upgrade to Add from Hold.
In the not-so-good books
1. DACIAN GOLD LIMITED (DCN) was downgraded to Neutral from Outperform by Macquarie B/H/S: 0/2/0
The company has provided FY20 guidance and a new life of mine plan for Mount Morgans, with 170,000 ounces signalled for the next five years. The updated plan assumes mill throughput of 2.9mtpa and recovery of 94.3%. These metrics are 16% and 4% higher than respective nameplate capacity and feasibility study outcomes. Incorporating the updated outlook, Macquarie makes material downgrades in the near term and upgrades in the long term. The broker lowers the target to $0.70 from $0.80 and downgrades to Neutral from Outperform.
2. EVOLUTION MINING LIMITED (EVN) was downgraded to Hold from Add by Morgans B/H/S: 0/4/3
Evolution Mining has pre-released quarterly production numbers and updated guidance. FY19 production met guidance but exceeded Morgan’s forecast, while costs came in above guidance. Cost guidance has increased for both FY20 and FY21, as capex guidance. A lower Aussie partially offsets the impact. Target falls to $3.44 from $3.55. Evolution remains the Morgans’ preference in the space, and the broker believes a gold allocation is required in any portfolio in uncertain geopolitical times. Recent share price strength nevertheless triggers a downgrade to Hold.
3. SIMS METAL MANAGEMENT LIMITED (SGM) was downgraded to Hold from Buy by Ord Minnett B/H/S: 3/2/1
Operating conditions remain challenged and Ord Minnett expects no reprieve in the near term. Barring any material macro changes, such as a truce in the US/China trade dispute, China relaxing non-ferrous scrap restrictions or a strengthening Turkish economy, the broker suggests the stock may struggle to outperform. Despite strength in iron ore, ferrous scrap pricing remains weak. Ord Minnett downgrades to Hold from Buy and reduces the target to $11.00 from $13.20.
4. WOODSIDE PETROLEUM LIMITED (WPL) was downgraded to Lighten from Hold by Ord Minnett B/H/S: 2/3/1
Marginal returns from development projects, Scarborough and Browse, are hampering the company’s ability to convince its JV partners to proceed and Ord Minnett ascertains this is likely to be causing delays to the investment decision schedule. The risk is that one or both of the projects will be shelved indefinitely which means the trains at the Karratha gas plant will need to be shut down. The stock is now trading above the broker’s target, leading to a downgrade to Lighten from Hold. Target is reduced to $33.85 from $34.60.
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 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.
