In the good books
1. ARISTOCRAT LEISURE (ALL) was upgraded to Overweight from Equal-weight by Morgan Stanley
Morgan Stanley asserts Aristocrat Leisure does not need to outperform to succeed in digital. The company’s land-based success and scale provide a competitive advantage, despite growth moderating in this area. Morgan Stanley adjusts estimates to allow for top-line growth from stronger digital growth, eases back margins to account for digital’s lower margins and adjusts for a lower tax rate. All up, estimates for earnings per share are reduced by -1% in FY19 and raised by 3% for FY20. Rating is upgraded to Overweight from Equal-weight and the target is raised to $35 from $29. Industry view: Cautious.
2. ATOMOS (AMS) was upgraded to Add from Hold by Morgans
Following increased working capital flexibility and factoring in the recent launch of the Neon range, Morgans upgrades revenue estimates by 5% across FY20/21. The broker believes the recent momentum in the company’s products and the relatively fixed cost base should mean there is upside to forecasts upon successful execution. Given the returns on offer the rating is upgraded to Add from Hold. The broker suggests additional partnerships can move the dial in terms of revenue/earnings uplift. Target is raised to $1.63 from $1.42.
3. ELDERS (ELD) was upgraded to Add from Hold by Morgans
Elders will acquire Australian Independent Rural Retailers for $187m. The acquisition will be funded via cash and scrip. Morgans considers the purchase price reasonable, given the size of the group. This will mean Elders has a presence in the wholesale channel, and the acquisition fills a gap in Queensland and NSW as well as increasing the company’s presence in the higher-margin animal health sector. Morgans calculates the midpoint of synergies is 8.9% accretive to earnings per share in FY21. Rating is upgraded to Add from Hold. Target is raised to $7.30 from $6.71.
4. SANTOS (STO) was upgraded to Outperform from Neutral by Macquarie
Macquarie upgrades to Outperform from Neutral following the recent pull back in the shares. Target is raised to $8.20 from $7.60. Several catalysts are expected to de-risk future large-scale development opportunities over the second half including flow-testing of Dorado-3, MacArthur basin drilling, potential Narrabri approvals and the 2019 investor briefing.
In the not-so-good books
1. CARSALES.COM (CAR) was downgraded to Reduce from Add by Morgans
Following a strong share price performance, stockbroker Morgans has decided it’s time to downgrade Carsales to Reduce from Add, representing a double-step downgrade in its ratings universe. Looking towards FY20, Morgans finds the company’s growth is most likely to consist of single-digit percentage growth and in this context the current valuation is seen as overly rich. Morgans retains a positive view on Carsales’ long-term prospects, but succumbs to the observation that, short-term, the valuation seems to have moved well-ahead of fundamentals. Price target $12.49 (unchanged). Forecasts have been left untouched.
2. DATA#3 (DTL) was downgraded to Hold from Add by Morgans
Data#3 has released revised guidance suggesting FY19 profit will be up 28%, 11% ahead of Morgans’ forecast. The broker had flagged upside were there to be no election slowdown, and neither the NSW or federal elections produced a slowdown. The broker rates the company highly but after a 52% rally over twelve months, downgrades to Hold. Target rises to $2.48 from $2.25.
3. GALAXY RESOURCES (GXY) was downgraded to Neutral from Buy by Citi
Operations were strong at Mount Cattlin in the June quarter, with spodumene production up 35% quarter on quarter. Full year 2019 production guidance is unchanged at 180-210,000t. Citi believes spodumene has the weakest fundamentals within the lithium supply chain because of low barriers to entry and the dependence on conversion capacity. There is also excess supply in the near term. The company’s current earnings are 100% exposed to spodumene which presents a downside risk to forecasts. Citi downgrades to Neutral from Buy and reduces the target to $1.60 from $2.70.
4. NIB HOLDINGS (NHF) was downgraded to Sell from Neutral by Citi
Citi marks to market forecasts to allow for strong equity markets in the second half and the fall in bond yields. The broker now allows for 2.85% rate increases for the next two years but also for a slower reduction in net margins. The broker continues to expect a solid FY19 result but wonders whether the relief rally following the election result has gone too far. Rating is downgraded to Sell from Neutral and the target increased to $7.05 from $5.85.
5. RAMSAY HEALTH CARE (RHC) was downgraded to Neutral from Outperform by Macquarie
Macquarie notes Ramsay Health Care’s NHS volume growth in the UK remains above sector average, but strong prior periods will be cycled over the balance of 2019. Earnings growth into FY20 will be supported by incremental brownfield contributions and more favourable tariff outcomes in the UK and France. But it’s all now captured in the price, hence Macquarie pulls its rating back to Neutral. Target unchanged at $75.
6. RESMED INC (RMD) was downgraded to Neutral from Buy by UBS
The stock has performed strongly and the company will report its results on July 26. UBS expects a continuation of strong mask and accessory revenue growth in FY20, up 9% in the Americas and 11% for the rest of the world. UBS downgrades to Neutral from Buy. US industry feedback remains positive based on re-supply and the 2021 competitive bidding round is the next hurdle, in the broker’s opinion.
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.
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