Stockbroking analysts haven’t been loafing around these past few weeks, updating forecasting models as the August reporting season approaches, but the news has remained negatively biased as downgrades continue outnumbering upgrades, and with earnings forecasts, on balance, continuing to slide further downwards.
For the week ending Friday 19 July 2019, FNArena registered seven upgrades for individual ASX-listed entities; again outnumbered by 15 downgrades.
Total numbers for the seven leading stockbrokerages monitored daily are now Buy 38.79%, Hold 44.46% and Sell 16.75%. The gap between total Buy ratings and Neutral/Holds has seldom been this wide, if ever.
In a rare expression of unity, all upgrades moved to Buy with Aristocrat Leisure, ANZ Bank, Santos and Sydney Airport among the lucky receivers. Among the downgrades, we find many stocks that performed well in the first six months of calendar 2019; Carsales, Cochlear, CSL, Magellan Financial, Ramsay Health Care, REA Group and ResMed.
Others that equally received a downgrade last week include Cimic Group, Data#3, G8 Education and Galaxy Resources.
Earnings estimates received notable boosts for Nearmap, Healius, Challenger, Austal and numerous others. But, again, the reductions elsewhere look a lot larger, led by Perseus Mining and Galaxy Resources, followed at significant distance by Michael Hill, Woodside Petroleum, OZ Minerals, and others.
It’s early days still in the US’ Q2 reporting season, and macro dynamics will continue dominating overall investor sentiment, but by week’s end local attention will increasingly also include profits, margins and forward guidance delivered by Australian companies. ResMed unofficially kicks off the August reporting season on Friday, with Credit Corp and Rio Tinto not far behind.
Cimic Group’s result release last week proved disappointing. Outside of iron ore miners, analysts’ expectations are rather low, but this doesn’t mean it’ll be easier for Australian companies to deliver a positive surprise.
In the good books
1. AUSTRALIA & NEW ZEALAND BANKING GROUP (ANZ) was upgraded to Add from Hold by Morgans B/H/S: 1/4/2
Morgans upgrades to Add from Hold because of recent share price weakness. The broker believes stimulus initiatives announced by APRA (Australian Prudential Regulatory Authority), for an additional capital add-on of $500m for operational risk, to be applied until the banks have completed their planned remediation, will de-risk the earnings outlook for the sector. Morgans considers the initiatives are positive for the outlook for system credit growth and asset quality. The broker expects the major banks to become more attractive to investors from a yield perspective as government bond yields fall. The broker expects an -18 basis points reduction in the CET1 ratio for ANZ Bank but it is still likely to be above the unquestionably strong benchmark of 10.5%. Target is steady at $29.
2. OCEANAGOLD CORPORATION (OGC) was upgraded to Outperform from Neutral by Macquarie B/H/S: 3/2/0
Macquarie visited OceanaGold’s NZ operations and came away expecting a substantial extension to mine life at Macraes and ongoing exploration at Waihi to offer production upside. The broker sees NZ as the key earnings driver in the medium term, and expects the stock’s discount to the sector to unwind as projects gain momentum. Upgrade to Outperform. Target unchanged at $5.00.
3. SYDNEY AIRPORT HOLDINGS LIMITED (SYD) was upgraded to Add from Hold by Morgans B/H/S: 3/1/3
Accepting a lower-for-longer scenario for bond yields, Morgans has upgraded to Add from Hold. Short term forecasts have been reduced a little, but the analysts point out the small changes have a compounded impact further out. Growth in dividends per share is now projected to decline to 2% only per annum across FY20-FY23. Lower bonds overshadow all of that, with the price target jumping $1.10 to $8.71.
In the not-so-good books
1. CIMIC GROUP LIMITED (CIM) was downgraded to Underperform from Neutral by Credit Suisse B/H/S: 1/2/1
First half results missed Credit Suisse estimates, largely at the revenue line. Cash conversion step down to 52% versus the levels of 112% witnessed on an annual basis since 2014. Management attributed this to a change in the business mix, as large infrastructure work was completed and there were a higher proportion of alliance-style contracts with less opportunity for early cash receipts. Credit Suisse lowers the target to $35 from $46 and downgrades to Underperform from Neutral. The broker reduces 2019 net profit forecasts by 8%.
2. COCHLEAR LIMITED (COH) was downgraded to Sell from Neutral by Citi B/H/S: 0/2/4
Citi expects net profit in FY19 of $275m, at the top end of guidance. The broker suspects market growth in North America will be lower than the prior corresponding period as Cochlear may have been more focused on protecting market share. Net profit is expected to be up 14% in FY20. Given the increase in the share price the broker downgrades to Sell from Neutral. Target is steady at $198.
3. CSL LIMITED (CSL) was downgraded to Neutral from Buy by Citi B/H/S: 3/4/0
Citi downgrades to Neutral from Buy on recent share price appreciation. The target is increased slightly to $239.60 from $236.60. The main issues during reporting season are expected to be centred on immunoglobulin market share gains. The broker forecasts FY19 net profit of US$1.94bn, slightly ahead of guidance.
4. G8 EDUCATION LIMITED (GEM) was downgraded to Neutral from Outperform by Macquarie B/H/S: 3/2/0
Data suggest occupancy trends are improving in the sector post Child Care Subsidy implementation, but Macquarie expects this tailwind to ease. Supply growth is persisting though moderating. The broker believes G8 Education is doing the right things regarding operational improvement, but it will take time to turn the ship around. It is also unlikely the company will be given the benefit of the doubt on a second half skew when it reports first half earnings, Macquarie suggests. Downgrade to Neutral. Target falls to $2.80 from $3.45.
5. MAGELLAN FINANCIAL GROUP LIMITED (MFG) Downgrade to Underperform from Neutral by Macquarie B/H/S: 0/4/3
June quarter funds management performance was supported by a strong market, albeit not as strong as March, Macquarie notes, and 1-8% increases in funds under management across the sector. Magellan was the only major manager to experience funds inflows, while Perpetual suffered the biggest outflows. Magellan continues to deliver a strong market performance but retail inflows are stabilising and Macquarie believes the share price has run too hard. Target rises to $45 from $39. Downgrade to Underperform.
6. PERSEUS MINING LIMITED (PRU) was downgraded to Neutral from Outperform by Macquarie B/H/S: 1/2/0
Perseus’ June Q saw weaker grades at Edikan, with Sissingue in line. Management has guided to flat production in FY20, as expected, weighted to the second half. The recent trend of cost reduction is expected to continue. Despite weaker production, deleveraging of the balance sheet continues. Macquarie nonetheless downgrades to Neutral after a strong share price run. Target unchanged at 70c.
7. REA GROUP LIMITED (REA) was downgraded to Reduce from Add by Morgans B/H/S: 3/2/1
The shares are now trading well above Morgans’ valuation and the rating is downgraded to Reduce from Add. REA Group shares have risen 21% since the broker last reported on the stock in May. Morgans suspects there will be near-term disappointment if the FY20 outlook commentary at the results on August 9 is subdued, or even negative. The broker likes the longer term story but considers the valuation stretched. Target is steady at $91.94.
8. SYRAH RESOURCES LIMITED (SYR) was downgraded to Underperform from Outperform by Macquarie B/H/S: 1/2/1
June Q production and costs at Balama both missed Macquarie’s forecasts, while sales were in line. Improving production and product mix remain key to stabilising Syrah’s balance sheet, the broker suggests. Macquarie has also pushed back its timing expectation for the Battery Anode Material project, which is key to longer term valuation. Downgrade straight to Underperform from Outperform. Target falls to 90c from $1.20.
9. WESTERN AREAS NL (WSA) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/4/0
Credit Suisse notes the June quarter production met FY19 in forecasts. Odysseus is on target with early works completed. The broker expects FY20 guidance with the FY19 result. Rating is downgraded to Neutral from Outperform on valuation and the target is lowered to $2.45 from $2.50.
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.
