The gap between stockbroking analysts issuing upgrades and downgrades for individual ASX-listed stocks only widens further as the major indices continue to push on to post-GFC and all-time highs, which can only be described as “as expected”‘.
For the week ending Friday 26 July 2019, FNArena registered seven upgrades versus 24 downgrades by the seven stockbrokers monitored daily (we recently lost Deutsche Bank).
Six out of the seven upgrades moved to Buy/equivalent of Buy, with Unibail-Rodamco-Westfield the exception (Neutral). Half of the downgrades -twelve- involves downgrades to Sell impacting on ratings for junior gold miners St Barbara (twice), Regis Resources (twice) and Evolution Mining, as well as on Computershare, Domain Holdings, JB Hi-Fi, Rio Tinto, Magellan Financial, and others.
The stand-out observation to make here is that while the bias remains to the downside as far as earnings forecasts are concerned, the undercurrent is definitely more positive for valuations and price targets.
The table for positive revisions to earnings estimates has Unibail-Rodamco-Westfield on top, followed at a distance by Orocobre, Growthpoint Properties Australia and Alacer Gold. The list of the week’s negative revisions is noticeably larger, both at the top and on average, and has Perseus Mining as the biggest loser, followed by EclipX Group, Pilbara Minerals and Woodside Petroleum.
The local reporting season effectively started on Friday with the likes of ResMed and GUD Holdings reporting. The season will gradually intensify this week, but it’ll be another ten days or so until the trickle has turned into a genuine flood.
Strap yourself in. Share price responses post financial results releases by ResMed, GUD Holdings and, a little earlier, Cimic Group are strongly suggesting post-event volatility is better not underestimated.
In the good books
1. BLUESCOPE STEEL LIMITED (BSL) was upgraded to Overweight from Equal-weight by Morgan Stanley B/H/S: 4/1/1
Momentum in steel spreads is positive, with US price increases and declining raw material prices in east Asia. Morgan Stanley believes, with spreads moving in the right direction, investors can focus on the favourable fundamentals. The broker believes FY20 forecasts are substantially de-risked and strong cash flow should eventuate. Rating is upgraded to Overweight from Equal-weight and the target raised to $14.50 from $12.00. Industry view: Cautious.
2. MYER HOLDINGS LIMITED (MYR) was upgraded to Buy from Neutral by UBS B/H/S: 1/1/2
UBS raises estimates for earnings per share by 9-12% and upgrades to Buy from Neutral. The broker estimates, at the current share price, the market is factoring in an $11m uplift in earnings (EBIT) from the new turnaround strategy. UBS believes this is too low, given Myer is most leveraged to tax reductions and there is scope to reduce space over the next 3-4 years. Target is raised to $0.64 from $0.59.
3. VIRTUS HEALTH LIMITED (VRT) was upgraded to Buy from Neutral by UBS B/H/S: 2/1/0
UBS reviews volume trends for the Australian IVF market and the implications. Data is positive for Virtus Health and the broker updates growth assumptions. Earnings estimates are upgraded by 1-11% across FY19-21. Target lifts to $5.40 from $4.40 and the rating is upgraded to Buy from Neutral. The domestic outlook is the key driver for the business, while organic earnings growth is likely to remain challenging in the international division, in the broker’s view.
In the not-so-good books
1. BEACH ENERGY LIMITED (BPT) was downgraded to Neutral from Buy by Citi B/H/S: 1/4/0
Citi now considers the stock fair value at a conservative US$55/bbl oil price and downgrades to Neutral from Buy. The broker remains sympathetic to those investors with a higher commodity deck that remain positive on the stock, particularly given the options on the balance sheet to accelerate organic growth or return capital. However, the broker also believes it is premature to take any profits ahead of FY20 guidance. Target is raised to $2.06 from $2.01.
2. COMPUTERSHARE LIMITED (CPU) was downgraded to Underperform from Neutral by Macquarie B/H/S: 0/5/2
Macquarie envisages downside risk to FY20 guidance. Global rate expectations have shifted materially lower and multiple reductions are now expected in the US. The broker suspects downside risk exists for the PE multiple, should the company guide to no earnings growth in FY20. Macquarie downgrades to Underperform from Neutral and reduces the target to $15 from $17.
3. ECLIPX GROUP LIMITED (ECX) was downgraded to Neutral from Buy by Citi B/H/S: 3/2/0
Citi downgrades to Neutral, and removes the High Risk rating, following the normalising of valuation from the lows following the March downgrade. While the core business is likely to remain appealing, and prove attractive to suitors in due course, there is potential for the underperforming businesses to deteriorate further, in the broker’s view. Target is raised to $1.56 from $1.29.
4. EVOLUTION MINING LIMITED (EVN) was downgraded to Underperform from Neutral by Macquarie B/H/S: 0/4/3
Macquarie observes FY20 guidance is in line with the three-year outlook delivered late in 2018. The year ahead will be strong on exploration, with discovery expenditure up 85%. Macquarie reduces estimates for earnings per share over FY20-23 by -1-3%. Rating is downgraded to Underperform from Neutral on recent share price strength. Target is reduced -2% to $4.20.
5. FORTESCUE METALS GROUP LTD (FMG) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/3/2
Credit Suisse believes iron ore prices will peak in the current quarter and downgrades to Neutral from Outperform, despite finding the company difficult to fault. That said, the broker finds little reason to sell the stock, particularly with a $0.22 dividend to come in August. However, it is likely the share price will come under pressure if iron ore prices ease. The company reported a strong finish to FY19 with record June quarter production. Target is reduced to $8.00 from $8.20.7
6. GOLD ROAD RESOURCES LIMITED (GOR) was downgraded to Neutral from Outperform by Macquarie B/H/S: 0/1/0
Macquarie downgrades to Neutral from Outperform as the target is now in line with the current share price. Target is $1.40. Gruyere will continue to produce gold via the SAG mill and CIL circuits until the commissioning of the ball mill. Commissioning in a timely manner will influence 2019 production costs, the broker assesses, with further delays likely to push back nameplate production.
7. INSURANCE AUSTRALIA GROUP LIMITED (IAG) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 0/6/1
The share price has been strong recently and Ord Minnett observes the valuation gap has opened up relative to peers. As a result, the broker downgrades to Hold from Accumulate. The company is due to report its FY19 result on August 8 and Ord Minnett will look for information regarding whether the company will put a stop to market share losses and seek growth, particularly in commercial insurance. Target is raised to $8.20 from $8.00.
8. ILUKA RESOURCES LIMITED (ILU) was downgraded to Neutral from Buy by UBS and to Neutral from Outperform by Credit Suisse B/H/S: 1/5/0
UBS was disappointed with the June quarter production outcomes because of poor zircon sales. The company has indicated the zircon market has deteriorated over the past three months as higher production from remnant miners and new entrants has caused price discounts for lower grades. Optimisation studies have continued at Sembehun and the project has now been sent back for further review of scope. UBS factors in delay of 24 months for Sembehun and cuts realised zircon pricing estimates. Rating is downgraded to Neutral from Buy and target is lowered to $10.60 from $12.00.
Credit Suisse notes a large response in the share price, down -10%, to the June quarter result. The broker finds it hard to envisage a near-term catalysts for the upside and downgrades to Neutral from Outperform. A softer sales outlook is being driven by tepid end-user zircon demand. Target is reduced to $10.00 from $10.40. The broker notes the timing of the Sembehun study and phase 1 have been pushed out. Higher capital expenditure would be required if the large-scale operation of over 300,000tpa is still a target, in the broker’s view. Hence, part of the design is returning to a scoping stage.
9. JB HI-FI LIMITED (JBH) was downgraded to Sell from Neutral by UBS B/H/S: 1/4/2
UBS lifts estimates for FY19-21 by 1-10% to reflect the benefit of fiscal and monetary stimulus. The broker believes the company is executing well but rising costs, increased competitive intensity and the need to invest will mean the multiple de-rates. JB Hi-Fi has the lowest degree of operating leverage among discretionary retailers under coverage and margin headwinds are not factored in, UBS assesses. Rating is downgraded to Sell from Neutral and the target is raised to $26.85 from $23.50.
10. MAGELLAN FINANCIAL GROUP LIMITED (MFG) was downgraded to Underperform from Neutral by Credit Suisse B/H/S: 0/3/4
Credit Suisse appreciates the positive leverage the company has to favourable equity markets, noting it is the only locally listed fund manager to experience positive flows. A 23% increase in funds under management was reported in the second half. Credit Suisse increases FY19 estimates by 8% and the outer years by 10-13%. Target is raised to $42.90 from $35.50. As the current share price is around 25% above the broker’s valuation the rating is downgraded to Underperform from Neutral.
11. RIO TINTO LIMITED (RIO) was downgraded to Underperform from Neutral by Credit Suisse B/H/S: 2/4/1
Credit Suisse believes a turning point is approaching for iron ore pricing, with momentum in China’s port inventory drawdown slowing, and supply continuing to recover. This, combined with a lack of meaningful valuation support, leads the broker to downgrade to Underperform from Neutral. Target is reduced to $92 from $95. The main risk to the broker’s view is continued strength in iron ore prices via a meaningful stimulus of construction activity in China.
12. ST BARBARA LIMITED (SBM) was downgraded to Underperform from Neutral by Macquarie and to Underperform from Neutral by Credit Suisse B/H/S: 1/1/2
June quarter production was affected by elevated costs at both Gwalia and Simberi. Macquarie expects costs to remain elevated in FY20 as Gwalia prioritises development and Simberi production steps down. There is also the prospect of a decision on the Simberi sulphide option. Macquarie downgrades to Underperform from Neutral and reduces the target by -3% to $3.00.
Credit Suisse observes lower production from Gwalia delivered an adverse impact on reported costs in the June quarter. Production was strong at Simberi, however, which meant costs decline further. The broker expects FY20 to be another constrained year for Gwalia before the mining bottlenecks are removed. Simberi sulphides remain the next most significant value option organically. The broker downgrades to Underperform from Neutral. Target is steady at $2.76.
13. SONIC HEALTHCARE LIMITED (SHL) was downgraded to Underperform from Neutral by Credit Suisse B/H/S: 3/2/2
Despite some stabilisation and improvement offshore, Credit Suisse is cautious about conditions for the company in Australia. On the back of weaker-than-expected industry data, estimates are reduced by -1% and the target is lowered to $24.20 from $24.70. The broker is not able to justify the current valuation and downgrades to Underperform from Neutral.
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 seven major Australian and international stock brokers: Citi, Credit Suisse, 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.
