In the good books
1. CIMIC GROUP (CIM) was upgraded to Neutral from Underperform by Macquarie
First half net profit was below expectations. Mining division strength stood out, delivering 26% growth in pre-tax profit. Operating cash flow was well below expectations. The company has indicated it is moving to alliance-style, rather than fixed-price, contracts which have a more even cash flow profile. Macquarie upgrades to Neutral from Underperform, given the extent of the fall in the share price and support from the share buyback. The broker reduces the target to $40.00 from $43.80. A return to positive construction growth is required to support a more favourable fundamental view, the broker asserts.
2. KAROON GAS AUSTRALIA (KAR) was upgraded to Outperform from Neutral by Macquarie
The company will acquire the Bauna oilfield for US$665m, becoming the fourth largest liquids producer on the ASX. Macquarie suggests a US$100-120m capital raising may be required to fund the acquisition shortfall and strengthen the balance sheet. The broker assesses the company’s three-year wait to obtain the field appears to have paid off. Seller Petrobras is undergoing an extensive divestment program to reduce debt. Macquarie believes the field is more suited to a company such as Karoon Gas, which has the ability to focus on lifting production volumes. Rating is upgraded to Outperform from Neutral. Target rises to $3.00 from $1.15.
3. REDBUBBLE (RBL) was upgraded to Hold from Reduce by Morgans
Morgans was surprised by the strength in the fourth quarter, particularly in margins, noting the company is looking at a secondary listing of shares in the US. Forecasts are upgraded to reflect the lower marketing and overhead costs seen in the fourth quarter. Morgans upgrades to Hold from Reduce and raises the target to $1.51 from $0.67. Risks are expected to diminish greatly if the company can prove cash flow self-sufficiency in FY20.
4. RESMED INC (RMD) was upgraded to Buy from Neutral by UBS
FY19 results were ahead of Citi’s estimates and FY20-21 forecasts are increased by 7-8%. The broker considers the business excellent, albeit fairly valued and, hence, maintains a Neutral rating. Target is raised to $19.00 from $17.75. ResMed has tentatively agreed with the US government to resolve on a civil basis the Department of Justice investigation for payment of US$39.5m relating to issues around re-supply. Citi believes the company took appropriate measures several years ago, noting ResMed is confident in its numbers.
5. SPARK INFRASTRUCTURE GROUP (SKI) was upgraded to Neutral from Underperform by Credit Suisse
Credit Suisse is upgrading to Neutral from Underperform as the stock is trading in line with valuation. Relative underperformance is rendering Spark Infrastructure undervalued based on historical correlation of valuation multiples. Target is raised to $2.30 from $2.10. Still, the broker cautions that forecast cash flows put significant doubt on the company’s ability to grow dividends and an extension of a discounted dividend reinvestment plan may be required beyond what is needed to fund the Bomen equity.
In the not-so-good books
1. AGL ENERGY (AGL) was downgraded to Underperform from Neutral by Macquarie
Back in May, AGL flagged several headwinds that would impact on the company in FY20. Yet Macquarie points out consensus estimates have barely changed. Cash generation is strong and the balance sheet under-geared but the broker believes AGL has now entered a multi-year earnings reduction cycle, forecasting a -30% drop by 2023. Further downside risk is added as 60-70% of earnings are coal related, and under threat from state-based policies, technology and any change in government. Macquarie cuts its target to $19.50 from $21.00 and downgrades to Underperform.
2. BINGO INDUSTRIES (BIN) was downgraded to Hold from Add by Morgans
Morgans revises its modelling to allow for a weaker economic outlook that is implied by government bond yields. A lower cost of capital reflects a lower interest-rate environment but the implications of low bond yields will affect future earnings growth. Morgans assumes earnings from the existing business decline in FY19 but the DADI acquisition provides growth. The company will report its results on August 22. Rating is downgraded to Hold from Add, given recent strength in the share price has compressed the total return potential. Target is raised to $2.64 from $2.41.
3. G.U.D. HOLDINGS (GUD) was downgraded to Neutral from Buy by Citi, to Neutral from Outperform by Macquarie and to Sell from Buy by UBS
Citi remains cautious, in light of the FY19 results, lowering estimates for FY20-21 by -16-19%. The broker downgrades to Neutral from Buy because of the decline in momentum in the second half. The company has noted soft demand from re-sellers and also increased competition in filters. Prices remain flat at Ryco. Target is reduced to $11.02 from $14.91.
FY19 results were softer than expected according to Macquarie. Valuation is undemanding, in the broker’s view, yet the automotive division was impacted by several problems that accelerated in the second half and may persist in the near term. The broker downgrades to Neutral from Outperform, having been disappointed organic growth was not sustained above 5% or boosted by bolt-on acquisitions. Target is reduced to $10.50 from $14.50.
FY19 results were in line with expectations according to UBS. The broker was disappointed with the Narva catalogue launch, with industry feedback suggesting weaker sales. The company faces substantial FX headwinds over FY20, and the broker points out prices have not increased for the largest brand Ryco. Hence, it could be difficult to grow earnings (EBIT) in FY20. UBS downgrades to Sell from Buy and lowers the target to $9.50 from $12.30.
4. MEDIBANK PRIVATE (MPL) was downgraded to Lighten from Hold by Ord Minnett
Ord Minnett assesses growth in the health insurance sector is constrained. Downgrading of medical insurance cover continues, premium rate increases are low and there is pressure on industry margins. The broker downgrades to Lighten from Hold, largely on valuation concerns. Target is raised to $3.33 from $3.05 as the model is rolled forward to June 2020. The company will report FY19 results on August 22. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
5. NIB HOLDINGS (NHF) was downgraded to Underweight from Equal-weight by Morgan Stanley and to Sell from Hold by Ord Minnett
Morgan Stanley believes structural issues continue to overhang the health sector, notwithstanding the federal election outcome as, in a community-based model with falling participation and an ageing pool of participants, claims per policy will experience upward pressure. In the face of a soft consumer backdrop and continuing downgrades, the broker believes the market is likely to be too bullish on revenue and policyholder growth. Despite this, health insurers continue to over earn, with returns above 22% considered unusually high in a regulated industry with government approved pricing. Rating is downgraded to Underweight from Equal-weight. Target is raised to $6.00 from $5.30. Industry view: In-line.
Ord Minnett believes the company faces regulatory pressures on premium rates that will constrain growth and margins. Hence, the broker suggests the stock should not be trading on elevated price to earnings (PE) multiples, which are currently around 23x FY20 estimates. Rating is downgraded to Sell from Hold, although the target is raised to $6.58 from $5.71 because of changes to forecasts as the model is rolled forward to June 2020. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
6. NORTHERN STAR RESOURCES (NST) was downgraded to Underperform from Neutral by Macquarie
Northern Stars June Q production missed Macquarie’s forecast by 7% and costs were 8% higher, reflecting weakness at Pogo and Kalgoorlie offsetting strength at Jundee. Pogo has nevertheless shown signs of gradual operational improvement. The company will provide FY20 guidance tomorrow ahead of its strategy day on Saturday. In the meantime, Macquarie downgrades to Underperform from Neutral. Target falls to $11.00 from $11.60.
7. PREMIER INVESTMENTS (PMV) was downgraded to Neutral from Outperform by Macquarie
Smiggles’ UK transition is in its early stages, but cyclical and structural headwinds are persisting, Macquarie notes, and increasing competition is now making its mark. Apparel has been doing the “heavy lifting” but will now begin to cycle tougher comparables. Cost improvement has nonetheless surprised and should provide somewhat of a buffer, but with the risks now more evenly balanced the broker downgrades to Neutral from Outperform. Target falls to $17.20 from $19.20.
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.
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