In the good books
1. ALS (ALQ) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse upgrades to Outperform from Neutral on the back of an expected recovery in geochemistry. July marked the highest exploration activity for six months. The total number of exploration projects was up 36% on June. Compositionally, gold and other exploration projects were up 46% and 18%, respectively. Credit Suisse expects this will deliver a re-rating of ALS shares, and the target is raised to $8.40 from $7.40. The company has also acquired Laboratorios de Control ARJ, a pharmaceutical testing company based in Mexico.
2. AMP (AMP) was upgraded to Outperform from Neutral by Credit Suisse
First half results beat Credit Suisse estimates. The result was affected by lower earnings in the businesses that are up for sale but retained units were ahead of forecasts by 7%. The broker now considers the price structure in the revised terms for the sale of the life business is more favourable, and the deal should gain regulatory approval. The company has also announced a $650m equity raising. Credit Suisse upgrades to Outperform from Neutral (prior to a short restriction). Target is $2.
3. JAMES HARDIE INDUSTRIES (JHX) was upgraded to Buy from Neutral by UBS
First quarter results were stronger than UBS expected and the outlook remains robust. The broker upgrades to Buy from Neutral. Volume growth in the US was partially the result of improved management of distribution channels, management asserts, rather than channel stocking or a pulling forward of sales. UBS assesses the outlook for margins is strong, as both input costs and cost reductions are supportive. UBS raises the target to $23.80 from $19.90.
4. NRW HOLDINGS (NWH) was upgraded to Buy from Neutral by Citi
Citi has upgraded to Buy from Neutral with a revised price target of $2.65 (we had $3.01 since May) while asserting the share price has fallen too far. On the stockbroker’s forecasts, the stock is now trading at a -38% discount to the Small Ordinaries. The analysts acknowledge the risks associated with being a contractor to the mining sector, but nevertheless believe the present discount is simply “excessive”. Revised forecasts assume any exposure to the Dalgaranga Gold project will be written off, plus lower group margins are also assumed.
5. NEWS CORPORATION (NWS) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse found the FY19 results solid and ahead of expectations, despite a miss at the revenue line. The highlight has been the relatively consistent performance of news and information services. The focus on value is also more evident. The value of the company’s assets, excluding REA Group ((REA)), has effectively halved since the split from Fox back in 2013 and Credit Suisse does not believe this is justified. An increasing focus on value by management can act to close the gap. Rating is upgraded to Outperform from Neutral and the target raised to $22.50 from $18.90.
6. REA GROUP (REA) was upgraded to Hold from Lighten by Ord Minnett
Ord Minnett believes the worst of the property downturn is behind the company and there is flexibility around costs. FY19 net profit was below the broker’s forecast. Margin expectations are increased for FY20-21 because of a much lower cost base. Listings are also expected to improve going into the second quarter when easier comparables will be cycled. Rating is upgraded to Hold from Lighten and the target raised to $90 from $71. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
7. RIO TINTO (RIO) was upgraded to Buy from Hold by Ord Minnett
Following a significant market sell-off, Ord Minnett trims near-term iron ore and metallurgical coal price forecasts by -5%. The broker suggests a trading opportunity has opened up, given the aggressive -20% sell-off in Rio Tinto, versus BHP Group ((BHP)) at -12%. Further Chinese policy support is considered likely, despite the uncertainty around trade tensions and the steel production outlook. The broker upgrades Rio Tinto to Buy from Hold. Target is reduced to $105 from $106. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
In the not-so-good books
1. ADALTA (1AD) was downgraded to Hold from Add by Morgans
Morgans was unimpressed with news of the resignation of AdAlta’s chief executive officer Sam Cobb, noting six months of solid progress which included the completion of a $5m placement and entitlement offer. The broker adjusts its model to include the issuance and places a -25% discount on the valuation to account for leadership uncertainty and also delays near-term licensing and long-term commercialisation assumptions. Target price falls to 18c from 82c and rating downgraded to Hold from Add.
2. AUSTRALIAN FINANCE GROUP (AFG) was downgraded to Hold from Add by Morgans
Australian Finance Group has entered into a binding merger with mortgage aggregator Connective Group Pty Ltd. The broker believes the deal will prove earnings-per-share accretive, pending approvals – a major proviso. The deal will hang on court and ACCC approval and the risk is high enough for the broker not to factor completion into earnings forecasts and valuations. Meanwhile, the company’s full-year result outpaced consensus by 7.5% and the broker expects consensus upgrades to outer year earnings. Target price rises to $2.30 from $2. The broker downgrades to Hold from Add.
3. ANSELL (ANN) was downgraded to Neutral from Outperform by Credit Suisse
FY19 results were largely in line with estimates. Organic sales growth was a little soft, in Citi’s view, although the weakness in industrial was offset by a strong result in healthcare. Basic guidance for FY20 earnings per share of US112-122c is in line and at the mid-point translates to 5% growth, on Citi’s estimates. The broker maintains a Buy rating and $31.50 target.
4. ALLIANCE AVIATION SERVICES (AQZ) was downgraded to Hold from Buy by Ord Minnett
Ord Minnett downgrades to Hold from Buy following the FY19 results, which were broadly in line with forecasts. The business remains strong but, with an expanding fleet, the broker suspects the pressure on expenditure will remain. The broker also notes the ACCC is continuing to review the Qantas ((QAN)) stake and the process is likely to conclude in coming months. Target is reduced to $2.60 from $2.90. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
5. AUSTAL (ASB) was downgraded to Hold from Accumulate by Ord Minnett
Earnings (EBIT) guidance for FY19 of $92m has been provided, consistent with prior revenue guidance of $1.8-1.9bn, Ord Minnett notes. FY20 earnings guidance of at least $105m is ahead of expectations, driven by an improvement in the Australasian shipyards as well as a strong performance at the two major vessel programs for the US. Austal now holds a substantial order book of commercial ferry contracts following major expansion in the Philippines and the establishment of the leased shipyard in Vietnam. Ord Minnett downgrades to Hold from Accumulate, assessing the recent run in the share price means the stock is now fully valued. Target is raised to $3.60 from $2.45. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
6. AURIZON HOLDINGS (AZJ) was downgraded to Underperform from Neutral by Macquarie
Citi lowers FY20 forecasts by -1% to reflect slower growth in the coal and bulk business. FY20 network earnings estimates are unchanged at $447m. The broker envisages scope for Aurizon to repurchase up to 10% of its outstanding share base should the gearing of operations reach the $1.2bn flagged by management. The outlook has considerably improved over the last 12 months, in the broker’s view, but the current share price reflects a lot of the improved fundamentals. Neutral rating maintained. Target rises to $5.70 from $5.60.
7. JB HI-FI (JBH) was downgraded to Equal-weight from Overweight by Morgan Stanley
Sales growth for JB Hi-Fi was better than Morgan Stanley feared in the fourth quarter, accelerating to 3.3%. July trading is also better than expected, although the broker notes the business was lapping relatively easy comparables. The outcome for JB Hi-Fi was solid in FY19, when set against market concerns regarding the lack of post-election momentum. However, Morgan Stanley notes, The Good Guys is experiencing a tough demand backdrop for white goods. FY20 estimates are increased by 0.5%. Ultimately, the broker suggests the near-term outlook will test the flexibility of the company’s model. Rating is downgraded to Equal-weight from Overweight after the recent outperformance in the shares. Target is $28. Industry view: Cautious.
8. MAGELLAN FINANCIAL GROUP (MFG) was downgraded to Sell from Neutral by Citi and to Sell from Hold by Ord Minnett
FY19 results were broadly in line with expectations. Citi finds the risk/reward less compelling now as the stock is trading well above peers, performance fees are lumpy and the medium-term growth prospects are some time away. Rating is downgraded to Sell from Neutral. The broker believes the company has taken an innovative approach to funds management, offering eligible investors 7.5% loyalty units if they subscribe to the new high conviction trust IPO. Target is steady at $54.
Ord Minnett downgrades to Sell from Hold on valuation grounds. While supporting the strategy to continue investing in listed structures through manager-funded priority offers, the broker considers this simply an incremental driver of growth. The company has raised capital to further invest in listed products, which tend to come with loyalty bonuses funded by the manager. While supportive of the building of direct-to-consumer relationships and retirement products, Ord Minnett believes the market is paying up for success. Target is raised to $49.60 from $40.33.
9. MIRVAC GROUP (MGR) was downgraded to Underperform from Neutral by Credit Suisse
FY19 results were in line with Credit Suisse estimates. The earnings outlook for FY20 is better than the broker expected. The company is guiding for free funds from operations of 17.6-17.8c per security, indicating growth of 3-4%. The growth in recurring income is the key positive, in the broker’s view. Residential pre-sales have trended lower but the broker expects FY20 should be a strong year for residential earnings. Rating is downgraded to Underperform from Neutral on valuation grounds. Target is raised to $3.04 from $2.85.
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.
