In the good books

1. ALTIUM (ALU) was upgraded to Neutral from Underperform by Macquarie

Altium’s result was modestly below expectation but largely due to promotional activity. Otherwise key metrics were strong, with better than expected new seat and subscriber additions. Macquarie believes the company can maintain strong growth from its core base while retaining optionality to pursue larger initiatives over time. Earnings forecasts have been ticked up and target rises 4% to $35.50. Upgrade to Neutral from Underperform.

2. BEACON LIGHTING GROUP (BLX) was upgraded to Add from Hold by Morgans

Beacon’s FY19 result met Morgan’s expectation after a “perfect storm” of headwinds for the company in the second half. It looks like sales may have turned positive in August and the broker expects a return of operating leverage in FY20 as comparable sales growth cycles the prior period’s weakness. Beacon has a track record of bouncing back strongly from subdued periods and FY20 should be no different, Morgans believes. On the share price fall the broker upgrades to Add from Hold. Target rises to $1.16 from $1.13.

3. BEACH ENERGY (BPT) was upgraded to Buy from Neutral by Citi

Upon initial analysis, Citi analysts had already expressed the view that market consensus will likely move higher following the release of FY19 financials. On second consideration, they have decided to upgrade to Buy from Neutral. Earnings estimates have been lifted by 8-19%. The analysts do make the point they have incorporated future exploration success in their forecasts. Beach is hereby labelled the standout among E&P companies in Australia. Citi analysts are of the view this company’s portfolio could facilitate an accretive acceleration of growth. Within this framework, higher capex for the years ahead is a positive, they suggest. Price target lifts to $2.33 from $2.06.

4. BLUESCOPE STEEL (BSL) was upgraded to Neutral from Underperform by Macquarie

BlueScope Steel’s FY19 result slightly outpaced Macquarie’s estimate, thanks to a strong cash performance. News the North Star expansion is expected to reach completion in 2021 was well received as was the balance sheet. Operations in NZ and Building Products ASEAN missed a beat and the FY20 trading outlook is weak. Macquarie cuts EPS estimates -30%, -9% and -11% across FY20-FY22. Target price falls to $10.80. Rating upgraded to Neutral from Underperform.

5. COCHLEAR (COH) was upgraded to Neutral from Underperform by Credit Suisse

FY19 net profit was in line with Credit Suisse estimates. Management expects underlying net profit in FY20 of $290-300m. The broker expects Cochlear to reclaim lost market share in FY20, forecasting unit sales growth of 12% for cochlear implants, given a full 12-month benefit of the Nucleus Profile Plus implant in the US and Germany. Rating is upgraded to Neutral from Underperform, given management’s confidence it can reclaim lost market share, and the target raised to $211 from $168.

6. CHARTER HALL RETAIL REIT (CQR) was upgraded to Hold from Lighten by Ord Minnett

FY19 earnings were slightly below Ord Minnett’s forecasts. The broker reduces forecasts for earnings per share by -4.1% in FY20 and -3.2% in FY21. This reflects a reduction in base rent estimates, the deferral of development projects and divestment of three assets. Rating is upgraded to Hold from Lighten on valuation. Target is steady at $4.50. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.

7. DOMAIN HOLDINGS AUSTRALIA (DHG) was upgraded to Neutral from Sell by UBS

A soft FY19 was in line with UBS expectations. FY20 estimates are reduced by -12%. The broker recognises some investors are prepared to look through the short-term listings weakness for exposure to an eventual housing recovery. The broker upgrades to Neutral from Sell. Target is raised to $3.00 from $2.75.

8. NEWCREST MINING (NCM) was upgraded to Hold from Reduce by Morgans

Newcrest Mining’s full-year result pleased the broker, thanks to increased production and lower costs. Net debt fell -62% and revenue rose despite lower realised gold and copper prices. On the downside, gold grades at Cadia are forecast to fall and mine life of Gosowong and Telfer is dwindling and impacting the company’s production profile. Morgans expects continued global volatility will underpin the gold price and the broker increases the valuation, the target price rising to $33.71 from $24.92. Rating upgraded to Hold from Reduce to reflect potential safe-haven benefits to the gold price should volatility escalate.

See downgrade below

9. NIB HOLDINGS (NHF) was upgraded to Hold from Sell by Ord Minnett

FY19 net profit was in line with Ord Minnett’s forecasts. The company has flagged signs of increased claims inflation but Ord Minnett finds no discernible trends at this stage. The broker believes the company can achieve above-system revenue growth in Australian Residents Health Insurance (ARHI) through policyholder growth. Rating is upgraded to Hold from Sell as the share price has fallen -12.5% since the end of July. Target is raised to $6.97 from $6.58. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.

See downgrade below.

10. NETWEALTH GROUP (NWL) was upgraded to Buy from Accumulate by Ord Minnett and to Neutral from Sell by UBS

The company achieved record flows and reported growth of 18% in revenue and 24% in earnings per share in FY19. Ord Minnett expects earnings growth to compound over the next five years and upgrades to Buy from Accumulate. The broker assesses the structural momentum will mean funds under administration quadruple over the next eight years. Target is reduced to $8.95 from $9.59.

FY19 operating earnings (EBITDA) were largely in line with UBS estimates. The broker expects flows to lift and considers the company better positioned to absorb ongoing revenue margin pressures, particularly if new third-party platform competitors emerge, or there are further reductions to official rates. UBS upgrades to Neutral from Sell and reduces the target to $7.25 from $7.65. With the stock now trading at 39.8x PE, the bottom end of its historical range, downside risks appear more moderate.

11. SEEK (SEK) was upgraded to Add from Hold by Morgans and to Neutral from Sell by UBS

Morgans does not provide an assessment of Seek’s FY19 result, rather choosing to concentrate on a bold “doubling down” on growth opportunities amid a global slowdown. The company has committed to invest even more aggressively in new technologies and early stage ventures at the expense of near-term earnings growth. Morgans has thus downgraded earnings forecasts in line with guidance but a roll-forward of valuation takes its target to $22.31 from $20.19, leading to an upgrade to Add from Hold.

Concerns around near-term earnings were confirmed and new FY20 guidance results in -20% reductions to UBS estimates for net profit. While revenue is expected to be up 15-18% in FY20, the broker suspects a large amount will relate to low-margin/lower-multiple Chinese off-line growth. UBS observes the market appears willing to back a quality management team to deliver on an eventual earnings rebound and upgrades to Neutral from Sell. Target is raised to $19.50 from $18.50.

12. SONIC HEALTHCARE (SHL) was upgraded to Neutral from Underperform by Credit Suisse

FY19 underlying operating earnings (EBITDA) were below Credit Suisse estimates. The broker notes lower US organic revenue growth while pathology earnings margins declined. Guidance calls for FY20 growth of 6-8% in operating earnings. Credit Suisse upgrades to Neutral from Underperform as the model is rolled forward. Despite the limited organic earnings growth outlook, the broker notes a strong balance sheet with capacity for further M&A. Target is raised to $26.80 from $24.20.

13. SMARTGROUP (SIQ) was upgraded to Outperform from Neutral by Credit Suisse and to Add from Hold by Morgans

First half net profit growth of 5.4% was below the double-digits usually seen, although Credit Suisse notes there was no contribution from acquisitions. This was also set against a backdrop where new car sales declined -9% over the same period. Credit Suisse expects similar growth in the second half and an acceleration in 2020 as conditions become easier. Rating is upgraded to Outperform from Neutral and the target raised to $9.80 from $9.25.

First half net profit was in line with forecasts. Topline growth was slightly better than Morgans expected. The broker believes the strong cash flow and low gearing provides options for acquisitions or capital management in the medium term. The broker considers the valuation relatively undemanding, and there is upside risk over the next 12-18 months. Morgans upgrades to Add from Hold and raises the target to $10.15 from $9.50.

In the not-so-good books

1. ABACUS PROPERTY GROUP (ABP) was downgraded to Neutral from Outperform by Credit Suisse

FY19 results were ahead of Credit Suisse estimates. FY20 guidance suggests 2-3% growth in distributions. Looking at FY20, Credit Suisse notes the company has around $118m in its growth pipeline including $63m of contracted acquisitions and a further $34m under consideration. This leaves $21m for new development expenditure. Credit Suisse downgrades to Neutral from Outperform on valuation grounds. Target is reduced to $3.87 from $4.00.

2. ALACER GOLD (AQG) was downgraded to Underperform from Outperform by Macquarie

Alacer Gold’s second-quarter report beat Macquarie’s estimates on production, costs and revenue (up 48%), but missed on net profit after tax (-13%) thanks to a -US$16.9m impairment. Gold production outpaced the broker by 12%, but oxide production outpaced by 42%. Costs proved a 9% beat. Net debt fell sharply. EPS estimates rise roughly 2% for 2019 and 6% in 2020, before falling -3% to -8% in later years. Target price rises to $6 from $5.80. Broker downgrades to Underperform from Outperform to reflect the recent share price rally.

3. BLACKMORES (BKL) was downgraded to Underperform from Neutral by Macquarie

Macquarie has downgraded to Underperform from Neutral after Blackmores’ result came with a disappointing trading update showing decelerating demand trends. The company is victim to both changing market dynamics and weak execution, with the China strategy in transition. While the stock has reached a level where support is typically found, the broker believes it is susceptible to further de-rating ahead of evidence of earnings stabilisation and execution on strategy. Target falls to $60 from $86.

4. CREDIT CORP (CCP) was downgraded to Hold from Add by Morgans

Credit Corp Group has paid $65m for agency collection business Baycorp and the company increases guidance to account for purchase-debt-ledger (PDL) acquisitions and an improvement in net profit after tax. Morgans spies scope for earnings upgrades as PDL acquisitions continue through FY20, and believes the growth outlook is strong. Earnings-per-share forecasts rise 5% to 6% across FY20 to FY22. Target price rises to $28.80 from $27.00 (a 5% upside to valuation) but rating downgraded to Hold from Add to reflect over-extended share price.

5. GBST HOLDINGS (GBT) was downgraded to Hold from Add by Morgans

GBST Holding’s full-year result seriously outpaced consensus, with underlying profits up 76% thanks to a strong UK performance. The result is most likely the company’s last, given it will soon be acquired by FNZ for $3.85 per share. Target price rises to $3.85 from $3.79. Rating downgraded to Hold from Add. The broker suggests investors seek tax advice before deciding to sell before or after bid completion.

6. GWA GROUP (GWA) was downgraded to Sell from Neutral by Citi

Citi downgrades to Sell from Neutral as industry forecasts suggest sectors relating to around 84% of the company’s bathroom & kitchens sales are likely to weaken over the next year or two. Citi suspects organic growth will be hard to come by. The broker considers the stock expensive given the limited organic growth profile. Forecasts for earnings per share are reduced by -8-11%. Target is lowered to $3.13 from $3.26.

7. IPH (IPH) was downgraded to Hold from Add by Morgans

IPH’s FY19 result outpaced Macquarie and consensus but the broker notes a softening in underlying organic earnings growth in Australia and New Zealand. The recently acquired Xenith is expected to the be the main earnings driver in the near term but a softening organic could weigh on performance. EPS forecasts rise 6% and 5% across FY20 and FY21. Target price rises to $10.10 from $8.95. Outperform rating retained, the broker believing the near-term outlook is underpinned by M&A synergy and foreign-exchange tailwinds.

8. INVOCARE (IVC) was downgraded to Sell from Neutral by UBS

UBS found the first half results messy. The underlying business continues to lose share and 87% of volume growth was from acquisitions. This highlights the importance of the Protect & Grow strategy, in the broker’s view. The broker was expecting a bigger rebound in the death rate and, while this should normalise over time, it creates potential risk to second half and FY20 forecasts. UBS downgrades to Sell from Neutral and lowers the target to $12.70 from $13.95.

9. MONADELPHOUS GROUP (MND) was downgraded to Sell from Neutral by Citi

Citi analysts initially responded by noting it appeared Monadelphous’s FY19 report marked a clear “miss”, but underlying the miss was only circa -2%. Then followed a non-tangible outlook, marred by delayed projects and margin pressure due to increased competition. Citi has decided to downgrade to Sell from Neutral. Price target drops to $15.50 from $16.80. Citi has come to the conclusion the immediate outlook has too much risks embedded, including management’s reference to lower margins. Estimates have been culled by double digit percentages. Citi’s focus is not entirely on lower margins, but it is a central factor in its cautious approach on second consideration.

10. NEWCREST MINING (NCM) was downgraded to Sell from Neutral by Citi

FY19 earnings were in line with Citi’s estimates. With declining production after FY20 and capital expenditure required to sustain earnings, Citi believes medium-term risks are to the downside. Rating is downgraded to Sell from Neutral. Target is lowered to $31.05 from $33.25.

See upgrade above.

11. NIB HOLDINGS (NHF) was downgraded to Sell from Neutral by UBS

FY19 results were largely in line with UBS estimates. The emergence of higher hospital claims inflation over the fourth quarter along with a reduction in premium rates points to margin compression ahead, the broker asserts. With lower bond yields and an earnings headwind in FY20, the broker downgrades to Sell from Neutral. Target is raised to $6.40 from $5.80.

See upgrade above.

12. ORORA (ORA) was downgraded to Neutral from Buy by UBS

FY19 earnings were below UBS estimates. The broker notes a more challenging macro environment in the US, where volumes have been affected by trade tensions. There is also increased competition and an inability to pass through raw material costs. UBS does not expect this situation to materially improve in FY20. Forecasts are downgraded for FY20-21 by -7%. Rating is downgraded to Neutral from Buy and the target lowered to $2.85 from $3.85.

13. PLATINUM ASSET MANAGEMENT (PTM) was downgraded to Sell from Hold by Ord Minnett

Having upgraded to Hold in May, expecting continued improvement in performance, Ord Minnett has now pulled back to Sell again. Underperformance and funds outflows are dominating the picture again, the analysts observe. The broker is now talking “false dawn”. Platinum’s investment performance simply doesn’t seem to be able to keep pace with, for example, Magellan Financial’s (MFG and Hyperion. On this basis, forecasts have seen material reductions, pulling down the price target to $3.53 from $4.77. On updated forecasts, FY20 seems poised for yet another year of negative growth.

14. THE STAR ENTERTAINMENT GROUP (SGR) was downgraded to Neutral from Outperform by Credit Suisse

Credit Suisse models no earnings growth in FY20 after downgrading estimates for earnings per share by -6-8%. This makes the case difficult for an Outperform rating and the broker concedes the stock may be appropriately valued, downgrading to Neutral. Target is reduced to $3.75 from $4.90. A high pay-out ratio for the dividend in FY19 signals to the broker the company may hold the dividend at $0.20.

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. 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.