The busiest week in the August reporting season generated an unusually high number of ratings upgrades and downgrades for individual ASX-listed stocks. The week ending Friday, 23 August 2019 generated no less than 30 upgrades and 25 downgrades. Clearly, there is a lot that needs to be rectified this month as corporate results mingle with risk off, risk on swings in sentiment.

Overall, the market is trending towards an overload in ratings in the Neutral/Hold basket with total recommendations for the seven stockbrokers covered now sliced into 44.97% in Neutral/Holds and Buy ratings only representing 37.74%, with Sells accounting for the remaining 17.29%.

No surprise thus, 17 of the week’s 30 upgrades didn’t move beyond Neutral/Hold. On the flipside, 13 of the 28 downgrades equally ended in the middle of the ratings spectrum.

Buy ratings went to Santos, Smartgroup, Seek, IDP Education, and Select Harvests. On the negative side, a number of gold producers are receiving fresh downgrades to Sell, with stocks including a2 Milk, Platinum Asset Management, Blackmores and Brambles equally receiving one downgrade to Sell.

For really big changes investors should cast an eye over the tables for changes to earnings estimates, which are simply huge on both sides. Western Areas and Senex Energy are both enjoying increases in excess of 100%, followed by equally impressive increases for WiseTech Global, WorleyParsons, Lendlease, Evolution Mining, and many others.

The top 10 for reductions to earnings forecasts looks equally eye-catching, carrying Nearmap on top, followed by BlueScope Steel, Whitehaven Coal, oOh!media, Iluka Resources, and others.

The local reporting season continues in its final week that equally remains in the grips of international developments.

In the good books

1. COLES GROUP LIMITED (COL) was upgraded to Neutral from Underperform by Credit Suisse

Credit Suisse describes the maiden FY19 result as “so far so good”. Supermarkets were better-than-expected. A reduction in net debt has also reduced perceptions of higher financial risk following the de-merger.

Once the convenience re-set is cycled, earnings growth in FY21 appears likely to the broker. Rating is upgraded to Neutral from Underperform and the target increased to $13.23 from $11.97.

2. DOMINO’S PIZZA ENTERPRISES LIMITED (DMP) was upgraded to Neutral from Underperform by Credit Suisse

Domino’s Pizza Enterprises’ FY19 result was below guidance and disappointed Credit Suisse, which now gives little credit to the company’s bullish FY20 forecast.

The company’s guidance thesis rests on a record year of store openings in France, but its execution history there has been wanting. Earnings are downgraded to reflect a rebase of profit forecasts for Australia.

Nonetheless, rating rises to Neutral from Underperform and the target price rises to $38.52 from $38.06, the broker believing the next catalyst is likely to be positive.

3. DOWNER EDI LIMITED (DOW) was upgraded to Neutral from Underperform by Credit Suisse.

FY19 results were ahead of estimates. This was largely because of a higher contribution from transport. Management appears upbeat on growth prospects, guiding to FY20 net profit of $365m.

With robust work in hand at $43.3bn, Credit Suisse believes the business is well-positioned for growth. Rating is upgraded to Neutral from Underperform. Target is raised to $7.70 from $7.10.

4. IDP EDUCATION LIMITED (IEL) was upgraded to Add from Hold by Morgans

IDP Education’s FY19 results met Morgans forecasts, logging strong growth across the board.

The broker says the metrics are hard to fault, the company providing a return on equity of greater than 45% and 100%+ cash conversion and low capital expenditure.

Indian student numbers grew 38%, the digital platform is in place and the broker expects margin expansion.

Broker upgrades to Add from Hold. Target price rises to $19.85 from $17.29.

See also IEL downgrade.

5. MOUNT GIBSON IRON LIMITED (MGX) was upgraded to Neutral from Sell by Citi

Underlying, it turns out, Mt Gibson’s FY19 report proved well, well, well below expectations at Citi; $70m versus $100m expected without a deferred tax recognition. But the focus of operations is shifting to Koolan Island and this will ensure operational continuity.

Citi analysts have upgraded to Neutral/High Risk from Sell/High Risk while increasing forecasts for volumes and costs. Price target remains unchanged at 85c. Citi analysts welcome the return of Koolan Island, but they also make it clear they are bears on the medium term outlook for iron ore prices.

6. MEDIBANK PRIVATE LIMITED (MPL) was upgraded to Equal-weight from Underweight by Morgan Stanley

The company executed strongly in FY19 and its defensive traits as well as the prospect of capital initiatives cause Morgan Stanley to upgrade to Equal-weight from Underweight.

Despite the structural issues facing the private health insurance sector, the glacial pace of change, coupled with the company’s initiatives, is providing the capacity to insulate net margins, in the broker’s view.

The target is raised to $3.15 from $2.60. Industry view: In-Line.

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.

See also NHF downgrade.

7. ORIGIN ENERGY LIMITED (ORG) was upgraded to Buy from Neutral by Citi

The FY19 report card revealed a better-than-anticipated outlook for Energy Markets and this has triggered an upgrade from Citi analysts to Buy from Neutral. The analysts do note they remain cautious on wholesale electricity.

Another unforeseen benefit is that refinancing expensive debt will prove more beneficial than assumed previously. Combined with other adjustments, Citi’s forecasts have increased by double digit percentages. Target price has lifted to $8.17.

8. PRO MEDICUS LIMITED (PME) was upgraded to Add from Hold by Morgans

Pro Medicus’s FY19 result was ahead of Morgans and consensus forecasts, thanks to strong organic growth. Management guided to a continuation of strong growth, pointing to an expanding pipeline and few restraints.

Morgans lowers tax rate forecasts and increases terminal growth rate estimates, which translate to an increase in EPS of 13.4%, 2% and 4.7% over FY20/FY21 and FY22.

The broker raises the target price to $32.79 from $25.46 and upgrades to Add from Hold, despite high multiples and low dividend, believing the company represents an excellent growth opportunity.

9. QANTAS AIRWAYS LIMITED (QAN) was upgraded to Buy from Neutral by UBS.

UBS considers FY19 underlying profit of $1.3bn in FY19 was solid, despite the challenging economic conditions. International capacity is expected to fall by -1% across the market in the first half supporting the continuation of strong momentum in the international division.

The broker raises estimates for profit and earnings by 14-20%. UBS now envisages a benign fuel outlook along with accretive buybacks will support growth in earnings per share of 13% per annum over the next three years.

Rating is upgraded to Buy from Neutral. Target is raised to $6.40 from $5.30.

10. STEADFAST GROUP LIMITED (SDF) was upgraded to Accumulate from Hold by Ord Minnett

FY19 net profit was in line with guidance. The company is raising $100m through an institutional placement and up to $20m through a share purchase plan.

Ord Minnett believes strong growth can be achieved in FY20, with room for further acquisitions and potential upside from monetising technology.

Rating is upgraded to Accumulate from Hold and the target lifted to $3.90 from $3.75.

The broker considers the environment favourable for businesses exposed to the uplift in the commercial insurance cycle in Australia.

11. STOCKLAND (SGP) was upgraded to Neutral from Underperform by Credit Suisse

Stockland Group delivered a full-year result in line with revised guidance, and provided FY20 guidance for flat growth.

Metrics were mixed, the company struggling on several fronts. After a full model rebuild, Credit Suisse revises funds from operations down -1.4% in FY20 and -3.2% in FY21.

Target price rises to $4.32 from $3.17 and the broker upgrades to Neutral from Underperform.

See also SGP downgrade.

12. SELECT HARVESTS LIMITED (SHV) was upgraded to Buy from Neutral by UBS

The company has upgraded its crop estimates by 8%. UBS upgrades estimates for FY19 and FY20 earnings per share by 17% and 31% respectively.

The broker expects the pricing environment to remain favourable in the medium term, with the Californian crop supply remaining tight and amid a tailwind from currency.

The strong operating momentum should support a net cash balance by FY20 and, in turn, capital management, in the broker’s view. Rating is upgraded to Buy from Neutral and the target lifted to $9.10 from $7.25.

13. SANTOS LIMITED (STO) was upgraded to Add from Hold by Morgans

Santos’ first-half result outpaced the broker, broad cost cutting yielding an increased margin of 64% against Morgans’ forecast 59%.

Gearing was high but the company has committed to using free cash flow to deleverage prior to hitting its growth stride. Meanwhile, Dorado logged a 68% increase in production.

Morgans says management has done a terrific job of turning around the company and, despite reservations given the stock’s popularity, upgrades to Add from Hold. Target price rises to $8.05 from $6.51.

14. WISETECH GLOBAL LIMITED (WTC) was upgraded to Hold from Lighten by Ord Minnett

FY19 results were ahead of forecasts. The main surprise for Ord Minnett was FY20 guidance, which highlights an acceleration in organic growth.

While still considering the valuation stretched, the broker acknowledges Lighten is no longer valid as a rating and upgrades to Hold. Target is raised to $26.69 from $18.37.

In the not so good books

1. THE A2 MILK COMPANY LIMITED (A2M) was downgraded to Lighten from Accumulate by Ord Minnett

FY19 net profit was up 47% but below Ord Minnett’s forecasts. The broker downgrades to Lighten from Accumulate because of the higher-than-expected investment required to achieve the revenue opportunity as well as a more negative channel mix.

The broker reduces the target to $12.92 from $17.23. Ord Minnett reduces earnings estimates for FY20, given margin guidance of 28.2%, but also because marketing costs are forecast to increase further as a percentage of sales.

2. BAPCOR LIMITED (BAP) Downgrade to Hold from Add by Morgans

FY19 results were in line with expectations. Morgans likes the relative safe-haven status of the business, given the volatile retail sector.

Trading multiples have expanded materially and now appear fair, so the rating is downgraded to Hold from Add.

The broker is comfortable with net profit guidance for FY20, expecting growth of around 7.8%. Target is raised to $6.98 from $6.31.

3. BRAMBLES LIMITED (BXB) was downgraded to Underperform from Neutral by Credit Suisse and Neutral from Buy by UBS

Brambles full-year FY19 result missed consensus and Credit Suisse forecasts due to pallet damage and lost pallets.

The broker expects continued margin decline in Canada and management’s CHEP outlook was lacklustre. Earnings forecasts fall -12% for FY20 and -20% for FY21.

The buyback is expected to restart immediately after the pre-result blackout, and is expected to take a year to 18 months.

Target price falls to $11.20 from $13.50.

Results for the June half year were well below UBS forecasts. The Americas division was -13% below forecasts because of weaker performances in Canada and Latin America.

FY20 guidance for earnings (EBIT) growth to be in line or slightly above the prior year was well below the broker’s estimates. UBS believes the stock is unlikely to outperform and downgrades to Neutral from Buy.

A number of issues are of concern. There appears to be a structural decline in profitability in Latin America and Canada which undermines confidence, the broker suggests.

Brexit could also add further costs. Target is reduced to $12.10 from $13.60.

4. CARSALES.COM LIMITED (CAR) was downgraded to Neutral from Outperform by Macquarie and to Accumulate from Buy by Ord Minnett

Carsales had pre-released its headline numbers so no surprises. The core domestic business continues to perform well and the company is well placed to deliver solid growth over the medium term, Macquarie believes.

The recent run in the share price nevertheless brings valuation into line hence the broker pulls back to Neutral from Outperform. Target rises to $15.80 from $13.20, including a boost from lowering the risk free rate.

FY19 net profit was in line with Ord Minnett’s forecasts. The broker observes the online advertising segment was resilient in the face of tough conditions, with dealer revenue up 6.9%.

Weakness in display showed signs of moderating in the second half, a positive sign for FY20. International business was a highlight, particularly Webmotors, where growth appears to be accelerating.

Ord Minnett retains a positive stance on the stock, underpinned by the long-term growth potential. Target is raised to $16.54 from $13.61 and the rating is downgraded to Accumulate from Buy.

5. EBOS GROUP LIMITED (EBO) was downgraded to Hold from Add by Morgans

Ebos Group’s FY19 result met Morgans forecasts. The company completed $300m of acquisitions and is expected to continue buying in FY20.

Key metrics were solid across most divisions, Healthcare proving the laggard, as PBS reform and the unwinding of the HepC benefit weighed.

Morgans leaves forecasts unchanged. Target price is steady at $24.07. The broker downgrades to Hold from Add following the recent sharp share price rally.

6. ERM POWER LIMITED (EPW) was downgraded to Hold from Accumulate by Ord Minnett and to Neutral from Outperform by Macquarie

FY19 underlying net profit was down -14% but overshadowed by the coincident announcement that Shell Australia has made an acquisition proposal at $2.465 a share cash. Ord Minnett considers the offer fair and in line with value estimates.

The likelihood of a competitor bid is low, given competition constraints that prevent an incumbent from placing a rival bid. The broker downgrades to Hold from Accumulate and raises the target to $2.45 from $2.00.

While Macquarie cannot rule out a higher offer, it sees a limited number of players who would be permitted to bid and have an investment grade rating. Macquarie shifts to Neutral from Outperform and lifts its target to the offer price of $2.47 from $2.05.

7. IDP EDUCATION LIMITED (IEL) was downgraded to Hold from Accumulate by Ord Minnett

FY19 net profit was in line with Ord Minnett’s forecasts. Student placement was the driver of the result, with Australian volumes up 10.4% and multi destinations up 51%.

Ord Minnett expects a recovery in volumes back to system in the short term and strong growth in placements to continue but does not suggest the business model is immune to risk.

Hence, the broker struggles with valuation and downgrades to Hold from Accumulate. Target is raised to $16.23 from $14.16.

See also IEL upgrade.

8. ST BARBARA LIMITED (SBM) was downgraded to Sell from Neutral by Citi

The FY19 performance missed expectations, by some -7% vis-a-vis market consensus on Citi’s observation. The analysts note the share price has weakened in the past year, but remains above their now revised price target.

While acknowledging there is upside potential were the price of gold to rally higher, Citi analysts have nevertheless decided to downgrade to Sell from Neutral. The new price target at $3 compares with $3.40 prior to the release.

9. SG FLEET GROUP LIMITED (SGF) was downgraded to Neutral from Buy by Citi

Citi analysts are of the view that management is controlling the controllables, but operating dynamics remain tough and there simply does not appear to be any catalysts for an upward move in momentum on the horizon.

Post a rally in the share price, Citi analysts have thus decided it’s time for a downgrade to Neutral from Buy. Forecasts remain largely unchanged post what the analysts describe has been a good performance in a challenging environment.

Meanwhile in the background, the UK is becoming an incrementally important profit contributor, the analysts observe. Price target improved slightly to $3.17 from $3.13.

10. STOCKLAND (SGP) was downgraded to Neutral from Outperform by Macquarie

Macquarie has chosen not to focus on Stockland’s FY19 result but instead on the FY20 outlook. Despite residential conditions improving, and net deposits in the Jun Q, and so far in the Sep Q, exceeding the company’s expectations, Stockland has guided to flat earnings and dividend growth.

Rents for retail tenants are being re-based but the broker sees further downside due to structural headwinds for the sector. Downgrade to Neutral from Outperform. Target falls to $4.34 from $4.77.

See also SGP upgrade.

11. VIRTUS HEALTH LIMITED (VRT) was downgraded to Equal-weight from Overweight by Morgan Stanley

FY19 results were below expectations. The company has adjusted its operating earnings (EBITDA) margin down by around -420 basis points with lost share in most markets, the broker observes.

Adverse mix and increased compliance costs have put pressure on margins and the broker is unsure when this may revert. Lower margin assumptions result in a -20% reduction to estimates for FY20-21.

Rating is downgraded to Equal-weight from Overweight and the target lowered to $4.44 from $5.34. Industry view is In-Line.

 

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 stockbrokers: 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.