In the good books
1. CLASS (CL1) was upgraded to Add from Reduce by Morgans
Class has decided to reduce its single-product reliance on Class Super, its SMSF management software system. Expanding the product range will require higher investment capex in the shorter term, Morgans notes, weighing on earnings. The move is not without risk but if successful, Class should become a more attractive growth investment, Morgans believes. The broker has made multiple changes to its forecasting and valuation models, which lead to a target price increase to $1.41 from $1.34, and a double-upgrade to Add from Reduce.
2. INCITEC PIVOT (IPL) was upgraded to Buy from Neutral by Citi
Citi analysts had already warned investors about the apparent downside risk to the company’s guidance for FY19 so yesterday’s profit warning from the company did not come as a surprise. What did surprise was the magnitude of the downgrade. Citi analysts now note management has announced a strategic review of the fertiliser business. Citi analysts think finding a buyer for the whole operation might prove a challenge, but the distribution business with circa 50% market share in Australia’s East will definitely attract interest, in their view. Market forecasts are poised to reset lower, but Citi also finds that, with the share price at a three-year low, the risk reward proposition for owning this stock has turned favourably again, hence the upgrade to Buy from Neutral. Target price remains unchanged at $3.45.
3. MYER HOLDINGS (MYR) was upgraded to Accumulate from Lighten by Ord Minnett
The company will report its FY19 result on September 5. Ord Minnett expects underlying net profit of $35.6m, up 9.5% with sales down -2.5%. The broker upgrades to Accumulate from Lighten and raises the target to $0.70 from $0.42. Ord Minnett notes the range is being optimised to drive gross margins as the company turns its range towards new and exclusive brands that should support sales. Myer is also addressing costs while improving its supply chain. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
4. PUSHPAY HOLDINGS (PPH) was upgraded to Hold from Lighten by Ord Minnett
Ord Minnett observes the stock price has retraced -25% since the FY19 result. The broker believes expectations now reflect a more realistic view of the company’s addressable market and earnings potential. While the fundamental view is of an increasingly competitive market, the broker acknowledges a Lighten rating is no longer valid and upgrades to Hold. Target is raised to $3.08 from $2.92.
5. WESTPAC BANKING CORPORATION (WBC) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse upgrades to Outperform from Neutral as the stock is trading at a 10-year low in terms of sector-relative valuation. The broker expects two of the three items weighing on the stock should be resolved in the coming quarter i.e. capital and dividend sustainability. The broker believes this could be dealt with at the upcoming result with a capital raising in the order of $1.5-2bn and a -10-15c per security reduction in the semi-annual dividend. While asset sales are possible, Credit Suisse believes the timing of completion means more urgent action on capital is required. The broker does not suggest Westpac will completely abandon the multi-brand strategy but a consolidation of some of the brands would provide a cost opportunity. Target is raised to $30.55 from $28.60.
6. WESTERN AREAS NL (WSA) was upgraded to Overweight from Equal-weight by Morgan Stanley
News reports suggest Indonesia is moving ahead with new regulations and bringing forward an export ban for nickel with grade less than 1.7%. Morgan Stanley estimates around 218,000t of Indonesian nickel-in-ore, or 9% of global mined supply, is exposed to the ban. If this nickel ore is left stranded the market would move into substantial deficit. The broker envisages high upside risk for nickel versus forecasts and Western Areas becomes the preferred nickel exposure. Rating is upgraded to Overweight from Equal-weight. Industry view is Attractive. Target is raised to $3.30 from $2.25.
In the not-so-good books
1. COLLECTION HOUSE (CLH) was downgraded to Reduce from Hold by Morgans
Underlying net profit in FY19 was up 7.4%, largely driven by a lower implied amortisation rate. Morgans assesses, if it were not for this and applying the same amortisation rate as FY18, underlying net profit would have been down -39%. The broker was looking for improved cash generation and this was absent in FY19. If operating performance improves there is upside in the longer term, but the broker also assesses the downside risk is significant. Rating is downgraded to Reduce from Hold and the target lowered to $1.09 from $1.42.
2. CSR (CSR) was downgraded to Lighten from Hold by Ord Minnett
Ord Minnett reduces forecasts for the building products division in FY20 and FY21 to better capture the economics of the company’s key business units during a downturn. The main positive is the balance sheet, which places CSR in a strong position whereby it can potentially pick up assets along the way if the opportunity arises. Ord Minnett reduces estimates for earnings per share by an average of -4% over the forecast period. The impact from lower building product margins and property earnings is partially offset by upward revisions to the aluminium division. Rating is downgraded to Lighten from Hold and the target reduced to $3.50 from $3.80. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
3. GTN (GTN) was downgraded to Neutral from Outperform by Macquarie
GTN’s -37% drop in profit had been pre-released. The Australian Traffic Network was the key driver of weakness, Macquarie notes, and with earnings visibility clouded there is no end in sight at present. Management appears to be taking the right steps, but clear evidence of sustained stability is required to restore investor confidence. Macquarie downgrades to Neutral from Outperform. Target falls to 85c from $1.35.
4. HARVEY NORMAN HOLDINGS (HVN) was downgraded to Lighten from Hold by Ord Minnett
FY19 results, which were below forecasts, indicate an investment phase has commenced for the company’s franchisees. Lower sales drove higher levels of tactical support. This meant franchising pre-tax profit was reduced in the second half. Ord Minnett notes the external environment in some locations internationally is challenging, while tough comparables are an issue in the NZ division. Given the challenges, valuation support is reduced in the broker’s view. While the final dividend was well above forecasts, Harvey Norman announced another entitlement offer, which Ord Minnett suspects reflects a desire to retain low levels of gearing. Rating is downgraded to Lighten from Hold and the target is $4. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
5. METALS X (MLX) was downgraded to Neutral from Outperform by Macquarie
Macquarie believes declining tin prices will force a funding squeeze for Metals X and the broker is now assuming a $20m capital raising. Updated reserve estimates have led to a cut in earnings forecasts. Cuts to production, and the dilution of a raising, lead the broker to cut its target to 16c from 30c. Downgrade to Neutral from Outperform.
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.
