In the good books
ALLIANCE AVIATION SERVICES (AQZ) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse reviews the investment thesis as the stock has fallen -11.5% and underperformed the small ordinaries index by -12.8% since the FY19 result. The broker believes concerns around wet lease arrangements are unfounded, while issues surrounding the Qantas (QAN) overhang continue. Rating is upgraded to Outperform from Neutral and the target raised to $2.90 from $2.60. The broker expects the company should generate around $28m in free cash flow, even after factoring in elevated capital expenditure into FY21.
NICK SCALI (NCK) was upgraded to Buy from Sell by Citi
Interesting twist as Citi had previously carried a Sell rating on the assumption that the disruption of the housing cycle in Australia would be too much to withstand for the small cap furniture retailer. Post yesterday’s profit warning, and share price sell-off, the analysts now think their thesis has successfully played out. Now taking the view that current tough times won’t last forever, Citi has decided to upgrade to Buy from Sell. Forecasts have been reduced, but Citi analysts seek comfort in forward looking indicators that are suggesting better times will announce themselves for housing related retailers such as Nick Scali. Price target has improved by 16% to $6.90.
PERPETUAL (PPT) was upgraded to Neutral from Underperform by Macquarie
Perpetual suffered further fund outflows in the Sep Q and the broker forecasts more ahead. While flow trends are a major concern, the stock’s de-rating to date and the potential for a positive acquisition announcement in the near term have Macquarie upgrading to Neutral from Underperform. Target falls to $32.00 from $34.50.
PERSEUS MINING (PRU) was upgraded to Outperform from Neutral by Credit Suisse
Yaoure remains on schedule for first gold by end of 2020. The potential to extend mine life is significant, Credit Suisse assesses. Meanwhile Edikan has moved to a materially lower mining rate for a modest reduction in production. The broker upgrades to Outperform from Neutral on higher gold price assumptions. Target is raised to $0.88 from $0.62 as valuation methodology is re-assessed.
REGIS RESOURCES (RRL) was upgraded to Neutral from Underperform by Credit Suisse
Credit Suisse notes the revised definitive feasibility study for McPhillamys is due in the first half of FY20 and may reveal improved economics on incorporating the higher-grade satellite, Discovery Ridge. Nevertheless, the severe drought conditions in NSW, as rural properties struggle for water, could add complexity to the granting of permits. The broker upgrades to Neutral from Underperform, amid higher gold price assumptions. Target is raised $4.95 from $3.90.
ST BARBARA (SBM) was upgraded to Outperform from Underperform by Credit Suisse
Further FY20 guidance is to be provided with the September quarter production report. Atlantic Gold is expected to be consistent with the prior owner’s guidance for 2019. This could benefit from mining to date that has demonstrated a large portion of previously-assumed waste is mineralised. Rating is upgraded to Outperform from Underperform as Credit Suisse raises gold price assumptions and re-assesses methodology. Target rises to $3.50 from $2.76.
In the not-so-good books
ALS (ALQ) was downgraded to Neutral from Outperform by Credit Suisse
While the stock is priced for a recovery in geochemistry Credit Suisse finds little evidence this is occurring. The focus at the upcoming result is likely to be on the volume growth in geochemistry and continued margin improvement in life sciences. The broker estimates the share price has already priced moderate sample volume growth in the second half of FY20 and, given the history of volatility at results announcements, the rating is lowered to Neutral from Outperform. Target is steady at $8.40. The company will report its FY20 first half results on November 19.
ALUMINA (AWC) was downgraded to Lighten from Hold by Ord Minnett
Ord Minnett updates commodity price forecasts, noting decelerating global growth. Until there are clear are signs the current cycle has ended, periods of risk-on sentiment lead to a re-rating of key preferences in the bulks and metals sectors. Aluminium and alumina estimates for 2020 are reduced by -6% and -14% respectively. The broker downgrades to Lighten from Hold and lowers the target to $2.00 from $2.50. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
BANK OF QUEENSLAND (BOQ) was downgraded to Reduce from Hold by Morgans
Bank of Queensland will report its FY19 result on October 17. Citi believes underlying growth in cash earnings will remain challenged relative to the major banks. The broker believes the bank has plenty of catching up to do in terms of streamlining the back office processes and improving customer facing technology. Moreover, the issues are unlikely to be resolved the next couple of years and the broker expects the home loan book will struggle to grow without compromising too much on margins. Rating is downgraded to Reduce from Hold and the target is steady at $8.
HT&E (HT1) was downgraded to Underperform from Neutral by Macquarie
While ad markets have continued to be choppy across broader media, Macquarie was surprised by the extent of Southern Cross’ guidance downgrade. Channel checks reveal weakness is across the board, not just in any one sector. The broker has reassessed its general media assumptions. The broker expects softness in radio will also impact on HT&E. Forecast earnings cut by -9.2% and -10.9% on 2020-21. Target falls to $1.55 from $1.75. Downgrade to Underperform from Neutral.
PILBARA MINERALS (PLS) was downgraded to Sell from Hold by Ord Minnett
Ord Minnett expects the lithium sector will have a difficult period for the next 6-12 months. Pilbara Minerals is downgraded to Sell from Hold. Target is reduced to $0.25 from $0.60. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
SANDFIRE RESOURCES (SFR) was downgraded to Hold from Accumulate by Ord Minnett
Despite potential upside, Ord Minnett notes development risk for Sandfire Resources and would become more constructive once risks diminish. Ord Minnett downgrades to Hold from Accumulate. Target is lowered to $7.00 from $7.70. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
SANTOS (STO) was downgraded to Equal-weight from Overweight by Morgan Stanley and to Hold from Buy by Ord Minnett
Morgan Stanley downgrades to Equal-weight after being Overweight for three years. The broker assesses the free cash story is diminishing and investors will be required to invest for a medium-term uplift in production. Meanwhile, risks are building across LNG industry and the stock appears fully valued. The company has announced a US$1.4bn deal to buy the northern Australian interests of ConocoPhillips. While the deal is solid, Morgan Stanley believes it will change the free cash flow profile of the company. Target is $8.00. Industry view: In-Line.
Santos has emerged as the buyer of the ConocoPhillips northern Australian assets, comprising the Darwin LNG, Bayu-Undan, Barossa and Poseidon projects. Ord Minnett considers the transaction positive in so far it gives Santos a majority stake. Ord Minnett downgrades to Hold from Buy based on valuation and lowers the target to $7.75 from $7.85. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
SUNCORP GROUP (SUN) was downgraded to Underperform from Neutral by Credit Suisse
Credit Suisse expects the company will review its targets in coming months as these are unlikely to be achieved in coming years unless the business takes on more risk. While Suncorp has reduced earnings volatility and improved the underwriting profit of the insurance division, Credit Suisse suggests this is being more than offset by lower bond yields. The broker considers a 10% return on equity a stretch. FY20 net profit estimates from business lines are decreased by -6%. Rating is downgraded to Underperform from Neutral and the target reduced to $12.75 from $13.90.
SOUTHERN CROSS MEDIA GROUP (SXL) was downgraded to Neutral from Outperform by Macquarie
While ad markets have continued to be choppy across broader media, Macquarie was surprised by the extent of Southern Cross’ guidance downgrade. Channel checks reveal weakness is across the board, not just in any one sector. The broker has reassessed its general media assumptions. Southern Cross forecast earnings fall -15% and -18% in FY20-21. Target falls to $1.05 from $1.40. Rating downgraded 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.
