1. CLEANAWAY WASTE MANAGEMENT (CWY) was upgraded to Neutral from Underperform by Credit Suisse
Citi lowers FY20 estimates for earnings per share by -12-13% over FY20-22 after the AGM trading update. The broker estimates that around 90% of the company’s commodity income is linked to old corrugated cardboard and prices have halved since the first half of FY19. However there are options from cost reductions, price increases and a stabilisation of commodity markets that could flow through from the second half. Buy rating maintained. Target is reduced to $2.25 from $2.40.
2. FREELANCER (FLN) was upgraded to Neutral from Sell by UBS
Freelancer posted benign organic growth in the Sep Q once adjusted for currency. The company is at a challenging crossroad, UBS suggests. Underlying growth is underwhelming but changes to the platform and new currency offerings in Escrow have the potential to re-stimulate. Penetration of Escrow payments into the second hand car market creates significant longer term potential but is as yet unproven. The broker has reduced forecasts and its target to 79c from 88c but upgrades to Neutral on valuation.
3. LENDLEASE GROUP (LLC) was upgraded to Buy from Accumulate by Ord Minnett
Having conducted a comprehensive analysis of the company’s Barangaroo South development, Ord Minnett estimates this will underpin 30-40% earnings growth over the next 3-5 years. Based on the company’s expanded development backlog and capital base, the broker forecasts FY25 earnings will be at comparable levels to FY23-24, indicating materially higher earnings should be sustainable. Rating is upgraded to Buy from Accumulate and the target lifted to $22.50 from $17.50. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
4. REGIS RESOURCES (RRL) was upgraded to Buy from Neutral by Citi
Citi observes the company has several low-risk organic growth options and delivery is predictable. Moreover, the stock offers a 3% fully franked dividend yield, one of the sector’s highest. Following a pullback in the shares since mid-August, the broker envisages value has emerged and upgrades to Buy from Neutral. Target is raised to $5.40 from $5.00.
5. SIMS METAL MANAGEMENT (SGM) was upgraded to Buy from Neutral by Citi and to Neutral from Underperform by Macquarie
Operating earnings (EBIT) are expected to fall to the lowest level in 20 years in FY20, Citi observes. Market conditions remain challenging and the company has warned of an underlying earnings loss of -$20-30m in the first half and an FY20 profit of $20-50m. The broker notes sentiment has turned more bullish in recent weeks and Turkish scrap prices have recently rebounded from the late September lows. Sentiment in US scrap markets is also improving. Citi upgrades to Buy from Neutral on valuation grounds, cutting the target to $10.50 from $11.50.
The company has announced its second negative FY20 trading update, now expecting underlying earnings (EBIT) of $20-50m, with a skew to the second half. A first half loss is expected of -$20-30m followed by a second half profit of $50-70m. Macquarie notes scrap markets have become illiquid and competitive, affecting margins. However, scrap prices have staged some sort of a recovery in recent weeks. The outlook in Turkey is less severe while US market conditions appear to be moderating. The broker upgrades to Neutral from Underperform, assessing the likelihood of further downside is now more finely balanced. Target is reduced to $9.05 from $9.30.
In the not-so-good books
1. ARISTOCRAT LEISURE (ALL) was downgraded to Neutral from Outperform by Credit Suisse
The stock has rallied recently and Credit Suisse downgrades to Neutral from Outperform. The broker assesses North American revenue share is an area where the company can surpass forecasts, particularly in the premium Class III installed base. The broker emphasises that earnings are growing strongly and investors may be able to take advantage should the share price weaken. Target is $33.40.
2. COSTA GROUP (CGC) was downgraded to Neutral from Buy by Citi and to Underperform from Neutral by Macquarie
Costa Group has downgraded earnings for the fourth time in 2019 and has decided to raise equity through a rights issue. Citi lowers estimates for operating earnings by -27% for 2019 and -17% for 2020. The broker believes the company has a challenge ahead to restore its previous reputation for earnings stability, despite the inherent risks from agriculture. The broker expects investors will stay cautious and be more reliant on external observations of improved prices in key categories. Rating is downgraded to Neutral from Buy and the target reduced to $2.90 from $4.20.
Costa Group has announced its fourth downgrade for the year, now expecting 2019 net profit of $28m and operating earnings (EBITDA) of $98m. Macquarie notes tomatoes are the only produce category to meet second half expectations. While the company has previously highlighted the risks to the downside in blueberries, mushrooms and raspberries there is also adverse yield and size impacts in citrus and avocado. Macquarie changes analysts and lowers the rating to Underperform from Neutral, noting that earnings visibility continues to be limited. Target is reduced to $2.51 from $3.40. Moreover, 2020 guidance seems optimistic in the broker’s opinion.
3. COLES GROUP (COL) was downgraded to Underperform from Neutral by Credit Suisse
Credit Suisse downgrades to Underperform from Neutral. The broker forecasts no growth in Coles supermarkets in the first quarter. With no evidence for a change in the performance relative to Woolworths (WOW), the broker expects the share price to outperform in the near term. Investors should note the rating for Woolworths is Underperform. Target is $13.23.
4. DOMINO’S PIZZA ENTERPRISES (DMP) was downgraded to Neutral from Buy by UBS
UBS saw Domino’s FY20 to date trading update as mixed, with network sales in line with consensus but new store growth as soft. Store growth is weighted to the second half but running short of expectation. The stock has run up 34% in three months to a 26x forward PE which the broker considers fair risk/reward, hence a downgrade to Neutral from Buy. Target rises to $50.00 from $48.50.
5. PILBARA MINERALS (PLS) was downgraded to Neutral from Outperform by Macquarie
Production was higher and sales lower in the September quarter as production was curtailed at Pilgangoora. The company has reduced December quarter sales guidance because of continued market weakness. Macquarie notes a muted spodumene market is squeezing the company’s sales volumes, and a recovery in demand in the near-term will determine whether curtailment measures are lifted as well as provide more certainty on stage 2. Target is reduced to $0.32 from $0.60 and the rating is 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.
