Recommendation upgrades and downgrades for ASX-listed entities were roughly in balance during the week ending on Friday, 1st November 2019. FNArena counted 11 and 12 respectively.
The not-so-good news is that less than half of all upgrades only moved to Neutral/Hold (5 out of the 11) but then only four of the 12 downgrades sunk to a Sell.
The fourth profit warning during this calendar year delivered Costa Group two fresh Sell ratings. On the positive side, gold producer Regis Resources was upgraded twice to Buy, while struggling scrap trader Sims Metal Management also received two upgrades, one to Buy and one to Neutral.
A small number of stocks enjoyed sizeable increases to earnings forecasts, led by Senex Energy, Viva Energy and Fortescue Metals. ResMed, fresh from another quarterly that beat market expectations, sits fourth on the week’s table for positive revisions.
No surprise, Sims Metal and Costa Group -both issuers of multiple profit warnings this year- take the wooden spoon honours for changes to earnings estimates, followed by Sandfire Resources, Newcrest Mining, Qantas and Blackmores.
The banks are not having a great season either, with Westpac announcing a -15% dividend cut on Monday morning, after ANZ Bank lowered its franking level to 70%. This puts the market’s background debate about Value vs Growth in a different perspective vis a vis overseas markets, especially since Macquarie Group’s result on Friday was well-received.
So was Orica’s, vindicating the strong share price performance since May. This week and next will bring more earnings results updates with representatives from both Value and Growth sides featuring prominently. See also the Corporate Results Monitor on the website.
Volatility guaranteed?
In the good books
ADELAIDE BRIGHTON LIMITED (ABC) was upgraded to Neutral from Sell by UBS B/H/S: 0/3/3
The pullback in housing and construction activity has made it a tough 2019 for Adelaide Brighton, UBS notes. The latest data suggest approvals are bottoming but the floor in commencements has not yet been reached, implying more margin pressure ahead. However with approvals and house prices rising, the risk of missing 2019 earnings guidance is diminishing, the broker suggests. Upgrade to Neutral from Sell. Target falls to $3.00 from $3.15.
AGL ENERGY LIMITED (AGL) was upgraded to Hold from Reduce by Morgans B/H/S: 0/4/3
First quarter generation output was 5% higher than the prior corresponding period and Morgans lifts estimates for the first half result. The broker envisages several issues in the medium term in the electricity market, as fuel costs increase and speculation mounts about the future of the Portland smelter. However, the company’s extensive vertical integration and hedging should insulate earnings from major swings in the electricity spot market over the next 12 months and the broker upgrades to Hold from Reduce, raising the target to $17.45 from $16.86.
REGIS RESOURCES LIMITED (RRL) was upgraded to Add from Hold by Morgans B/H/S: 4/3/0
Morgans changes analysts and, given recent share price weakness, upgrades to Add from Hold. The company’s strategy has been to grow organically and optimise current operations. Guidance has been met for the past five years and, the broker observes, costs are among the lowest in the industry. The strong growth pipeline includes McPhillamys, which will add around 50% to the production profile once operational. Morgans reduces the target to $5.41 from $5.51.
SCENTRE GROUP (SCG) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 2/1/2
Specialty sales growth was 1.8% in the September quarter, a 50 basis points increase on June. Ord Minnett observes Scentre Group has defensive income, improving retail sales and a superior portfolio to Vicinity Centres (VCX). The management business is also considered more valuable and the broker switches preferences, upgrading its rating to Accumulate from Hold. Target is steady at $4.30.
WOOLWORTHS LIMITED (WOW) was upgraded to Neutral from Underperform by Macquarie B/H/S: 0/3/2
Macquarie notes supermarket like-for-like sales were up 6.6% in the first quarter and well ahead of rival Coles (COL). Nevertheless, this was at the lower bounds of market expectations. The company has admitted to underpaying 5700 salaried staff and remediation costs of -$200-300m are envisaged. Macquarie notes Woolworths was already facing higher enterprise bargaining costs so the review will put further upward pressure on the wages bill. The broker rolls forward its model and upgrades to Neutral from Underperform. Target is raised to $37.00 from $29.90.
In the not-so-good books
BLACKMORES LIMITED (BKL) was downgraded to Underperform from Neutral by Credit Suisse B/H/S: 0/3/3
Credit Suisse notes Blackmores has rejuvenated its management ranks. China has been elevated to the status of having a direct CEO reporting to the company. The broker believes this could be a turnaround story and mulls whether there could even be a takeover. Blackmores has stated it is looking for a partner to help develop the Chinese business. Growth is expected to resume in FY21 after restructuring changes, amid benefits from a new factory and a full year of cost reductions. Rating is downgraded to Underperform from Neutral. Credit Suisse maintains a target of $69.
JAPARA HEALTHCARE LIMITED (JHC) was downgraded to Lighten from Hold by Ord Minnett B/H/S: 0/3/0
Following the interim report from the Royal Commission Into Residential Aged Care, Ord Minnett downgrades to Lighten from Hold. Target is steady at $1. The broker is concerned that Japara Healthcare’s higher cost base leaves it more exposed to the sector’s issue of income vs expenses growth. Spending on new facilities will mean gearing continues to rise at a time when earnings are contracting.
NOVONIX LIMITED (NVX) was downgraded to Hold from Add by Morgans B/H/S: 0/1/0
The company has exhibited a strong performance in the September quarter, Morgans observes, in anticipation of its first customer contract for the synthetic graphite product. The broker expects the first 500tpa of production capacity will be commissioned in the current half-year and this will mean the company is likely to need funds to secure the period between commissioning and full-scale production. The broker requires clarity on a funding package along with customer demand in order to re-assess its view and downgrades to Hold from Speculative Buy. Target is $0.65.
REGIS HEALTHCARE LIMITED (REG) was downgraded to Hold from Buy by Ord Minnett B/H/S: 1/2/1
Ord Minnett notes the interim report from the Royal Commission Into Residential Aged Care was more critical than previously anticipated, raising the potential for more radical recommendations in the final report. The broker had also not expected commissioners to clearly oppose any funding boost ahead of their recommendations. As the stock is trading close to valuation, the broker downgrades Regis Healthcare to Hold from Buy. Target is $3.15.
RHINOMED LIMITED (RNO) was downgraded to Hold from Add by Morgans B/H/S: 0/1/0
First quarter revenue was below expectations amid continued volatility in cash flow. Morgans continues to take a cautious approach to the upside potential in the Columbia Care partnership. Given changes to forecasts, and the dilution from the recent capital raising, the target is lowered to $0.28 from $0.38. While remaining positive about the long-term view, the broker recognises increasing investor fatigue regarding the time being taken to achieve breakeven. Rating is downgraded to Hold from Speculative Buy.
VICINITY CENTRES (VCX) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 0/4/1
The share price has risen 7% in the past month and Ord Minnett switches retail preferences, believing Scentre Group (SCG) has a better portfolio. The broker downgrades to Hold from Accumulate. Target is steady at $2.80.
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 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.
