More downgrades than upgrades and a community of stockbroking analysts that sees its ratings heavily weighted towards Neutral/Holds amidst a local share market that is characterised more by rotation and temporary mood swings than a clear direction.
These are the easy-to-draw conclusions when overseeing what is happening inside the world of stockbroking analysts reviews and updates.
For the week ending Friday 8 November 2019, FNArena registered but four upgrades in ratings for ASX-listed entities against 11 downgrades. One of the upgrades, for Pendal Group, was met by two downgrades on the other side of the ledger.
Positive news is that three of the four upgrades moved to a Buy. On the flipside, only one downgrade moved to Sell (all others to Neutral/Hold). Pendal Group was the receiver of the sole fresh Sell rating.
A lot of action can be seen in the week’s overview for positive changes to earnings estimates. Zip Co claims the week’s top spot, followed by National Australia Bank (surprise!), Xero and Orica. The week’s table for negative revisions shows equally sizable adjustments with OceanaGold in the bottom spot, followed by CSR, Flight Centre, Blackmores and Medibank Private.
Out-of-season corporate results releases continue throughout the rest of the month in Australia.
In the good books
1. PENDAL GROUP LIMITED (PDL) was upgraded to Add from Hold by Morgans B/H/S: 3/3/1
FY19 net profit was down -19% and in line with expectations. The weaker result was primarily driven by a step-down in performance fees. There remains a risk of meaningful outflows in EU funds but on a 12-month view Morgans envisages upside from improved sentiment towards the UK. The broker upgrades to Add from Hold on valuation. Target is raised to $8.85 from $7.96.
See downgrade below.
2. ZIP CO LIMITED (Z1P) was upgraded to Buy from Sell by UBS B/H/S: 3/0/0
The company has announced a strategic agreement with Amazon, whereby it will be offered as a payment option for customers shopping on Amazon.com.au. With the share price falling significantly over recent weeks, UBS upgrades to Buy from Sell. The target of $4.80 is unchanged. The broker prefers Zip Co to its main peer Afterpay Touch (APT) as it has less exposure to the associated risks with ‘buy now pay later’ and a revenue model that relies on both consumers and merchants.
In the not-so-good books
1. BORAL LIMITED (BLD) was downgraded to Neutral from Buy by UBS to Neutral from Buy by Citi B/H/S: 0/5/0
UBS lowers its rating to Neutral from Buy as the stock is approaching the target. House prices are lifting and housing approvals appear to be bottoming but the next 12 months are still likely to experience a contraction ahead of a trough, in the broker’s view. US activity needs to pick up faster and Australian housing approvals lift further to regain confidence. Target is reduced to $4.90 from $5.20. Boral has reiterated FY20 net profit guidance to be -5-15% below FY19.
While the company maintained FY20 guidance, Citi notes a weak first half is placing increasing reliance on a strong second half. While lead indicators have turned positive, underlying activity remains weak and management has had to deepen its cost reductions. The broker downgrades to Neutral from Buy, envisaging few catalysts for the upside in the near term. Target is steady at $5.
2. DOWNER EDI LIMITED (DOW) was downgraded to Neutral from Buy by UBS B/H/S: 2/2/0
The shares have recently outperformed and UBS downgrades to Neutral from Buy. The share price has increased around 20% in the year to date. The company has reiterated guidance for FY20 net profit of around $365m. Downer EDI has indicated that cash conversion in FY20 would not be as strong as previously because of the impact of the Murra Warra wind farm, the run down in NBN/LNG projects and higher cash costs. UBS reduces the target to $8.15 from $8.35.
3. FLIGHT CENTRE LIMITED (FLT) was downgraded to Neutral from Buy by Citi B/H/S: 4/3/0
Citi notes Flight Centre has either downgraded or issued guidance below consensus five times in the past 12 months. The consistent underlying driver of weakness has been the Australian leisure channel. The broker downgrades to Neutral from Buy and reduces the target to $42.90 from $50.50. Citi forecasts an underlying pre-tax profit decline of -32% in the first half before a 12% recovery in the second half. The pre-tax profit margin is expected to contract to 1.3% in FY20.
4. PENDAL GROUP LIMITED (PDL) was downgraded to Sell from Neutral by UBS and to Neutral from Outperform by Macquarie B/H/S: 3/3/1
FY19 results were largely in line with UBS estimates. Hence, the rally in the share price appears overdone, particularly on the back of the outlook for higher FY20 costs. The broker commends the medium-term focus on strategic growth but notes elevated costs come at a time when JO Hambro’s revenue growth prospects are more constrained. Rating is downgraded to Sell from Neutral and the target is raised to $7.45 from $6.90.
Pendal Group’s full-year result was broadly in line with consensus, leading to a sigh of relief from the market. FY20 is expected to be impacted by lower JOHCM performance fees and a higher compensation ratio, offset by lower tax. The stock has made a comeback of late on signs of funds flow improvement, and at 16.7x is only -1% below its five-year PE average. Macquarie thus downgrades to Neutral from Outperform, while still preferring Pendal, along with Janus Henderson (JHG), in the space. Earnings forecasts downgraded but target unchanged at $8.25.
See upgrade above.
5. REA GROUP LIMITED (REA) was downgraded to Neutral from Outperform by Macquarie B/H/S: 1/3/1
Ahead of REA Group’s quarterly report tomorrow, and Domain Group’s AGM next week, the broker has increased its real estate ad volume decline expectations in the first half to -12% from a prior -7.5% given data confirmation weak conditions have persisted into FY20. The broker does see volumes ticking up down the track but for now downgrades REA to Neutral from Outperform. A lowering of the broker’s risk free rate assumption increases the target to $109 from $107.
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.
