In the good books
AMCOR (AMC) was upgraded to Outperform from Neutral by Credit Suisse
The first quarter revealed volume growth in medical flexible packaging and liquid flexible pouches, areas not immediately evident. There is no change to company guidance, with Amcor reiterating FY20 estimates for earnings per share of US61-64c. Plastic volumes increased and Credit Suisse cannot, therefore, conclude that environmental concerns are affecting overall plastic consumption. Rating is upgraded to Outperform from Neutral and the target raised to $15.50 from $14.75.
AFTERPAY TOUCH GROUP (APT) was upgraded to Buy from Neutral by Citi
Citi analysts have dug deeper into web site traffic and app downloads for the Buy Now, Pay Later sector in general. Their conclusion is that Afterpay Touch had a solid October in the USA. In addition, Citi expects the recent launch of a number of marquee brands to result in strong merchant sales over the upcoming holiday period. The analysts continue to see fierce competition as the key risk for the company, but given the recent share price retreat, and the above analysis, they have decided to upgrade to Buy from Neutral. Price target $31.10 (was $33.70).
CATAPULT GROUP INTERNATIONAL (CAT) was upgraded to Add from Hold by Morgans
Catapult Group has renewed and expanded its deal with Rugby Australia, in the wake of renewing its deal with the NRL, meaning no more material renewals upcoming in the near future. The key to RA’s renewal was the technology, Morgans notes, not the price, suggesting R&D investment is paying dividends. The broker now expects Catapult to achieve FY20 sales, earnings and cash flow targets, and has upgraded to Add from Hold in anticipation of outperformance ahead. De-risking means the broker has also lowered its cost of capital assumption, leading to a target price increase to $2.19 from $1.56.
CSL (CSL) was upgraded to Buy from Neutral by UBS
As industry continues to collect plasma, UBS notes the average fractionator has the option of increasing the immunoglobulin price and/or reducing the price of albumin to stimulate demand. As US albumin pricing is arguably at a floor, the broker believes using the immunoglobulin price lever is more likely to be used. As CSL has embarked on plasma expansion well in advance of its peers it is likely to grow ahead of the market, in the broker’s view. UBS upgrades to Buy from Neutral and raises the target to $295 from $265.
DOMAIN HOLDINGS GROUP (DHG) was upgraded to Outperform from Neutral by Macquarie and to Accumulate from Hold by Ord Minnett
Macquarie observes cost management has offered more protection than previously expected against the headwinds to volume. Trading was slightly weaker than expected in July to October but offset by strong cost-cutting. While some of the costs will return, the broker assesses the business has significant operating leverage. Trends are expected to improve in December. Rating is upgraded to Outperform from Neutral. Target is raised to $3.60 from $3.20.
FY20 trading was stronger than Ord Minnett expected and a new pricing structure to be rolled out on January 1 should help improve yields and depth penetration. Ord Minnett expects a recovery in the real estate listings environment in the second half of FY20 and prefers Domain to REA Group (REA), as the former is more leveraged to improvements in Sydney and Melbourne. Rating is upgraded to Accumulate from Hold and the target raised to $3.65 from $3.15. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
In the not-so-good books
CSR (CSR) was downgraded to Neutral from Outperform by Macquarie
Macquarie retained Outperform in the wake of CSR’s recent earnings result, but believes valuation has now become full. The stock has rallied 63% year to date, and risk/reward is evenly balanced. There remain residual uncertainties both at the macro and stock-specific level, the broker notes, and FY20-21 forecast PEs are in line with historical averages. The broker awaits signs of improvement in the residential building market and for now pulls back to Neutral, retaining a $4.80 target.
INCITEC PIVOT (IPL) was downgraded to Neutral from Buy by Citi, to Underweight from Equal-weight by Morgan Stanley and to Hold from Buy by Ord Minnett
Bottom line: Citi analysts believe market forecasts might be due for a reset lower as fertiliser sales remain sluggish. For Explosives, the analysts believe pricing leverage will likely only show up in FY21 (due to longer term contracts). The release of FY19 financials resulted in a disappointment, not because of FY19 numbers, but because of FY20 guidance. Citi analysts reduced forecasts by -22% and -11% for FY20-21. These cuts have a direct impact on forecast dividends. The analysts observe drought conditions had a material impact with demand for the company’s highest margin ammoniac product literally drying up (that’s probably a pun intended). Downgrade to Neutral from Buy. Target price steady at $3.55.
FY19 earnings were 4% ahead of Morgan Stanley’s estimates. This was supported by a land sale without which earnings would be in line. North American explosives also surprised to the upside, particularly after declining volumes were experienced in the first half. The broker does not believe the issues that greatly affected FY19 will persist into FY20. However, delivery of a clean FY20 is crucial for the company and, regardless of the outcome, there are headwinds from challenging fertiliser markets and domestic seasonal conditions. Hence, the broker considers the stock expensive and downgrades to Underweight from Equal-weight. Cautious industry view. Target is raised to $3.20 from $3.10.
FY19 earnings (EBIT), while down -45.4%, were ahead of Ord Minnett’s forecasts. The stock has reached a level where the broker considers the risks and rewards are balanced. Louisiana earnings and improved explosives demand are expected to support growth, although weak fertiliser pricing and poor weather are likely to remain headwinds. Rating is downgraded to Hold from Buy as the stock has traded through the new target of $3.40, reduced from $3.45. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
OZ MINERALS (OZL) was downgraded to Neutral from Buy by Citi and to Lighten from Hold by Ord Minnett
Citi has downgraded OZ Minerals to Neutral from Buy with a reduced-price target of $12, down from $12.40. The analysts are trying to balance opposing risks with delivering a big project such as is Carrapateena on time and budget with signs the price of copper might be stabilising. Citi remains of the view this remains a stand-out against other copper exposures, on the ASX and elsewhere. The analysts suggest investors should look through short term setbacks at Carrapateena.
The Carrapateena reserve grade has been cut to 1.6-1.8% (-11%) after a re-design of the sub-level cave footprint. The company has pointed to a one-month delay in first production at Carrapateena while adding one year to the mine life of Prominent Hill. Incorporating the changes, reduces Ord Minnett’s valuation by -4%. This leads to a downgrade to the rating to Lighten from Hold. Target is reduced to $9.60 from $10.10. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
QBE INSURANCE (QBE) was downgraded to Neutral from Buy by Citi
Citi downgrades to Neutral from Buy, maintaining a $13.45 target. The broker now believes it highly likely that US crop insurance will endure an adverse outcome in 2019. Both Chubb and Zurich have hinted at adverse outcomes. The broker also notes a significant second half vs first half headwind for QBE’s claims ratio. Potential volatility is envisaged in the stock price as the market assesses the issues, which Citi suspects may lead to a better opportunity.
REA GROUP (REA) was downgraded to Underperform from Neutral by Credit Suisse
First quarter results reflected weakness in residential listing volumes, amid a revenue decline of -9%. Credit Suisse finds the valuation difficult to justify, although agrees there is likely to be a recovery in the second half. The main issue for the broker is whether the contribution to revenue growth from higher depth penetration is now close to a top and, while this is unlikely to be a structural factor, lower developer volumes will probably remain a headwind in the near to medium term. Rating is downgraded to Underperform from Neutral and the target lowered to $90.00 from $90.50.
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.