Changes in recommendations for ASX-listed stocks by the seven stockbrokerages monitored daily continue to carry a slight bias towards downgrades. For the week ending Friday 29 November 2019 FNArena registered 10 upgrades and 11 downgrades with Telstra the sole recipient of two upgrades, both to Buy.
Only three out of the 10 upgrades stopped at Hold/Neutral, while four companies received a fresh Sell recommendation: AMP, IOOF Holdings, Perpetual and Sigma Healthcare.
With the out-of-season corporate reports now winding down, and quarterly updates on commodities still ahead, it is no surprise overall activity in further adjustments to earnings estimates remains rather benign. Though it has to be pointed out that corporate Australia is still issuing profit warnings.
For the week, Caltex Australia took the honours in positive amendments to earnings forecasts, at a distance followed by Mineral Resources, and further down Fisher & Paykel Healthcare (FY19 release), and IOOF Holdings. The negative side of the ledger, on the other hand, has plenty of action on display with Orocobre’s forecasts getting yet another chainsaw treatment, followed by equally significant reductions for Nearmap, Nufarm (yet another profit warning), Superloop, Sims Metal Management (was that another profit warning?), and Westpac.
The greatest discrepancy for the Australian share market remains the fact that fresh money keeps flowing in, pushing indices to new all-time highs, while momentum for earnings estimates remains (quite noticeably) weighted to the downside. One cannot help but wondering what the implications are for the upcoming February reporting season. This, however, might remain a question for next year.
In the good books
COLLINS FOODS LIMITED (CKF) was upgraded to Add from Hold by Morgans B/H/S: 1/1/0
The first half highlighted strong momentum in the base KFC Australia business while Europe continues to underperform. The company has highlighted same-store sales growth in the second half to date of 4.5% for KFC Australia. Store roll-out expectations have been reiterated. Morgans expects FY20 operating earnings (EBITDA) of $122.3m, up 7.5%. The broker notes the stock trades at a discount to listed peers and points to de-gearing of the balance sheet to the top of the target range with the potential for further accretive acquisitions. Rating is upgraded to Add from Hold and the target raised to $11.76 from $8.20.
See downgrade below.
EBOS GROUP LIMITED (EBO) was upgraded to Buy from Neutral by UBS B/H/S: 1/2/1
UBS upgrades to Buy from Neutral as the stock now offers a 16% total return based on the current target. The broker’s FY20 operating earnings (EBITDA) forecast now sits at $294m. Given the strong capital allocation record, UBS would expect the company to, at a minimum, achieve its stated 15% return on capital target on future acquisitions. Assuming EBOS Group does deploy $300m of capital into acquisitions by the end of FY20 it could add 14% to group earnings (EBIT). Target is reduced to NZ$25.50 from NZ$25.90.
TELSTRA CORPORATION LIMITED (TLS) was upgraded to Outperform from Neutral by Credit Suisse and to Outperform from Neutral by Macquarie B/H/S: 4/1/1
The company’s investor briefing flagged declines in the near term for mobile revenue per unit amid competition in enterprise. However an improving trend has been noted. Credit Suisse suspects capital intensity is likely to improve while the dividend appears sustainable at $0.16 per share. While recognising the stock has had a good run over the past 12 months, as momentum is positive Credit Suisse upgrades to Outperform from Neutral. Target is raised to $3.90 from $3.70.
It appears the usual uptick in competitive behaviour among mobile providers in the run-up to Christmas is absent this year. Macquarie hasn’t changed its Telstra forecast, but is more confident in its FY21 mobile growth forecasts. Leading indicators suggests a competition inflection point in the next twelve months. Mobile improvement, as well as reduced capital intensity, provide scope for dividend growth down the track, the broker suggests. Upgrade to Outperform from Neutral, target rises to $4.00 from $3.75.
In the not-so-good books
COLLINS FOODS LIMITED (CKF) was downgraded to Neutral from Buy by UBS B/H/S: 1/1/0
The first half result would have beat UBS estimates had the Netherlands not underperformed. Customer uptake at the new Taco Bell locations remains strong and the broker considers this a core driver for medium and long-term growth. Nevertheless, after a material re-rating the broker considers the valuation fair and downgrades to Neutral from Buy. Target is raised to $10.60 from $8.75.
See upgrade above.
PERPETUAL LIMITED (PPT) was downgraded to Underperform from Neutral by Macquarie B/H/S: 0/6/1
Perpetual reaffirmed business-as-usual cost and cost savings guidance at its AGM. Macquarie suggests the organic and inorganic pipeline for Perpetual Private is encouraging. Perpetual Investments is still looking for an acquisition as outflows continue. Those outflows are likely to sustain pressure on the stock’s relative multiple to peers thus the broker downgrades to Underperform from Neutral, noting Perpetual has joined in a recent re-rating for the sector. Target rises to $35.50 from $32.00.
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.
