For the week to Friday, December 6, FNArena registered 12 ratings upgrades from database brokers and only 3 downgrades. Of the 12 upgrades, 9 moved to Buy or equivalent and 3 to Hold, while all 3 downgrades moved to Hold.
One stock — gold miner Northern Stare Resources — saw two upgrades to Buy given a recent pullback in price. Four of the upgrades involved stocks from the energy sector, including three upgrades from Ord Minnett.
Changes to earnings forecasts included a standout 35.7% increase for buy now pay later (BNPL) company Zip Co despite a capital raising, but this is from negative to a bit less negative as Zip remains in the investment phase. More notable was a 11.9% earnings increase for oOh!media after the outdoor advertiser revealed conditions were now not as bad as previously witnessed.
On the downside, we can dismiss a big cut for Orocobre (-47%) as part and parcel of volatile lithium mining prices/production issues and rather note a -15.5% cut for Whitehaven Coal after a weak trading update.
In the good books
DEXUS PROPERTY GROUP (DXS) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 2/2/1
Credit Suisse upgrades to Outperform from Neutral following recent price movements and suggests investor concerns about the exposure to the Sydney CBD office market are overdone. The broker points out it takes 4-5 years for changes in market rents to cycle through a portfolio and remains comfortable that Dexus Property will generate distribution growth. A strong balance sheet also provides flexibility. The “threat” of a buyback could provide support for the stock, although this is not reflected in the broker’s estimates. Target is steady at $12.32.
METCASH LIMITED (MTS) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 2/2/2
First half net profit of $95.7m was in line with Ord Minnett’s forecast. Operating cash flow was weak, as the company invested in working capital, although the core wholesale food sales grew and the lower deflation please the broker. Ord Minnett remains confident the key FoodWorks contract can be maintained. While hardware has enjoyed significant synergy realisation, the broker notes the external environment is more difficult and the loss of a major Queensland customer a headwind. Ord Minnett upgrades to Accumulate from Hold, noting improving sales trends and valuation. Target is steady at $3.
NORTHERN STAR RESOURCES LTD (NST) was upgraded to Buy from Neutral by UBS B/H/S: 4/0/2
Northern Star had been enjoying a valuation premium, UBS notes, after several years of outperformance in production, exploration and acquisitions. But that premium has now been wiped out given the turnaround at Pogo is some 6-12 months behind management target. The turnaround remains delayed, the broker notes after visiting Pogo, but is coming. The recent share price decline has taken the stock into undervaluation, leading UBS to upgrade to Buy. Target rises to $12.00 from $11.20.
TELSTRA CORPORATION LIMITED (TLS) was upgraded to Buy from Neutral by UBS B/H/S: 5/0/1
UBS has reviewed its Telstra thesis in the wake of a positively received investor day and concluded mobile earnings will likely remain weak in the first half FY20, but average revenue per user should stabilise in FY21 ahead of a return to significant growth in FY22. From FY23, mobile growth should offset NBN headwinds. The dividend should thus be safe at 16c. Upgrade to Buy from Neutral, target unchanged at $4.00.
WESTERN AREAS NL (WSA) was upgraded to Neutral from Sell by UBS B/H/S: 3/4/0
The recent surge in the nickel price drove Western Areas into overvaluation on UBS’ numbers, which is why a Sell rating was in place. The subsequent -20% fall in the nickel price has seen the stock fall back to fair value. Upgrade to Neutral. Target rises to $2.90 from $2.80 on a rise in the broker’s own nickel price forecasts.
In the not-so-good books
CSL LIMITED (CSL) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 4/3/0
Management has highlighted the breadth of projects and included an upbeat assessment of key markets at its R&D briefing. Ord Minnett raises FY20 forecasts to 3% ahead of guidance, reflecting strong demand and rising prices. The target is raised to $270 from $260. Rating is downgraded to Hold from Accumulate, considering the lack of potential upside to the revised target. Opportunities are large but are some years away from commercialisation and face uncertain trials, the broker assesses.
CALTEX AUSTRALIA LIMITED (CTX) was downgraded to Neutral from Buy by Citi B/H/S: 1/4/0
The company has disclosed initiatives to deliver $195m in earnings (EBIT) over five years. As Caltex has previously walked away from expecting an earnings uplift in convenience, Citi believes it needs to earn back the trust of the market on the credibility of its forecasts. The broker is hesitant to increase estimates for earnings, given a lack of transparency on the opportunities and a need to prove most of the convenience initiatives. Citi assesses management needs to execute on initiatives just to match the bid from Alimentation Couche-Tard, without the luxury of breaching the ‘no material asset sales’ condition. Rating is downgraded to Neutral from Buy and the target raised to $34.00 from $30.50.
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.