In the good books

Evolution Mining (ERVN) was upgraded to Outperform from Underperform by Credit Suisse.

Preliminary operating results for the December quarter reveal Mount Carlton production is expected to be at the bottom end of the guidance range. Credit Suisse suspects, while cost guidance is unchanged, achieving the target may be at risk. FY20 guidance for Mount Carlton of 70-75,000 ounces reflects 10% of group production. While a small component, this mine has been an historical outperformer and strong generator of cash for the company.

Credit Suisse believes the water risk is moderating at Cowal as the company’s strategy to secure more water from alternative sources such as bores is progressing well. Rating is upgraded to Outperform from Underperform on share price weakness. Target is $4.30.

See downgrade below.

Metcash (MTS) was upgraded to Neutral from Underperform by Credit Suisse.

Credit Suisse upgrades to Neutral from Underperform as the stock reflects better value. The target is raised to $2.64 from $2.39. Nevertheless, Credit Suisse understands it is challenging to resolve the competitive issues facing the business and there is no easy solution to the heavy risk weighting applied to the company’s food division. The broker floats the idea that, whilst not a perfect solution, the sale of food distribution to retailers could achieve a better alignment of interests and facilitate a high level of investment.

Netwealth Group (NWL) was upgraded to Buy from Neutral by Citi.

Citi upgrades Netwealth Group to Buy from Neutral, envisaging upside to near-term earnings from better-than-expected flows. Target is steady at $9.60. Findex, an advisory firm with $17bn under advice, has launched a new platform offering. Pricing is materially lower than current platform pricing but Citi does not expect this to impact the near-term earnings of its competitors, given the likely time required to gain traction among independent wealth firms.

Oceanagold (OGC) was upgraded to Buy from Accumulate by Ord Minnett

Ord Minnett upgrades to Buy from Accumulate based on valuation. Target is raised to $4.20 from $4.10. The broker continues to be attracted to the turnaround potential in the business, expecting the strategies will become clearer in February when guidance is provided. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.

St Barbara (SBM) was upgraded to Buy from Accumulate by Ord Minnett

Ord Minnett upgrades to Buy from Accumulate based on valuation and raises the target to $3.40 from $3.10. The broker continues to be attracted to the deeper value and turnaround potential, expecting more clarity in February when the company provides guidance and plans for key projects. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.

Woolworths (WOW) was upgraded to Equal-weight from Underweight by Morgan Stanley–

Morgan Stanley believes Woolworths is now better positioned, as industry margins have re-based and there is scope for operating leverage. Deflationary pressures are easing, and valuation now reflects this as well as a range of supply chain initiatives and improving online profitability.

Hence, the broker upgrades to Equal-weight from Underweight and raises the target to $36.50 from $28.00. Adjusted earnings estimates are raised by 1-3% over the forecast period. Industry view: Cautious.

 

In the not-so-good books

Coles (COL) was downgraded to Underweight from Equal-weight by Morgan Stanley.

Morgan Stanley observes supermarket industry margins have re-based and this has paid off for the major operators. The broker believes execution will be a differentiator in supermarkets in 2020 and Woolworths has a margin advantage, partially reflecting its scale advantage. This is considered unlikely to be eroded over the medium term.

While acknowledging a benign backdrop, the broker still struggles to find meaningful valuation upside for Coles and downgrades to Underweight from Equal-weight. Target is raised to $13.50 from $13.00. Industry view: Cautious.

Evolution Mining (EVN) was downgraded to Neutral from Outperform by Macquarie.

The company has experienced a soft December quarter with Mount Carlton the main area of weakness. A geological review has reduced FY20 production expectations. Given a narrowing of the ore lode is also being noted in the underground mine, Macquarie assesses there will be an impact on longer-term production.

The company is also taking steps to mitigate the effects of an escalation of water restrictions at Cowal. An increase in the salinity of processing water will affect near-term costs at the mine. Macquarie downgrades to Neutral from Outperform and reduces the target by -10% to $3.80

See upgrade above.

Fortescue (FMG) was downgraded to Hold from Buy by Ord Minnett.

Ord Minnett notes the shares have surged more than 150% in 2019, but as iron ore approaches US$100/t investors may be reluctant to chase the stock, fearing the market will become overheated. The stock still offers a strong dividend yield but has approached fair value and the broker downgrades to Hold from Buy. Target is raised to $11.00 from $10.50. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.

Independence Group (IGO) was downgraded to Lighten from Hold by Ord Minnett

While the macro outlook remains favourable, Ord Minnett believes several stocks in the base metals sector are overvalued.

The rating on Independence Group is downgraded to Lighten from Hold with the target steady at $5.70.

Mosaic Brands (MOZ) was downgraded to Hold from Add by Morgans.

The company’s first half trading update was below expectations, with the Christmas period being affected by the recent bushfires. As a result first half operating earnings (EBITDA) are expected to be $33m. The impact of the fires has continued into the start of the second half and management will provide an update at the first half result in late February. This could mean the full year outcome is below revised expectations. The stock remains attractively priced from a valuation perspective but Morgans downgrades to Hold from Add to reflect elevated earnings uncertainty. Target is reduced to $2.40 from $3.46.

Orocobre (ORE) was downgraded to Sell from Hold by Ord Minnett

Ord Minnett downgrades to Sell from Hold, raising the target to $2.55 from $2.25. The broker expects global GDP growth could rebound by mid-year, linked to a fading drag from political conflict. However, miners largely reflect this improved outlook and inexpensive valuations will be harder to find. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.

Pendal Group (PDL) was downgraded to Hold from Add

First quarter funds under management of $101.4bn were up 1% on the prior quarter. Further net outflows were experienced at JO Hambro. Morgans observes the stock has rallied from a previously undemanding valuation because of improved sentiment in UK markets.

As the stock is now trading in line with valuation the rating is reduced to Hold from Add. Some risk of sustained outflows, amid a preference for the growth path being less reliant on market direction, prevents the broker from taking a more positive view. Target is reduced to $8.83 from $8.85.

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.