Local equity indices rallying to new all-time highs can only mean one thing when it comes to stockbroker ratings: more downgrades than upgrades. Last week truly delivered, with FNArena counting 16 downgrades versus 11 upgrades. In the bigger scheme of things, that’s not even that big a gap between the two opposite moves.
Looking into the finer details reveals junior gold producers in particular proved a popular subject for an upgrade in rating, with Evolution Mining, OceanaGold, Perseus Mining and St Barbara all receiving one upgrade during the week ending Friday 17 January 2020. Gold stocks delivered four of the seven fresh Buy ratings for the week.
Evolution Mining and Perseus Mining also received one downgrade during the week; to Neutral/Hold and Underperform/Sell respectively.
On the other side of the ledger, we find seven fresh Sell ratings and, without one single exception, all were inspired by a rallying share price… and fundamentals that don’t support a share price surging to where it is. At least that’s the opinion of the stockbroking analysts downgrading to Sell during the week.
Magellan Financial Group is among those downgraded to Sell, as are Coles, Domain Holdings and Independence Group. In terms of earnings forecasts, OceanaGold, Karoon Gas, Ardent Leisure and Orocobre all enjoyed meaty increases during the week. Heavy negative revisions were reserved for Zip Co and South32, at a respectful distance followed by Audinate Group, Whitehaven Coal, and Saracen Mineral.
Ahead of the Australia Day long weekend, the local calendar remains item-light, with the odd LIC releasing their financial performance and with the likes of BHP Group and Netwealth Group issuing quarterly updates. Two more weeks and corporate results will start trickling in. That might be the first test for an exuberant share market this early in the fresh first calendar year of the decade ahead.
In the good books
- FLEXIGROUP LIMITED (FXL) was upgraded to Buy from Neutral by UBSB/H/S: 3/1/0
UBS explores the merits of the company’s refreshed strategy around ‘buy now pay later’ amid the launch of new products. The broker believes a simplified brand strategy makes sense and should help drive cost cutting. The broker also considers the market is becoming more positive on the new strategy and assesses value is on offer, upgrading to Buy from Neutral. Target is raised to $2.30 from $1.90.
- INCITEC PIVOT LIMITED((IPL) was upgraded to Equal-weight from Underweight by Morgan StanleyB/H/S: 2/5/0
Morgan Stanley observes diammonium phosphate markets have demonstrated improved pricing and this is now coupled with more reasonable valuations. This leaves the risks for the stock evenly balanced and the rating is upgraded to Equal-weight from Underweight. Cautious industry view. Target is steady at $3.20. It appears the recent capacity curtailments may have prompted some upside to prices. Meanwhile, explosives markets remain relatively supportive, with robust volumes and stable supply and demand.
- PERSEUS MINING LIMITED (PRU) was upgraded to Outperform from Neutral by MacquarieB/H/S: 1/1/1
Production in the December quarter was better than Macquarie expected. The broker considers the company comfortably within its first half guidance range, while the stronger second half guidance will be driven by grade.
A maiden reserve at Zanikan near Sissingue is expected. Macquarie lifts estimates for earnings per share by 34% in FY20 and upgrades to Outperform from Neutral. Target is raised 14% to $1.20. See also PRU downgrade.
- QBE INSURANCE GROUP LIMITED (QBE) was upgraded to Outperform from Neutral by Credit SuisseB/H/S: 4/3/0
Credit Suisse observes questions are being asked about the nature of the outlook statements for FY20. The broker concludes that the FY20 combined operating ratio guidance is achievable and should improve further in FY21. The broker remains confident in the recovery potential of QBE’s earnings as well as balance sheet strength and believes any reserving risk is manageable. Rating is upgraded to Outperform from Neutral and the target raised to $15.00 from $12.55.
- WHITEHAVEN COAL LIMITED (WHC) was upgraded to Hold from Lighten by Ord MinnettB/H/S: 4/3/0
Ord Minnett upgrades to Hold from Lighten, assessing the downside risk is limited. As the stock is yet to move, even though thermal coal prices have rallied 16% in the year to date, the broker suspects it will trade sideways for some time. Overall, Ord Minnett found the December quarter production result poor quality, revealing even lower Maules Creek volumes and limited Narrabri production. Target is steady at $2.80.
In the not-so-good books
- BEACH ENERGY LIMITED (BPT) was downgraded to Hold from Accumulate by Ord MinnettB/H/S: 0/5/1
Ord Minnett is positive on the outlook for Beach Energy as it offers good production growth and strong cash flow. However, the share price has outperformed in recent months and the broker downgrades to Hold from Accumulate. Target is raised to $2.65 from $2.60.
- DOMAIN HOLDINGS AUSTRALIA LIMITED (DHG) was downgraded to Sell from Neutral by UBSB/H/S: 3/0/3
UBS believes new listings are now on track to return to positive growth in the second half. FY20 earnings forecasts are unchanged but FY21-22 are increased by 11-12% on higher assumed listings growth. However, even on these expectations, the stock now trades above the broker’s discounted cash flow valuation and the rating is downgraded to Sell from Neutral. Target is raised to $3.50 from $3.20.
- MAGELLAN FINANCIAL GROUP LIMITED (MFG) was downgraded to Underperform from Neutral by MacquarieB/H/S: 0/2/5
Macquarie downgrades to Underperform from Neutral on valuation grounds. The broker acknowledges the company is a stand-out performer but cannot justify the current multiple of 25x. That said, inflows have accelerated in the December quarter and market conditions remain supportive. Target is raised to $55 from $49.
- MEGAPORT LIMITED (MP1) was downgraded to Neutral from Buy by UBS and to Hold from Accumulate by Ord MinnettB/H/S: 1/2/0
UBS observes the business continues to grow at an impressive rate but remains conscious that the majority of December quarter KPIs (key performance indicators) did not record an acceleration in growth momentum. The broker downgrades to Neutral from Buy and wants more tangible signs of an acceleration in KPI growth rates before becoming more positive. Target is raised to $11.75 from $11.55. Top-line growth in the December quarter was better than Ord Minnett expected, although there was a slight miss in some KPIs. The broker remains positive on the company because of its high-quality business model and exposure to strong sectoral growth. As the stock is trading in line with the revised target, the rating is downgraded to Hold from Accumulate. Target is raised to $11.30 from $10.50.
- PERSEUS MINING LIMITED (PRU) was downgraded to Underperform from Outperform by Credit SuisseB/H/S: 1/1/1
December quarter production was in line with guidance. FY20 guidance has tightened to 275-295,000 ounces at a cost of US$850-950/oz. Development has progressed at Yaoure. The impact of the wet season appears to have been considerably less than in the prior corresponding period, with Sissingue well prepared. The gold price assumption is increased to US$1300/oz, driving an increase in reserves, predominantly at Edikan. Credit Suisse downgrades to Underperform from Outperform on valuation. Target is raised to $0.93 from $0.88. See also PRU upgrade.
- PLATINUM ASSET MANAGEMENT LIMITED (PTM) was downgraded to Underperform from Neutral by MacquarieB/H/S: 0/0/5
Macquarie downgrades to Underperform from Neutral on valuation grounds. The rate of outflows remains elevated in the December quarter, albeit moderating. While the easing of outflows is encouraging, it occurred without a meaningful improvement in performance, the broker notes. Target is raised to $4.30 from $3.85.
- SANTOS LIMITED (STO) was downgraded to Hold from Add by MorgansB/H/S: 2/4/0
Having achieved the target, Morgans downgrades its rating on Santos to Hold from Add. Target is raised to $8.86 from $8.67. Production growth, fuelled by development and acquisition, will remain a feature of the company’s near-term operating results, in the broker’s view. Morgans expects the low end of the guidance range of 73-77 mmboe to be achieved in 2019.
- SUPER RETAIL GROUP LIMITED (SUL) was downgraded to Hold from Accumulate by Ord MinnettB/H/S: 4/3/0
Ord Minnett assesses there is downside risk to FY20 sales growth as the company is exposed to the Australian bushfires because of its focus on camping and outdoor goods. The strong share price performance in 2019 has reduced the valuation support, although the broker acknowledges the PE multiple remains at a discount to peers. Ord Minnett would become more constructive at a lower share price and downgrades to Hold from Accumulate. Target is steady at $10
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 stockbrokers: 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.
