Switzer Report Buy, Hold, Sell – What the Brokers Say

In the good books

Charter Hall Long WALE REIT (CLW) was upgraded to Neutral from Underperform by Macquarie

Macquarie upgrades to Neutral from Underperform, to reflect a new valuation methodology. The broker assesses the portfolio is backed by long-term sustainable cash flow that is attractive for those investors seeking income return.

Underlying growth is supported by fixed and CPI-linked annual reviews. Target is raised to $5.88 from $4.74

Charter Hall Social Infrastructure REIT (CQE) was upgraded to Accumulate from Hold by Ord Minnett

Ord Minnett upgrades Charter Hall Social Infrastructure REIT to Accumulate from Hold in view of the longer weighted average lease expiry and considers the stock oversold. Target is $3.65.

The sector is trading broadly in line with valuation, yet appears attractive relative to the domestic market on a range of metrics, in the broker’s view. The broker expects A-REITs will remain net buyers and fund acquisitions with a combination of debt and equity.

Charter Hall Retail REIT (CQR) was upgraded to Outperform from Underperform by Macquarie

Macquarie reviews the outlook for convenience landlords and upgrades to Outperform from Underperform. The broker remains attracted to the defensive nature of the cash flow.

Direct market transactions limit the downside risk to net tangible assets and the stock offers a 6.4% distribution yield, which is cash backed. Target is raised 33% to $5.20.

Dexus (DXS) was upgraded to Buy from Neutral by UBS, to Outperform from Underperform by Macquarie, and to Accumulate from Hold by Ord Minnett

UBS upgrades to Buy from Neutral. After a prolonged period of above-trend rental growth in Sydney and Melbourne office markets, the broker anticipates a moderation in 2020/21, with net effective rental growth of 1-3% per annum. Importantly, the broker envisages ongoing capitalisation rate compression, strong cash flow from annual escalations and positive leasing spreads. Target is raised to $13.60 from $12.90.

Macquarie finds the earnings trajectory solid, with underlying growth in the office portfolio supplemented by trading profits. The buyback is also supporting the share price.

The broker notes the outlook for office market rents is moderating but the earnings profile of Dexus Property remains sound. Rating is upgraded to Outperform from Underperform. Target is raised 6.3% to $13.26.

Ord Minnett upgrades to Accumulate from Hold on the basis of further office capitalisation rate compression. The sector is trading broadly in line with valuation, yet appears attractive relative to the domestic market on a range of metrics, in the broker’s view. The broker expects A-REITs will remain net buyers and fund acquisitions with a combination of debt and equity. Target is $13.50. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.

Fortescue Metals (FMG) was upgraded to Neutral from Underperform by Credit Suisse

The commodity price outlook is far more accommodative and Credit Suisse lifts the target to $11.00 from $7.50. Rating is upgraded to Neutral from Underperform. This reflects not just material changes in estimates for earnings per share but also the strength of Fortescue Metals’ balance sheet and a buoyant outlook for dividends.

Credit Suisse expects China’s steel demand will remain firm in the first half but decline from the second half as property construction may ease. However, given the strong rhetoric around infrastructure a 1.6% increase in Chinese steel demand is assumed for 2020, well above previous forecasts.

Hub24 (HUB) was upgraded to Add from Hold by Morgans

Funds under administration in the December quarter were up 10%. Net inflows were 2% higher. The obvious headwinds, Morgans suggests, are pricing pressure and earnings on cash transaction account balances.

The broker is cautious about the impact on sentiment and earnings from any change to pooled client cash. Taking a longer-term view, Morgans expects the company will scale up successfully and deliver solid earnings growth.

Rating is upgraded to Add from Hold and the target reduced to $13.35 from $13.79.

Infigen Energy (IFN) was upgraded to Add from Hold by Morgans

Infigen Energy’s output from the wind farms connected to the National Electricity Market was 22% higher in the first half. The major driver was a full half output from the Bodangora farm.

Futures point to a softer spot market in the second half, which Morgans suspects will be positive for Infigen Energy.

Morgans upgrades earnings forecasts for FY20, envisaging less volatility in the spot market that will take the pressure off spot purchases.

The broker believes an increasing focus on carbon emissions could mean that the stock is useful as a hedge against potentially increasing carbon prices.

Rating is upgraded to Add from Hold and the target raised to $0.76 from $0.64.

Mirvac (MGR) was upgraded to Neutral from Sell by UBS and to Hold from Sell by Ord Minnett

UBS upgrades to Neutral from Sell after incorporating recently-acquired projects. Mirvac is the preferred A-REIT for a residential recovery, having underperform Stockland ((SGP)) by -18% since the 2019 election, and given the preference for office over retail.

If Mirvac can execute on its strategy and introduce third-party capital to the BTR projects, the broker assesses it should be able to reach its medium-term target of 5000 units by FY24. Target is raised to $3.30 from $3.00.

Ord Minnett upgrades to Hold from Lighten because of the value-accretive development pipeline, and raises the target to $3.20 from $2.95.

Metcash (MTS) was upgraded to Neutral from Underperform by Macquarie

Macquarie upgrades to Neutral from Underperform, as the share price has fallen to the target of $2.65. The broker assesses the stock screens cheap on a discounted cash flow measure.

However, Macquarie remains concerned over the prospect of further customer losses and the associated operating de-leverage.

NIB Holdings (NHF) was upgraded to Neutral from Sell by UBS and to Neutral from Sell by Citi

The company has lowered its guidance for FY20 underlying profit by -15%, to more than $170m from more than $200m. A component of the downgrade relates to higher costs but most of the pressure has been blamed on higher claims inflation.

UBS downgrades estimates for FY20 by -16% and FY21 by -10%. The stock is now trading on a more sustainable footing and the broker upgrades to Neutral from Sell. Target is reduced to $5.85 from $6.50. Citi factors in small positive gains, allowing for the full impact of the reserve top up the company has to make to the claims provision. The broker assesses some value has crept into the stock and upgrades to Neutral from Sell. Target is steady at $6.85.

While nib is gaining traction from its Qantas ((QAN)) Assure initiative, weak industry dynamics continue to weigh. Industry policyholder numbers are stagnant and affordability constraints remain elevated. Citi anticipates earnings per share will contract -8% in FY20 and maintains only a low single-digit growth forecast for FY21-22.

QBE (QBE) was upgraded to Buy from Neutral by Citi

Citi has upgraded to Buy from Neutral as the insurer updated with worse than expected impact from crop insurance, but with otherwise in-line underlying performance. Citi thinks the market will look through this short term impact, and so do Citi analysts, clearly.

Forecasts have been sliced due to the crop insurance impact, and the analysts point out QBE Insurance remains a business containing many moving parts. Citi retains a positive outlook medium term. Price target shifts to $15.20 from $13.45.

Shopping Centres Australasia (SCP) was upgraded to Neutral from Underperform by Macquarie

Amid a sector wide review, Macquarie upgrades to Neutral from Underperform. Target is $2.91.

While the broker prefers the convenience-based landlords over regional landlords, given defensive cash flows, the stock is already trading on a 5.4% distribution yield and 25% premium to net tangible assets so the broker finds

Woolworths (WOW) was upgraded to Outperform from Neutral by Macquarie

Macquarie upgrades to Outperform from Neutral, envisaging upside to earnings from strong same-store sales growth. The broker likes the dominant store footprint and potential efficiency gains. Moreover, Woolworths is well-positioned to undertake capital management once the Endeavour assets are distributed. Target is raised to $42.40 from $37.00.

In the not-so-good books

AGL (AGL)was downgraded to Sell from Neutral by UBS

UBS notes AGL Energy is heavily exposed to changes in average wholesale electricity prices. All else being equal, the broker calculates a -$5/megawatt-hour annual reduction in average prices across all National Electricity Markets equates to a -$190m reduction in annual earnings (EBIT).

Lower electricity price forecasts mean the broker’s FY20-22 estimates for earnings per share are reduced by -5-7% from prior estimates. While the share price has risen 7% over the last three months, and will be supported as the remainder of the buyback is completed, earnings headwinds remain, the stockbroker finds. As a result, UBS downgrades to Sell from Neutral, reducing the target to $18.35 from $18.85.

AP Eagers (APE) was downgraded to Hold from Add by Morgans

New car sales are under pressure and Morgans downgrades 2019-21 forecast by -1-2.4%. In the short term the broker is also wary of the wide divergence in consensus forecasts.

The stock provides strong leverage to a recovery in vehicle sales but the potential for further downgrades is a risk the broker would prefer to avoid until there is further clarity.

Rating is downgraded to Hold from Add. Target is reduced to $11.96 from $12.02.

Domino’s Pizza Enterprises (DMP) was downgraded to Sell from Neutral by Citi

Citi analysts believe Domino’s Pizza’s High PE multiple is directly linked to the prospect for more store openings and growth in Europe, but thus far in FY20, they note, store growth has been soft.

The analysts observe their forecasts are -3-4% below consensus at the moment. As equities are on a tear, including for the company’s peers, they have added 5% to their price target, to $48.60.

However, given the prospect for disappointment, directly related to store rollouts, Citi has decided to downgrade to Sell from Neutral.

Flight Centre (FLT) was downgraded to Neutral from Outperform by Credit Suisse

Credit Suisse observes recent travel data have been weak, consumer sentiment is poor and there is a strong second half skew to guidance.

At this point, the broker queries the assumptions about a recovery that are implied in FY20 guidance and downgrades to Neutral from Outperform, lowering the target to $44.83 from $47.49.

Nufarm (NUF) was downgraded to Neutral from Outperform by Macquarie

The company expects first half operating earnings between $55-65m. Macquarie expects regulatory approval for the Latin American sale will occur in February and notes this is key to fixing the balance sheet. Rating is downgraded to Neutral from Outperform, given limited returns and the potential for ongoing challenging conditions in the second half stemming from competitive markets and constrained raw material supply. Target is reduced to $5.77 from $5.83.

Origin Energy (ORG) was downgraded to Hold from Add by Morgans

Fundamentals for the company’s energy markets have become weaker. Given that around 50% of operating earnings are derived from energy markets Morgans believes this will be a drag on the performance.

The APLNG business is likely to continue performing well but the broker assesses the opportunities to grow earnings are limited. Future performance of APLNG will increasingly be a function of commodity prices, the broker adds. Morgans believes investors that are looking for exposure to oil price would do better by focusing on stocks with a pure concentration in energy exports. Rating is downgraded to Hold from Add and the target is lowered to $8.43 from $8.62.

Peet and Company (PPC) was downgraded to Neutral from Outperform by Macquarie

Macquarie is concerned about the risks associated with FY20 earnings per share, forecasting this to drop -36%. The forecast assumes significant sales in the first half are settled in the second half. While residential markets are improving the broker envisages downside risk. Rating is downgraded to Neutral from Outperform. Target is steady at $1.25.

Qantas (QAN) was downgraded to Neutral from Buy by Citi

Following a strong run up in the share price, Citi downgrades Qantas to Neutral from Buy. Target is raised to $7.45 from $6.90.

Pre-tax profit forecasts for FY20 are reduced by -1%, consistent with the company’s guidance about the impact of industrial action at Jetstar.

Citi believes the current share price adequately reflects a rational Australian domestic market, capital distributions and upside from Project Sunrise.

Reece Australia (REH) was downgraded to Hold from Add by Morgans

Following recent share price strength, amid expectations of a cyclical upswing, Morgans downgrades to Hold from Add.

Estimates for earnings per share in FY20 are reduced by -7%, to reflect lower local demand and revised appreciation assumptions. Target is raised to $12.45 from $11.47.

Rio Tinto (RIO) was downgraded to Accumulate from Buy by Ord Minnett

Ord Minnett downgrades to Accumulate from Buy. Quarterly production was generally in line with forecasts. The broker notes the attractive metrics in the stock but a strong run up in the share price has led to the downgrade.

The main disappointment was a decline in copper grades at Kennecott and lower copper guidance for 2020 with weak grades persisting before recovering in early 2021.

The main positive surprise was bauxite, which was 9% ahead of forecasts. Target is steady at $112.

This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.

Scentre Group (SCG) was downgraded to Sell from Neutral by UBS

UBS downgrades to Sell from Neutral, noting occupancy, income and valuations remain under pressure. Store closures and retailers entering administration over the past month have been abnormally high and, the broker assesses, could impact up to 84 tenancies across the company’s portfolio.

With income uncertainty increasing at a time when there is a large number of retail assets on the market, UBS expects valuations will be under pressure. Target is reduced to $3.70 from $3.90. The broker also updates earnings estimates to reflect the Booragoon acquisition.

Stockland (SGP) was downgraded to Lighten from Hold by Ord Minnett

Ord Minnett downgrades Stockland to Lighten from Hold following a period of flat earnings growth and the recent surge in the share price. Target is raised to $4.30 from $4.20.

This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.

Sydney Airport (SYD) was downgraded to Neutral from Outperform by Macquarie

International traffic declined -0.4% in December while domestic rose 1.3%. Macquarie notes the outlook for international capacity growth in 2020 has shifted to a contraction of -0.5-1.5%.

The broker now considers the valuation is challenged and downgrades to Neutral from Outperform.

Macquarie reduces operating earnings (EBITDA) estimates by -1.7% for 2020 and 2021, reflecting lower international passenger expectations. Target is reduced to $8.68 from $8.77.

Suncorp (SUN) was downgraded to Neutral from Buy by Citi

On the bank-insurer’s own acknowledgment, natural hazard costs including bushfires have risen some -$109m above 1H allowances. In isolation this reduces Citi’s forecast for 1H20 by -14%, point out the analysts.

A repeat for H2 seems unlikely because of aggregate and stop loss reinsurance protections. Citi explains this means the opposite is likely to occur in H2, leaving no net impact on FY20 numbers. Citi analysts have made only minimal adjustments to their forecasts. There is one looming negative, however, and that will be the next round of negotiations with the reinsurers. Citi pulls back its rating to Neutral from Buy. Price target falls to $14.30 from $14.50.

Transurban (TCL) was downgraded to Accumulate from Buy by Ord Minnett

The company is moving to become a tax-paying entity over the next two years although Ord Minnett does not consider this a major headwind for earnings.

The broker estimates the annual tax impost will normalise quickly in FY22 and peak at 10% of free cash flow. The broker downgrades to Accumulate from Buy based on valuation. Target is raised to $16.50 from $16.00. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.

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.