In the good books
BANK OF QUEENSLAND (BOQ) was upgraded to Hold from Lighten by Ord Minnett
Ord Minnett believes 2020 will be a challenging year for retail and commercial banks. It is difficult to envisage significant upside for share prices although material downside is also considered unlikely. Bank stocks appear cheap versus an expensive market, the broker adds. Bank of Queensland is upgraded to Hold from Lighten, given the recent underperformance in the share price. Target is $7.70. The broker still expects a reduction in the dividend in the first half resulting from margin pressure. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
BLACKMORES (BKL) was upgraded to Neutral from Sell by Citi
Citi continues to believe the stock is overvalued but acknowledges an underweight position is risky given the ongoing pursuit of a Chinese partner, increased multinational interest in the segment and the prospect of Marcus Blackmore selling shares. The broker upgrades to Neutral from Sell and incorporates a takeover scenario into the valuation. Target is raised to $88 and $66. Blackmores is expected to report on February 25 and Citi estimates first half sales of $349m with earnings (EBIT) of $33m.
CIMIC GROUP (CIM) was upgraded to Outperform from Neutral by Credit Suisse
The company will exit its 45% stake in BIC Contracting that operates in the Middle East. Weakening market conditions in the region were cited as well as a desire to focus on opportunities in the main geographies of Australasia and Asia-Pacific. Cost of the exit is higher than Credit Suisse expected, with a P&L post-tax impact of around -$1.8bn in 2019 and a cash impact of -$700m in 2020. The final dividend for 2019 has been cancelled. The decision to exit removes an overhang from a known issue and Credit Suisse believes the extent of the sell off in the shares provides a buying opportunity. Rating is upgraded to Outperform from Neutral. Target is reduced to $35 from $36.
JANUS HENDERSON GROUP (JHG) was upgraded to Overweight from Equal-weight by Morgan Stanley
Morgan Stanley envisages many upside risks, the largest positive being better retail flows. This should drive a substantial re-rating, either at the fourth quarter result or in the next quarter and the broker upgrades to Overweight from Equal-weight. In the results on February 4 the broker targets adjusted earnings of US$134m and expects flows to improve. A new US$100m buyback is expected. The stock is considered cheap versus Australian peers and the target is raised to $47.00 from $34.50. Industry view is In-Line.
SYDNEY AIRPORT (SYD) was upgraded to Outperform from Neutral by Macquarie
Macquarie believes the impact of the coronavirus will be constrained to one quarter, as was the case with SARS. The risk is the impact lasts 12 months but given the response of the Chinese government this is considered low. On that basis the broker suggests the sell-off means the stock is now offering value. Upgrade to Outperform. Target unchanged at $8.68.
TPG TELECOM (TPM) was upgraded to Neutral from Underperform by Credit Suisse
Credit Suisse expects the merger with Vodafone Australia will proceed and now reflects this in its valuation of the stock. As it is trading close to the updated target, raised to $6.70 from $5.50, the broker upgrades to Neutral from Underperform. The broker believes the outcomes from the NBN wholesale pricing review will be incrementally positive for TPG Telecom.
In the not-so-good books
ALACER GOLD CORP (AQG) was downgraded to Neutral from Outperform by Credit Suisse
December quarter production delivered on 2019 guidance. Credit Suisse was pleased with the commissioning of sulphide production although this was at the lower end of guidance. The 2020 guidance, for 310-360,000 ounces, at the high end is below the broker’s current 2020 sulphide forecast. Nevertheless, Credit Suisse is not concerned about its current modelling of 2020 production as there is potential upside from oxide. Rating is downgraded to Neutral from Outperform on valuation. Target is unchanged at $7.20.
CLASS (CL1) was downgraded to Hold from Add by Morgans
Morgans notes managing director Andrew Russell has delivered on a promise to reduce the reliance on a single product. The purchase of NowInfinity takes the company into a larger software market, although the overlap with the existing client base is high. The broker considers the deal highly accretive to valuation. The strategy involves some implementation and timing risks but could eventually return the company to double-digit revenue and earnings growth. Morgans downgrades to Hold from Add as the stock is now trading near the revised valuation. Target is raised to $2.00 from $1.41.
DOWNER EDI (DOW) was downgraded to Underperform from Neutral by Credit Suisse
While the downgrade to guidance is disappointing, Citi maintains a Buy rating and expects most of the issues will be contained to FY20. Contracting is inherently risky but the broker expects the re-positioning of the business away from fixed-price construction will reduce risk in FY21 and beyond. Moreover, the sale of the mining and/or laundries business could be a positive catalyst. Target is reduced to $8.00 from $8.80.
MACQUARIE GROUP (MQG) was downgraded to Sell from Neutral by Citi
Since the earnings trough in 2012, Citi notes the company has had a stellar run up in the share price. The stock is now on unfamiliar ground as earnings momentum is set to slow and the broker believes the recent re-rating is now implying upgrades to guidance. The likelihood of another record year looks a difficult proposition to Citi and the rating is downgraded to Sell from Neutral. Target is steady at $123.50.
REGIS RESOURCES (RRL) was downgraded to Underperform from Neutral by Macquarie
December quarter production of 90,800 ounces has taken the first half production to 50.3% of the mid point of FY20 guidance. The Rosemont underground development is on budget and the scoping study on Garden Well is nearing completion. Credit Suisse found the production report solid and maintains a Neutral rating. A downgrade to estimates for FY20 earnings per share reflects higher cost guidance. Target is reduced to $4.75 from $4.95.
RESOLUTE MINING (RSG) was downgraded to Neutral from Outperform by Macquarie
The company will raise up to $146m from institutions and $25m from its largest shareholder, with up to $25m in the share purchase plan at a -6.4% discount to the last closing price. Funds will be used to retire the US$130m bridging loan. Macquarie acknowledges this will provide some relief to the balance sheet but the near-term performance of Syama will determine further de-leveraging capacity over 2020. The dilution drives a reduction in the target to $1.20 from $1.40 and a downgrade to Neutral from Outperform.
THE STAR ENTERTAINMENT GROUP (SGR) was downgraded to Hold from Buy by Ord Minnett and to Neutral from Buy by UBS
Ord Minnett envisages a soft domestic outlook over the next 12 months amid weak consumer sentiment and a subdued earnings profile in Sydney. The broker decreases operating earnings forecasts for FY20 by -0.3%, and by -2.6% for FY21. Growth from the projects in Brisbane and the Gold Coast, coupled with disciplined capital allocation, are considered the main positives. Rating is downgraded to Hold from Buy and the target reduced to $4.50 from $5.05. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
UBS assumes that the Sydney VIP market will grow by 50% while in the first year of Crown Sydney’s (CWN) operations Star Entertainment will lose half of its VIP share to Crown. This is likely to result in a -25% reduction in VIP revenue. The broker assumes the premium mass segment will grow by 20% and that Star Entertainment keeps 55% of this. The broker re-models assumptions and downgrades to Neutral from Buy. Target is reduced to $4.50 from $5.20. No material impact is assumed from the outbreak of the coronavirus at this stage although it is a risk.
TREASURY WINE ESTATES (TWE) was downgraded to Hold from Accumulate by Ord Minnett and to Neutral from Buy by UBS
First half results were weaker than Ord Minnett expected. The company has downgraded FY20 earnings (EBITS) guidance to growth of 5-10% and provided FY21 guidance for growth of 10-15%. Commercial challenges in the US drove the weak result. A strategic review has been announced to accelerate change in commercial operations. Ord Minnett downgrades to Hold from Accumulate and lowers the target to $15 from $20. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
Treasury Wine has reduced FY20 guidance and reported earnings (EBIT) growth of 6% in the first half. The miss to expectations stems from a -26% decline in the Americas earnings, related to both execution and market issues. UBS is particularly disappointed, given guidance was reaffirmed in October. FY20 earnings growth is now expected to be 5-10% versus prior forecasts for 15-20%. The broker reduces net profit estimates by -12% for FY20. The company will undertake a strategic review relating to the optimisation of its internal operating model. Rating is downgraded to Neutral from Buy, given the increased near-term uncertainty. Target is reduced to $18.00 from $20.50.
WEBJET (WEB) was downgraded to Underweight from Equal-weight by Morgan Stanley
Morgan Stanley assesses the company’s B2C business in Australia is most at risk from the trends that are playing out elsewhere. Expedia and TripAdvisor have both cited increased monetisation of search traffic by Google as a contributing factor to declines in their earnings and outlook. Morgan Stanley expects revenue leakage, growth in marketing costs and ultimately compression in multiples. The implications are considered material and the broker downgrades to Underweight from Equal-weight. Target is reduced to $10.00 from $12.40. Industry View is In-Line.
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.
