In the good books
ANZ BANKING GROUP (ANZ) was upgraded to Neutral from Underperform by Credit Suisse and to Overweight from Equal-weight by Morgan Stanley
Credit Suisse observes the stock has underperformed the market by -17% and the bank index by -9% over the last 12 months. Going forward, the broker considers most of the issues are now behind the bank and there is some upside emerging. With asset divestments still to come, a capital management story could re-emerge. Hence, the rating is upgraded to Neutral from Underperform. Target is unchanged a $26.
Morgan Stanley assesses the franchise is improving its performance while capital concerns have eased. Cost expectations have been re-based. The broker believes the institutional strategy is working and the operating environment is now more promising, providing comfort on the outlook for growth and returns. Rating is upgraded to Overweight from Equal-weight and the target raised to $26.60 from $24.80. Industry view: In-Line.
BAPCOR (BAP) was upgraded to Add from Hold by Morgans
Morgans expects around 10% sales growth in FY20 noting, while the company reiterated its growth guidance at the AGM there was a softer tone from management. Bapcor foreshadowed softer margins across all businesses at the AGM. The broker suspects earnings growth will be skewed to the second half. While cautious about the results, Morgans suspects the outlook is improving and upgrades to Add from Hold. Target is $6.90.
CIMIC GROUP (CIM) was upgraded to Outperform from Neutral by Macquarie
Cimic’s result met recently updated guidance. Continuing the theme of recent results, mining once again beat forecasts and construction once again missed, Macquarie notes, although a decline in activity in protest-ridden Hong Kong offset strength in local infrastructure development. Strong cash generation leads the broker to anticipate a return to dividends as early as the first half 2020. This, and the fact the stock is trading at its largest PE discount to the market in ten years, prompts an upgrade to Outperform. Target rises to $32.64 from $32.49.
FLEXIGROUP (FXL) was upgraded to Add from Hold by Morgans
The company’s first half update has signalled Credit Suisse’s FY20 forecasts are too high. FY20 cash net profit estimates are reduced by -8.6%. At face value, a reduced FY20 total volume target is disappointing but the broker maintains estimates for growth of 8%. The company has announced a new four-year exclusive agreement with Flight Centre ((FLT)) for its long-term interest-free product, which should contribute to a double-digit increase in cards volume over the period. Outperform rating maintained. Target is reduced to $2.00 from $2.05.
G.U.D. HOLDINGS (GUD) was upgraded to Neutral from Sell by UBS
GUD Holdings’ result suggested risks around house brands and cautious resellers are having less of an impact than feared, the broker notes. However new car sales have declined for the last 21 months, there is a risk of supply chain disruption due to the coronavirus and an 18x FY20 PE appears to the broker to be fair. Neutral thus retained. Accretive acquisitions represent upside risk. Target rises to $12.10 from $11.30.
HT&E (HT1) was upgraded to Neutral from Underperform by Macquarie
Macquarie continues to favour digital platforms and streaming over broadcast media, given the structural trends. The broker remains cautious nevertheless, because of HT&E’s limited operating flexibility. Rating is upgraded to Neutral from Underperform on valuation appeal and strength in the balance sheet. Target is raised to $1.65 from $1.55. The company will report its results on February 24.
HARVEY NORMAN HOLDINGS (HVN) was upgraded to Equal-weight from Underweight by Morgan Stanley and to Buy from Neutral by UBS
Morgan Stanley assesses housing turnover is set to improve although underlying consumer indicators remain mixed. As the outlook has de-risked for housing-linked retailers, the broker “neutralises” its view and upgrades to Equal-weight from Underweight. That said, the broker believes improving prospects are significantly captured by the current stock price. Cautious industry view. Target is raised to $4.00 from $3.20.
UBS upgrades to Buy from Neutral and lifts estimates for earnings per share by 2-6%. The broker acknowledges the rating is not without risk, with housing activity unlikely to fully recover until the first half of FY21. The more positive view is based on favourable industry feedback, particularly across consumer electronics, and a better housing outlook. Target is raised to $4.50 from $4.00.
ILUKA RESOURCES (ILU) was upgraded to Neutral from Sell by Citi
Citi notes the coronavirus outbreak has continued to worsen and this affects both the global and Chinese economic outlook in 2020. The broker’s GDP forecasts for China have been lowered for 2020 to 5.5% growth and most of the commodity price forecasts have been downgraded. However, while the coronavirus creates uncertainty regarding the timing of an improvement in realised zircon prices, Citi believes 2020 will be the low. Iluka Resources is upgraded to Neutral from Sell and the target is raised to $9.40 from $9.00.
JANUS HENDERSON GROUP (JHG) was upgraded to Buy from Neutral by Citi
Citi found plenty of positives in the fourth quarter results. Revenue trends are encouraging and ahead of forecasts and the investment performance is strong while fee margin is stabilising. While headline net outflows were worse than forecast, the broker asserts this disguises the improvement in equity and multi-asset flows Intech remains a risk, as the improvement was not as great as expected. A new buyback of US$200m will also support earnings per share. Citi upgrades to Buy from Neutral and raises the target to $42.10 from $38.40.
JB HI-FI (JBH) was upgraded to Neutral from Sell by UBS
JB Hi-Fi estimates are lifted by 3-11% for FY20-22 and the rating is upgraded to Neutral from Sell. Despite the 74% rise in the share price over the last 12 months, UBS envisages few downside catalysts. Industry feedback is supportive of both sales and margin and there is a more positive housing outlook. Target is raised to $37.80 from $28.00.
NEWCREST MINING (NCM) was upgraded to Hold from Lighten by Ord Minnett
Ord Minnett upgrades to Hold from Lighten as the shares are now trading in line with valuation. Target is steady at $30. The broker has lifted its long-term gold price forecast to US$1500/oz or A$2027/oz, at an AUD/USD exchange rate of 0.74. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
NEW HOPE CORPORATION (NHC) was upgraded to Buy from Neutral by Citi
Thermal coal forecasts are unchanged at US$65/t for 2020 and US$75/t for 2021. Citi notes the New Hope shares are down -25% over the last three months as the company has announced it may be in court again over the WICET debts. The company is also awaiting approvals for New Acland stage 3. Citi still expects New Acland will get the go-ahead and upgrades to Buy from Neutral. Target is $2.20.
NIB HOLDINGS (NHF) was upgraded to Equal-weight from Underweight by Morgan Stanley
The stock is nearing fair value and Morgan Stanley upgrades to Equal-weight from Underweight. That said, margins have peaked and the upgrade cycle is over. Moreover, cyclically low claims inflation has masked the structural headwinds. A new analyst assumes primary coverage and the target is reduced to $5.45 from $5.80. Industry view: In-line.
STAR ENTERTAINMENT GROUP (SGR) was upgraded to Neutral from Underperform by Credit Suisse
The Macau government will close its casinos for two weeks to inhibit the spread of coronavirus. Credit Suisse suspects the travel restrictions could directly affect the Australian casino sector. There may also be another fairly small impact from Chinese tour groups and China’s premium mass players postponing trips to Australia. On this basis, the broker expects turnover in VIP to be down -15% over January to June 2020, and the July-December period is expected to show a -7% decline in turnover because of the opening of the Sydney Sovereign Room. Given the share price has fallen towards valuation, Credit Suisse upgrades to Neutral from Underperform. Target is $4.
WESFARMERS (WES) was upgraded to Equal-weight from Underweight by Morgan Stanley
Morgan Stanley assesses housing turnover is set to improve although underlying consumer indicators remain mixed. As the outlook has de-risked for housing-linked retailers, the broker “neutralises” its view and upgrades to Equal-weight from Underweight. That said, the broker believes improving prospects are significantly captured across the stock. Target is raised to $40 from $32. Cautious industry view.
In the not-so-good books
COMMONWEALTH BANK (CBA) was downgraded to Underperform from Neutral by Credit Suisse
Credit Suisse downgrades FY20 earnings estimates by -2% because of an increase in insurance claims. Commonwealth Bank will report its first half result on February 12. The broker continues to like the bank but as it is trading well above an unchanged target of $77.60, believes it is priced for perfection and downgrades to Underperform from Neutral.
FRONTIER DIGITAL VENTURES (FDV) was downgraded to Hold from Add by Morgans
Frontier Digital Ventures’ portfolio of online marketplaces continues to deliver rapid growth, Morgans notes. The December quarter saw 66% revenue growth with four portfolio components profitable and several more close to breakeven. The company is on track to hit portfolio-wide profitability in FY20. Morgans lifts its target to $1.09 from 96c but since the stock has already run up, downgrades to Hold from Add.
MOTORCYCLE HOLDINGS (MTO) was downgraded to Hold from Add by Morgans
Morgans expects a weaker first half result, despite cost reductions and better dealership earnings. The broker does not expect the company to provide formal FY20 guidance but it may signal that it is cycling a very weak base in the second half. The broker makes no changes to forecasts but downgrades to Hold from Add. Target is $2.28.
MOUNT GIBSON IRON (MGX) was downgraded to Sell from Neutral by Citi
While the 2020 iron ore benchmark price forecast is unchanged at US$75/dmt, the broker revises down Mount Gibson estimates by -3%. Rating is downgraded to Sell/High Risk from Neutral/High Risk and the target lowered to $0.80 from $0.85.
NORTHERN STAR RESOURCES (NST) was downgraded to Hold from Buy by Ord Minnett
Ord Minnett downgrades to Hold from Buy as the shares are now trading in line with valuation. The broker has lifted its long-term gold price forecast to US$1500/oz or A$2027/oz, at an AUD/USD exchange rate of 0.74. The target is reduced to $13.00 from $13.20.
OIL SEARCH (OSH) was downgraded to Lighten from Hold by Ord Minnett and to Neutral from Outperform by Macquarie
Discussions between ExxonMobil and the PNG government regarding the P’nyang gas expansion have broken down. ExxonMobil is the majority shareholder and operator. Ord Minnett notes there is still a possibility the Papua LNG project will proceed with just the two-train expansion, although the likelihood is low. As there is now substantially more risk in the stock, the rating is downgraded to Lighten from Hold. Target is reduced to $6.85 from $7.60. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
ExxonMobil, the operator of the P’nyang joint venture, has been unable to reach an agreement with the PNG government on development of the project. As a result, Macquarie delays expectations for the PNG LNG expansion, increases capital expenditure estimates and lowers risk weightings. Furthermore, there is a potential knock-on impact on the timing of the Papua LNG project. Macquarie reduces the Oil Search target by -15% to $6.80 and downgrades to Neutral from Outperform.
RESMED (RMD) was downgraded to Neutral from Buy by UBS
Following the second quarter results UBS updates assumptions, which results in upgrades of 5% to earnings per share. However, based on the recent share price performance the rating is downgraded to Neutral from Buy. US re-supply is showing no signs of a slowdown. Furthermore, with the success of Brightree, UBS does not believe saturation will occur in the short to medium term. Target is raised to US$174 from US$150.
SHOPPING CENTRES AUSTRALASIA PROPERTY GROUP (SCP) was downgraded to Hold from Accumulate by Ord Minnett
First half results revealed leasing markets for retail have deteriorated. Ord Minnett is concerned this will become worse. Neighbourhood centre capitalisation rates also remain elevated, which the broker assesses largely reflects direct market inefficiencies and is something the company could exploit. Ord Minnett downgrades to Hold from Accumulate because of a recent run up in the share price. Target is raised to $3.00 from $2.70 to reflect a lower cost of capital. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
SEEK (SEK) was downgraded to Reduce from Hold by Morgans
Morgans downgrades to Reduce from Hold to reflect a view that coronavirus may be more disruptive to Asian job markets and last longer than the SARS virus. The company is highly leveraged to Asian job ads. The broker lowers FY20 and FY21 estimates by -9.7% and -21.4% respectively. Target is reduced to $19.25 from $21.82.
WESTPAC BANKING CORPORATION (WBC) was downgraded to Underweight from Equal-weight by Morgan Stanley
Morgan Stanley considers Westpac has the worst revenue outlook of the major banks with ongoing AUSTRAC uncertainty and the potential for disappointment on costs, downgrading to Underweight from Equal-weight. Morgan Stanley also suggests there is limited capital and dividend flexibility but does not expect another capital raising unless the AUSTRAC penalty is over -$2bn. While forecasting reported revenue to grow 1.5% in FY20, notable items are clouding underlying trends, the broker adds. Target is reduced to $23.60 from $24.50. Industry view: 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.