In the good books
BORAL (BLD) was upgraded to Hold from Lighten by Ord Minnett
The North American division has again been the main area of disappointment, particularly with respect to margins, and Ord Minnett reduces estimates for earnings per share by -9% over FY20-22 to reflect this. The broker believes most important strategic decision for the CEO Mike Kane’s successor will be whether to persist with the existing North American portfolio, possibly at lower carrying value, or to re-focus on the more profitable business in Australia. As FY20 guidance is now more realistic, Ord Minnett upgrades to Hold from Lighten. Target is $4.50. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
See downgrade below.
JB HI-FI (JBH) was upgraded to Outperform from Neutral by Macquarie
JB Hi-Fi’s first half profit beat consensus by 5%, while full year guidance is also ahead of consensus. All divisions delivered positive comparable sales in the first half, Macquarie notes. Improved execution at The Good Guys has the broker becoming more bullish on what had been the company’s problem child. Despite the threats from online (i.e. Amazon), JB Hi-Fi has proved it is able to successfully innovate and diversify into new products while maintaining costs, Macquarie notes. Upgrade to Outperform. Target rises to $51.10 from $36.8 as the broker resets PE multiple assumptions back to historical levels.
See downgrade below.
OIL SEARCH (OSH) was upgraded to Hold from Lighten by Ord Minnett
The breakdown of discussions over P’nyang has meant the share price has de-rated and there are significant impediments to reviving the three-train PNG LNG expansion. Moreover, a two-train expansion appears unlikely, in Ord Minnett’s view. As the share price is now placing little value on the project, the broker upgrades to Hold from Lighten. Target is $6.85. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
SYNLAIT MILK (SM1) was upgraded to Neutral from Underperform by Credit Suisse and Macquarie
Credit Suisse upgrades to Neutral from Underperform and assesses the market is now more realistic about diversification outcomes. The broker would like more visibility on the impact of the A2 Milk ((A2M)) negotiations and the margin that can be extracted in the long term. The legal risk around Pokeno also needs to be resolved. Target is raised to NZ$8.84 from NZ$8.50.
Macquarie has reviewed its outlook for Synlait Milk given new capacity which could drive earnings growth of 85% in the medium to longer term if the company can achieve incremental returns on capital anywhere near its 20%-plus target. Start-up costs for this new capacity are currently dragging on profit. To that end the market is valuing the stock at a material discount to the NZX50 index. The broker upgrades to Neutral. Target rises to NZ$8.72 from NZ$8.69.
In the not-so-good books
BORAL (BLD) was downgraded to Underperform from Neutral by Credit Suisse
US coal power station output has fallen -15% in 2019 with a further -9% fall expected in 2020. Credit Suisse estimates a decline of more than -0.8mt in ash sold from Boral sites and decreases its FY20 forecast to 6.6mt. The broker expects Boral will abandon its 2021 target for a 20-25% increase in volumes amid margin pressure from alternatives. Credit Suisse downgrades to Underperform from Neutral on these stock-specific issues and reduces the target to $4.45 from $4.50.
See upgrade above.
CHALLENGER (CGF) was downgraded to Neutral from Outperform by Macquarie and to Sell from Lighten by Ord Minnett
After a tough operating environment in the past 12-18 months, Challenger has delivered a strong result. Full year profit is expected to be around the top end of the guidance range. Macquarie believes this might prove conservative. The broker continues to like the company’s long term growth thematic, but the stock has risen 60% since June and 25% in 2020, including 14% yesterday. Downgrade to Neutral. Target rises to $10.00 from $8.50.
First half results were ahead of Ord Minnett’s forecast. FY20 guidance appears conservative but the broker suspects the company will struggle to provide an adequate return on capital, given the inherent risks and the business model. As the stock is considered too expensive, Ord Minnett downgrades to Sell from Lighten. Target is steady at $7.50. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
FLIGHT CENTRE (FLT) was downgraded to Hold from Buy by Ord Minnett
Despite the company expecting pre-tax profit in the first half to remain within the guidance range of $90-110m, Citi suspects the focus will quickly shift to the second half where Flight Centre historically generates 60% of underlying profit. The coronavirus adds to a number of headwinds and the probability of further downgrades to FY20 profit guidance of $310-350m has increased, in the broker’s opinion. This is expected to weigh on the share price in the near term and Citi retains a Neutral rating. Target is $41.60. First half results will be reported on February 27.
JB HI-FI (JBH) was downgraded to Sell from Neutral by Citi
Following an initially positive response, Citi analysts have subsequently decided it’s time to downgrade to Sell from Neutral. Citi analysts remain positioned near the top of market consensus, having only minimally upgraded their forecasts post the release. Citi continues to laud the quality and the growth potential of the business, also carried by improving housing activity, but the share price is simply assuming too optimistic an outlook, suggest the analysts. Price target has jumped to $39.50 from $35.20.
See upgrade above,
KATHMANDU (KMD) was downgraded to Neutral from Outperform by Credit Suisse
The investor briefing on Rip Curl highlighted the importance of brand authenticity and what a “surf” focus means for growth. The briefing reinforced Credit Suisse’s view that Rip Curl is an attractive and strategically sound acquisition. No specific revenue or cost synergies were provided. The general trading update was also in line with expectations, with underlying earnings (EBIT) to be up 40% in FY20. Credit Suisse believes the current share price now reflects a balanced risk/reward and downgrades to Neutral from Outperform. Target is raised to NZ$3.65 from NZ$3.35.
NORTHERN STAR RESOURCES (NST) was downgraded to Neutral from Buy by UBS
Underlying first half operating earnings (EBITDA) were ahead of forecasts because of higher tolling revenue and lower costs. The share price has lifted 42% since December, UBS observes, outperforming the gold price. Hence, while the production outlook is firm, the shares are considered fair value. Rating is downgraded to Neutral from Buy and the target is raised to $14.00 from $13.75.
REA GROUP (REA) was downgraded to Underperform from Neutral by Macquarie
REA Group delivered a solid first half in the context of a -14% overall drop in listings, and worse still in Sydney and Melbourne, Macquarie suggests. Management has executed well in continuing to build yield and protect the earnings outlook. The second half should see volumes recover and earnings growth accelerate, the broker believes, but the market has already run ahead of this expectation. Downgrade to Underperform. Target rises to $110 from $105.
SUNCORP (SUN) was downgraded to Hold from Add by Morgans
First half earnings were -13% below consensus and Morgans lowers FY20 and FY21 estimates for earnings per share by -8-12%, mainly because of reduced group insurance margin forecasts. The broker believes the strategy to reduce earnings volatility and improve the core performance is correct but headwinds continue and a timeframe for a meaningful uplift in the trajectory is difficult to assess. Rating is downgraded to Hold from Add and the target reduced to $12.47 from $13.85.
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.