In the good books
BEACH ENERGY (BPT) was upgraded to Outperform from Neutral by Credit Suisse and to Add from Hold by Morgans
Credit Suisse observes the market appears to be doubting or fearing the FY20 capital expenditure guidance, after the stock slumped -11% versus its peers. The broker suspects the company was getting the negative news out of the way and is poised to deliver an upgrade to the long-term production outlook in August. Several positive catalysts are anticipated in the next six months and Credit Suisse upgrades to Outperform from Neutral. Target is $2.49.
Morgans believes the impact of coronavirus has given the market a buying opportunity. The broker had held the view that the market was pricing in value the company had not yet delivered. While making allowances for production and oil prices in forecasts, the broker now believes the share price is at a point where there is value, despite the uncertainty. Rating is upgraded to Add from Hold. Target is steady at $2.28.
CLASS (CL1) was upgraded to Add from Hold by Morgans
First half results were described by Morgans as satisfactory. The core Class Super software continues to win share and new products, the broker observes, are showing promise. Changes to forecasts are minimal but Morgans upgrades to Add from Hold because of share price movements. Target is raised to $2.02 from $2.00.
COCHLEAR (COH) was upgraded to Outperform from Underperform by Macquarie and to Overweight from Equal-weight by Morgan Stanley
Macquarie upgrades Cochlear to Outperform from Underperform following news Sonova has announced a recall of un-implanted versions of the HiRes Ultra/Ultra 3d – a move that will likely cost tens of millions, temporarily easing competition in the implant market. The broker expects this will support market share gains for Cochlear over FY20 and FY21. Meanwhile, Cochlear’s result proved mixed. A 13% rise in implant growth and a 5% increase in Western European unit sales was countered by reimbursement pressure in Western Europe; a miss on services (-8% below consensus and -3% below the broker); increased competition in acoustics; and weaker margins and cash flow. Macquarie’s EPS target for FY20 eases -1% but jumps 8% and 10% for FY21/22. Target price jumps to $250 from $185.
Morgan Stanley highlights the rebound in unit growth in the first half, which the company attributes to market share gains and market growth. Western Europe was weaker than expected. Cochlear finds growth in Europe challenging because of funding caps or restrictive indications. Morgan Stanley assesses there is a more favourable risk/reward profile and upgrades to Overweight from Equal-weight. Target is raised to $251 from $232. In-Line industry view.
IGO (IGO) was upgraded to Hold from Lighten by Ord Minnett
Ord Minnett upgrades to Hold from Lighten, anticipating limited downside to the nickel price from here. The broker does not believe the stock is expensive and should benefit from improved prices and higher payability. There are also further options at the Tropicana mine as the underground phase is rolled out. Target is $5.70.
NETWEALTH GROUP (NWL) was upgraded to Neutral from Underperform by Credit Suisse and to Buy from Hold by Ord Minnett
First half net profit was ahead of Credit Suisse estimates. This was due to a slower rate of revenue margin contraction than had been expected. FY20 revenue and operating earnings (EBITDA) guidance is 2-5% ahead of the broker’s forecasts and the net flow guidance has been upgraded to $9bn. Credit Suisse upgrades to Neutral from Underperform, as the company continues to capture market share and management remains confident in the flows. Target is raised to $7.90 from $7.40.
First half results were “reasonable”, in Ord Minnett’s view, thanks to a gradual ramp up of technology and sales hires. The broker prefers to focus on the bottom line, which continues to expand. While margin compression was the focus for the market, the broker suggests this is both expected and inevitable. Rating is upgraded to Buy from Hold and the target raised to $8.72 from $8.14.
QBE INSURANCE (QBE) was upgraded to Add from Hold by Morgans
2019 results were largely in line with expectations although, arguably, Morgans notes the combined operating ratio was a little worse than the December commentary. 2020 guidance is unchanged and reflects a combined operating ratio of 93.5-95.5% and net investment return of 2.5-3%. Positive trends in the result, particularly premium rate rises, point to an upgrade cycle which has further to run and Morgans returns the rating to Add from Hold. Target is raised to $16.23 from $13.02.
SG FLEET GROUP (SGF) was upgraded to Outperform from Neutral by Macquarie
SG Fleet Group’s FY20 first half slightly outpaced the broker. Conditions remained challenging given declining private car sales, and momentum slowed due to credit constraints but the broker says the corporate outlook is good, thanks to late contract wins and a strong pipeline. EPS forecasts rise 2% for FY20, and fall -12% for FY21 and -10% for FY22. Target price falls to $2.60 from $2.92. Macquarie upgrades to Outperform from Neutral given the company is trading at a -45% discount to the emerging leaders price-earnings-ratio and boasts a 6% yield.
SIMS METAL MANAGEMENT (SGM) was upgraded to Neutral from Sell by UBS
Sims Metal Management reported negative earnings margins in the first half due to a collapse in ferrous volumes and prices. China’s National Sword initiative has disrupted the market, UBS notes. The broker believes margins have now troughed and has increasing confidence in price and volume growth in coming years. The second half will still be challenging nonetheless, given heightened competition and virus impact. UBS upgrades to Neutral from Sell. Target rises to $10.80 from $8.05.
SYNLAIT (SM1) was upgraded to Buy from Neutral by UBS
Capacity expansion has proven harder than the company expected, because of lower infant milk formula (IMF) sales along with margin pressure in lactoferrin and basic ingredients. UBS believes the company’s profit warning addresses the issues and is comfortable that a substantial uplift in earnings per share in FY21 can occur. The broker assesses the drop in the share price creates an attractive opportunity and upgrades to Buy from Neutral. UBS lowers estimates for earnings per share by -10% and -8% in FY20 and FY21. Target is reduced to NZ$8.00 from NZ$9.20.
WESTERN AREAS (WSA) was upgraded to Buy from Hold by Ord Minnett
First half results were solid, Ord Minnett notes, and limited downside to the nickel price is anticipated. The broker does not believe the stock is expensive and should benefit from improved prices and higher payability. Rating is upgraded to Buy from Hold while the target is raised to $3.00 from $2.70. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
In the not-so-good books
ALTIUM (ALU) was downgraded to Lighten from Hold by Ord Minnett
First half results were solid but the uncertainties surrounding the coronavirus impact in China have clouded the outlook, Ord Minnett observes. The company now expects the lower end of the FY20 guidance range. While this may be a short-term issue, the broker notes the stock has rallied strongly into the result and the timing for when China can return to business-as-usual is unclear. Rating is downgraded to Lighten from Hold. Target is raised to $37.76 from $29.59.
ANSELL (ANN) was downgraded to Neutral from Buy by Citi and to Lighten from Hold by Ord Minnett
It appears the interim performance was largely in-line, but FX impacted negatively. Higher SG&A also had a negative impact, while margins improved, assisted by cheaper raw materials and management’s transformation program. Citi has downgraded to Neutral from Buy while lifting the price target to $32 from $31.50. Minor changes to forecasts were made only. Weighing up multiple risks, the analysts believe the stock is fairly valued at present. The fact that management left FY20 basic EPS guidance of US112-122cps unchanged shows the level of uncertainty for the Industrial division, state the analysts. The Healthcare division should continue to do well as some competitors remain challenged.
Ord Minnett downgrades to Lighten from Hold in light of the risks to global manufacturing if the coronavirus does have a material impact on supply chains. The broker was underwhelmed by the first half result, with the promised savings lost to currency headwinds and higher labour costs. Target is $28. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
BRAMBLES (BXB) was downgraded to Underperform from Neutral by Credit Suisse
First half earnings (EBIT) were marginally below estimates. American revenue was strong but the margin was weaker than Credit Suisse expected. In contrast, the EMEA margin was ahead of expectations. Revenue guidance for FY20 has been slightly upgraded, with mid single-digit sales revenue growth and underlying profit growth now anticipated. Credit Suisse raises the target to $12.00 from $11.20 but lowers the rating to Underperform from Neutral on valuation.
CORPORATE TRAVEL MANAGEMENT (CTD) was downgraded to Hold from Add by Morgans
In light of the significant earnings risks to travel companies in the short term, Morgans assesses it is too early to start buying these stocks. Forecasting the downside risk is almost impossible and will depend on how long the coronavirus lasts. Importantly, travel demand, history has shown, eventually rebounds strongly. Rating is downgraded to Hold from Add until the outlook becomes clearer. Forecasts are under review pending the first half result of February 19. The broker suspects FY20 guidance will need to be revised to allow for the impact of coronavirus. Target is reduced to $19.40 from $23.40.
CSL (CSL) was downgraded to Equal-weight from Overweight by Morgan Stanley
Morgan Stanley downgrades to Equal-weight from Overweight, believing the share price captures the positive momentum in earnings per share but not the longer-term risks such as potential disruption from alternative therapies. Current prices reflect R&D success in CSL112 and transplants but the broker notes there is a longer lead time required for evidence of success. Target is $306. In-Line sector view retained.
GWA GROUP (GWA) was downgraded to Neutral from Outperform by Macquarie
First half earnings (EBIT) were in line with Macquarie’s estimates. FY20 guidance has been maintained. Macquarie believes this was a solid result in a tough market. Recent housing indicators, in the broker’s view, support expectations for a market recovery in FY21. The stock appears fairly valued given forecast growth and the broker downgrades to Neutral from Outperform. Target is raised to $3.90 from $3.60.
OZ MINERALS (OZL) was downgraded to Hold from Add by Morgans
2019 results were broadly in line with expectations. Morgans expects the company to be busy in 2020, with the requirement to draw down debt funding likely to keep dividends at modest levels. The broker adjusts models for updated guidance and a softer copper price, offset slightly by a softer Australian dollar. Rating is downgraded to Hold from Add as the stock is now trading within valuation ranges. Target is reduced to $10.85 from $10.90.
PEOPLE INFRASTRUCTURE (PPE) was downgraded to Hold from Add by Morgans and to Accumulate from Buy by Ord Minnett
Revenue and operating earnings (EBITDA) growth was strong in the first half, although margins were lower than Morgans anticipated. The broker believes the company is well-positioned to capitalise on the strong industry tailwinds. Nevertheless, the stock is trading close to the revised target, which edges down to $3.82 from $3.83, and the rating is downgraded to Hold from Add.
First half underlying operating earnings (EBITDA) of $12.9m were in line with Ord Minnett’s estimates. Recent acquisitions are performing in line with expectations. The broker considers this another solid result in what is becoming a typical event. A lot of opportunity is envisaged. The broker downgrades to Accumulate from Buy. Target is raised to $4.05 from $3.74.
REGIS RESOURCES (RRL) was downgraded to Lighten from Hold by Ord Minnett
First half net profit was in line with forecasts. The main value drivers, Ord Minnett believes, are mine life extensions at Duketon and progress at McPhillamys. The hedge book remains the most out-of-the-money of the company’s peer group and the broker believes, given its debt-free position, this is a focus point. The broker downgrades to Lighten from Hold and reduces the target to $3.90 from $4.20. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
RESMED (RMD) was downgraded to Equal-weight from Overweight by Morgan Stanley
Morgan Stanley assesses the shares are capturing positive momentum in earnings per share but not the longer-term risks and downgrades to Equal-weight from Overweight. Current prices are seen reflecting success of the POC franchise and software strategies but not the potential adverse outcome of the US competitive bidding round in 2021. Target is US$165. Industry view: In-Line.
WORLEY (WOR) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse expects first half underlying net profit of around $258m and earnings (EBITA) of $353m when the company reports on February 24. The main focus will be on the integration of the Jacobs acquisition, which has doubled the size of the company. The broker changes analysts and lowers the rating to Neutral from Outperform. Target is reduced to $15.00 from $17.70.
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.
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