The week ending Friday 21 February 2020 marked the busiest five days in the Australian reporting season, and securities analysts were not sitting idle, as witnessed by no fewer than 29 upgrades in ratings for individual ASX-listed stocks against 23 downgrades.
Only six of the 29 upgrades did not reach further than Neutral/Hold, while nine of the downgrades ended on Sell.
Multiple companies received more than one upgrade during the week: Beach Energy, Cochlear, Netwealth Group, and Super Retail. On the flipside, Ansell, Charter Hall Group, and People Infrastructure all received multiple downgrades.
Changes to earnings estimates have a clear bias towards hefty decreases in forecasts. A closer look into the negative adjustments shows plenty of small cap resources companies, alongside disappointers such as Superloop, Blackmores and Corporate Travel Management.
Among the companies enjoying positive revisions to forecasts, we find Asaleo Care commanding the week’s top spot, followed by Santos, Woodside Petroleum, QBE Insurance, and Coca-Cola Amatil.
The February reporting season has one more full week to go.
In the good books
BORAL LIMITED (BLD) was upgraded to Neutral from Underperform by Credit Suisse B/H/S: 1/4/0
First half results were pre-announced. The company provided new information on concrete volumes, noting these were down -30% in January because of the bushfires. However, demand has been strong in February. In North America a structural shift away from traditional masonry products has affected stone sales and Credit Suisse suspects this trend will persist. Credit Suisse upgrades to Neutral from Underperform, although does not subscribe to a view that all the bad news has been flagged. Target is raised to $4.70 from $4.10.
DOMAIN HOLDINGS AUSTRALIA LIMITED (DHG) was upgraded to Neutral from Sell by UBS B/H/S: 3/1/2
Domain Group’s earnings were in line but UBS wanted clarity on the company’s most improtant drivers, being yield and volume. The conference call suggested downside expectations for both. Downgrading these assumptions, along with D&A and tax, leads to a greater than -20% reduction in earnings forecasts. UBS is hopeful that the near-term depth and yield slowdown is just a function of weak property markets, with agents and vendors hesitant to upgrade to depth in a soft listings environment. On the fall in share price, the broker upgrades to Neutral from Sell. Target rises to $3.60 from $3.50 on higher longer term earnings expectations.
DOMINO’S PIZZA ENTERPRISES LIMITED (DMP) was upgraded to Accumulate from Lighten by Ord Minnett B/H/S: 1/3/3
First half results were behind Ord Minnett’s forecasts, yet sales growth was recorded across the business. Same-store sales growth recovered in Australasia while Europe was a key driver of growth. Ord Minnett reviews its investment thesis and upgrades Domino’s Pizza to Accumulate from Lighten. The broker remains confident strong earnings growth will continue and identifies a degree of valuation support, making the risk/reward balance attractive despite the recent share price performance. Target is raised to $67 from $52.
See downgrade below.
EBOS GROUP LIMITED (EBO) was upgraded to Add from Hold by Morgans B/H/S: 2/1/1
Ebos Group’s FY20 first-half result beat the broker, thanks to a strong performance in the pharmacy division relating to the Chemist Warehouse Group contract. Management guided to strong profit growth for FY20 and the broker estimates an increase of 18.8% for the period. Ebos has a war chest of NZ$350m and the broker spies acquisitions on the horizon. Earnings forecasts inch up. Target price rises to $24.65 and the broker upgrades to Add from Hold.
NEW ENERGY SOLAR (NEW) was upgraded to Overweight from Equal-weight by Morgan Stanley B/H/S: 1/0/0
2019 production was slightly below Morgan Stanley’s estimates while earnings beat forecasts by 19%. The broker now estimates 109% cash coverage of an 8.1c distribution in 2020. The broker assesses New Energy Solar is a rare pure renewables exposure with an undemanding valuation and upgrades to Overweight from Equal-weight. Industry view: Cautious. Target is raised to $1.41 from $1.38.
NEW HOPE CORPORATION LIMITED (NHC) was upgraded to Outperform from Neutral by Macquarie B/H/S: 4/0/0
Strong results from Bengalla have offset declining production from New Acland. Stage 3 approvals have been delayed until legal proceedings are resolved. Incorporating the quarterly result and increasing the production profile for Bengalla results in an increase of 6% in Macquarie’s estimate for earnings per share. Target rises to $2.00 from $1.90. Macquarie upgrades New Hope Corp to Outperform from Neutral as there is also upside in a spot price scenario.
OIL SEARCH LIMITED (OSH) was upgraded to Neutral from Underperform by Credit Suisse B/H/S: 2/5/0
Credit Suisse suspects the market may be overly pessimistic regarding the prospect of the P’nyang deal. This may still be achieved, as both ExxonMobil and government statements support the possibility, and could provide near-term price support. After the Oil Search share price has de-rated over the last two weeks, Credit Suisse upgrades to Neutral from Underperform. The broker still considers the stock fundamentally overvalued on a risked basis, with material downside should P’nyang not proceed. Target is $6.
OZ MINERALS LIMITED (OZL) was upgraded to Accumulate from Lighten by Ord Minnett B/H/S: 3/3/1
Ord Minnett believes OZ Minerals can fund its growth ambitions over the next decade by restricting developments to one at a time and prioritising West Musgrave over Carrapateena BC. The broker expects the valuation to re-rate over the next six months and upgrades to Accumulate from Lighten. Target is raised to $11.30 from $9.80.
PERPETUAL LIMITED (PPT) was upgraded to Overweight from Equal-weight by Morgan Stanley B/H/S: 1/4/2
The building out of the US platform is progressing faster than Morgan Stanley expected and the Trillium acquisition adds crucial ESG capabilities. Moreover, most of the Australian business is growing and costs are contained. Hence, the broker upgrades to Overweight from Equal-weight. Target is raised to $55.00 from $38.50. Industry view: In-line.
SONIC HEALTHCARE LIMITED (SHL) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 4/2/1
First half underlying operating earnings (EBITDA) were in line with Credit Suisse estimates and benefited from the Aurora acquisition. Sonic Healthcare’s FY20 EBITDA guidance for comparable growth of 6-8% was reaffirmed. Credit Suisse upgrades to Outperform from Neutral, increasing operating earnings estimates by 25% as accounting changes are incorporated into its modelling. Target is raised to $33.20 from $31.80.
SMARTGROUP CORPORATION LTD (SIQ) was upgraded to Outperform from Neutral by Macquarie B/H/S: 2/4/0
Smartgroup’s result was in line with an update provided in November, and highlighted solid organic growth, ongoing efficiency improvement, strong cash generation and low leverage, Macquarie notes. The broker believes the company provided additional add-on insurance disclosure given the December 2019 insurance-driven downgrade, ongoing regulatory reviews into these products and the uncertainty this has caused in the market. While the range of outcomes is wide-ranging and the potential for mitigation is unclear, Macquarie sees an undemanding valuation and yield above 6% as sufficient to prompt an upgrade to Outperform from Neutral. Uncertainty nevertheless leads to a target cut to $7.46 from $7.66.
SANTOS LIMITED (STO) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 3/3/0
2019 underlying net profit was below Ord Minnett’s forecasts. This largely stemmed from the impact of a substantial increase in depreciation in 2018. The broker notes the suite of operating assets continues to perform and costs are being managed well. Cost discipline will be a key driver of maintaining a healthy balance sheet, the broker asserts, as the company prepares to embark on a multi-year growth phase. Rating is upgraded to Accumulate from Hold and the target rises to $9.20 from $9.10.
SUPER RETAIL GROUP LIMITED (SUL) was upgraded to Accumulate from Hold by Ord Minnett and to Outperform from Neutral by Macquarie B/H/S: 6/1/0
First half results were broadly in line with Ord Minnett’s forecasts. Like-for-like sales growth at the start of the second half was mixed with Rebel and SuperCheap Auto solid and BCF weak. Despite the bushfires and labour costs, Ord Minnett is more confident about the outlook for Rebel. Valuation support has also emerged and the broker upgrades to Accumulate from Hold. Target is raised to $10.50 from $10.00.
First half results were marginally ahead of the provisionally-released data in January. Macquarie notes the bushfire impact has already been flagged and the outdoor category may get worse before it gets better if distressed retailers discount to generate cash. Of more concern was the apparent mis-step in pricing strategy in Macpac, which occurred prior to the bushfires. At the risk of being early, the broker upgrades to Outperform from Neutral on a 12-month view. Target is raised to $10.38 from $8.60. Coverage is transferred to another analyst.
SYDNEY AIRPORT HOLDINGS LIMITED (SYD) was upgraded to Add from Hold by Morgans B/H/S: 2/2/2
Morgans issues a call to action for Sydney Airport, after the company posted a solid 2H19 result, thanks to strength in commercial. Cash conversion was 98%, and net operating receipts rose 5%, covering the second-half dividend by 107%. Management failed to provide dividend guidance, possibly because of the coronavirus. The broker says the virus will impact over the next few months but expects a strong rebound after that, given management expected a repeat of the SARS scare. EPS forecasts fall -4% for FY20 and outer years rise 1% to 2%. If coronavirus sentiment strengthens, the stock price could further weaken, but the broker believes sufficient value exists at these prices and upgrades to Add from Hold. Target price rises to $9.10 from $8.98.
WESFARMERS LIMITED (WES) was upgraded to Outperform from Neutral by Macquarie B/H/S: 1/3/2
Wesfarmers delivered strong revenue growth and an in-line profit in a difficult retail environment, Macquarie notes. Bunnings exceeded expectations while K-Mart, Officeworks and WesCEF continue to be strong businesses. Target continues to struggle. Bunnings has once again proved its ability to gain sales through difficult periods, Kmart is back in good shape and there is potential for acquisitions with the balance sheet in excellent shape. Smaller businesses are challenged but the company is well diversified, Macquarie points out. Upgrade to Outperform from Neutral. Target rises to $52.60 from $37.50.
In the not-so-good books
ACCENT GROUP LIMITED (AX1) was downgraded to Neutral from Buy by Citi B/H/S: 2/1/0
One day after lauding Accent Group’s operational excellence, Citi analysts have decided it’s time to downgrade to Neutral from Buy. The move has been inspired by the share price rally, in combination with potential downside from the coronavirus spreading. Earnings estimates have been increased, with the price target lifting to $2.04 from $1.95. Citi maintains the view this is one of the most innovative retailers under coverage.
COCA-COLA AMATIL LIMITED (CCL) was downgraded to Underperform from Neutral by Credit Suisse B/H/S: 1/3/3
Guidance has been retained for mid single-digit growth in earnings per share in 2020. Credit Suisse assesses management at Coca-Cola Amatil has restored momentum to the business. However, the rating is downgraded to Underperform from Neutral after a strong rally in the share price. Australia achieved 3% volume growth in the second half, with revenue growth for the first time since 2012. Target is raised to $11.40 from $11.00.
CHARTER HALL GROUP (CHC) was downgraded to Accumulate from Buy by Ord Minnett and Downgrade to Neutral from Buy by UBS B/H/S: 3/2/0
Charter Hall’s first half results were in line with expectations. The main focus for Ord Minnett is the earnings quality, given a material contribution from the sale of Folkstone inventory. The broker forecasts underlying growth in FY20 earnings per share of 33%. The rating is downgraded to Accumulate from Buy on valuation grounds. Target is steady at $14.20. Charter Hall’s result was well ahead UBS thanks to higher performance fees and and higher transactional revenue and development income. The group remains a beneficiary of low rates, the broker notes, and strong demand for office, logistics and long WALE real estate. However, the broker does not see a stellar FY20 being repeated, despite Charter Hall’s “unparalleled” track record in raising and deploying capital. Target rises to $13.80 from $12.50. Downgrade to Neutral from Buy.
DOMINO’S PIZZA ENTERPRISES LIMITED (DMP) was downgraded to Underperform from Neutral by Credit Suisse B/H/S: 1/3/3
Credit Suisse believes the enthusiastic market response to the first half result reflects support for a return to strong store and revenue growth. The results benefitted from increased profit on the sale of franchises and favourable currency. Rating is downgraded to Underperform from Neutral to reflect valuation. Target is reduced to $53.21 from $53.77.
See upgrade above.
IRESS LIMITED (IRE) was downgraded to Underperform from Neutral by Macquarie B/H/S: 1/2/1
2019 results were in line with expectations. The timing of revenue makes for a heavy skew for segment profit to the second half of 2020, Macquarie observes. While there is the likelihood of strong medium-term earnings growth in super administration and offshore markets, the broker envisages downside risk and potential for greater revisions at the lower end of guidance. As a result the rating is downgraded to Underperform from Neutral. Target is reduced to $11.99 from $13.00..
PERPETUAL LIMITED (PPT) was downgraded to Sell from Neutral by Citi B/H/S: 1/4/2
Citi has downgraded its recommendation for Perpetual shares to Sell from Neutral post the release of H1 financials, predominantly inspired by a positive response in the share price which is seen as over the top. Perpetual Private is enjoying the benefits from current dislocation in the domestic Advice industry, but the analysts highlight any financial benefits from the rise in new advisors will only arrive at a delay due to non-compete clauses. Equally important, if the overall investment performance fails to improve, Citi sees ongoing risk of fund outflows. The recently acquired Trillium should see a step up in funds under management (FuM) growth as US distribution efforts build, but the analysts add this will likely come from lower margin institutional funds. Target price unchanged at $42.30.
See upgrade above.
SIMS METAL MANAGEMENT LIMITED (SGM) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 1/4/0
First half results were in line with the weak guidance provided. The underlying earnings (EBIT) loss of -$23m was slightly better than Credit Suisse anticipated. FY20 EBIT guidance is $17-37m. This captures the initial benefits of a new cost reduction program. The broker assesses the earnings outlook for Sims Metal has several caveats, including the risks from coronavirus, aggressive competitor buy side pricing and changes in sentiment towards the Turkish economy. Rating is downgraded to Neutral from Outperform on valuation. Target is $10.60.
VOCUS GROUP LIMITED (VOC) was downgraded to Neutral from Buy by UBS B/H/S: 1/5/0
UBS noted numerous positives in Vocus Group’s result, including fears over FY20 guidance being allayed, less of a second half skew than expected and enterprise growth supporting earnings growth aspirations over FY20-22. Network services is the key to the company’s fortunes and upside from here hinges on proving that the business can deliver on earnings growth targets, the broker suggest, which to date are on track. Target rises to $3.85 from $3.65 but on share price strength, UBS pulls back to Neutral from Buy.
WISETECH GLOBAL LIMITED (WTC) was downgraded to Lighten from Hold by Ord Minnett .B/H/S: 2/1/0
First half results were weaker than expected. WiseTech Global’s guidance is also surprisingly weak and Ord Minnett estimates organic growth has been reduced by -30% in just three months post the AGM. The broker does not envisage free cash flow growth will turn positive until FY22. Rating is downgraded to Lighten from Hold. Target is reduced to $19.34 from $26.69.
Earnings forecast
Listed below are the companies that have had their forecast current year earnings raised or lowered by the brokers last week. The qualification is that the stock must be covered by at least two brokers. The table shows the previous forecast on an earnings per share basis, the new forecast, and the percentage change.
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.