In the good books
Alumina (AWC) was upgraded to Hold from Lighten by Ord Minnett
Ord Minnett upgrades to Hold from Lighten. The broker lowers 2020 earnings estimates after accounting for amortisation of the WA gas contract pre-payment.
Ord Minnett no longer envisages significant de-rating catalysts, with the stock trading close to its recent lows amid support from a 4%-plus dividend yield. Target is raised to $2.10 from $2.00.
This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
Australian Finance Group (AFG) was Upgraded to Add from Hold by Morgans
Morgans upgrades Australian Finance Group to Add from Hold. While the company’s FY20 first-half result was slightly shy of the broker, it was 11% above consensus, and net interest margins (NIM) shot through the roof – double Morgans’ forecast.
Favourable securitisation markets played a role. More than half of the NIM rise reflected the spread compression in the one-month bank bill swap rate over the one-month overnight indexed swap. The broker says the balance was attributable to strong growth in the higher margin Link product, as well as out-of-cycle repricing.
While tipping modest NIM growth ahead, the broker perceives upside risk from growth in Link. Morgans notes NIM as a percentage of revenue is rising (given a constrained mortgage market) and says the company’s overall risk profile is rising in that it is leaning towards a securitisation model rather than the more defensive wholesale mortgage broking business; and given that global events can affect the residential-mortgage-backed securitisation market.
The broker believes the company has enough cash to weather 12 months of such a disruption, which would hit the share price.
In the meantime, EPS forecasts rise 3% for FY20, 11% for FY21 and 14% for FY22. Target price rises to $3.25 from $2.50.
BlueScope Steel (BSL) was upgraded to Neutral from Sell by UBS
BlueScope Steel’s result featured a solid beat for Australian steel, thanks to a recovering housing market, but underperformance in building products in Asia and North America.
Asia is impacted by the virus but despite this being a short term hit, competition is also an issue, UBS notes. The group’s net result beat guidance by 10%.
The broker’s prior Sell rating reflected slowing Australian housing, North Star execution risk and elevated valuation. The first and last of these have now reversed, hence UBS upgrades to Neutral. Target rises to $13.00 from $12.28.
Cooper Energy (COE) was upgraded to Buy from Hold by Ord Minnett
The underlying -$2m net loss in the first half was well below Ord Minnett’s forecasts of a $12m profit. Nevertheless, the broker remains positive on the stock as it is trading well below valuation and earnings and cash flow are insulated because of the fixed-price contracts.
There are a number of upcoming catalysts including a final investment decision on Minerva and the development of the Annie field. Ord Minnett upgrades to Buy from Hold and reiterates a $0.64 target.
EBOS Group (EBO) was upgraded to Neutral from Underperform by Credit Suisse
First half results were broadly in line and Credit Suisse was impressed with the integration of the Chemist Warehouse supply contract. There were a number of margin pressures in evidence and Credit Suisse has some questions about the sustainability of some earnings streams, given the extent of the initiatives required to offset the pressures.
Nevertheless, EBOS appears to be well-positioned for a number of growth opportunities and the broker upgrades to Neutral from Underperform. Target is raised to NZ$22.47 from NZ$21.75.
HUB24 (HUB) was upgraded to Outperform from Neutral by Credit Suisse
First half earnings missed Credit Suisse forecasts because of a deterioration in IT services profitability and higher expenses in the platform division.
Nevertheless, the broker found many positive aspects including strong growth in funds under administration, slower revenue margin contraction and further earnings margin expansion.
Credit Suisse observes valuation support has recently emerged and upgrades to Outperform from Neutral. Target is reduced to $12.80 from $13.00.
Inghams (ING) was upgraded to Outperform from Neutral by Credit Suisse
The first half result was weaker than the prior corresponding half, as expected, albeit slightly ahead of Credit Suisse forecasts. The broker was pleased with the positive momentum and assesses full year expectations are achievable. While feed costs remain elevated, they are already factored into the base. Demand is also robust.
The broker upgrades to Outperform from Neutral, envisaging upside on a 12-month view. Target is raised to $4.00 from $3.50.
NIB Holdings (NHF) was upgraded to Buy from Neutral by Citi
nib Holdings issued a profit warning in January and yesterday’s H1 report still fell short of expectations. Citi analysts have included a marking-to-market in their update, which has resulted in a minor increase for FY20 estimates, but decreases of -6% and -3% for FY21 and FY22, respectively.
The analysts note management’s guidance for FY20 implies a better second half. Beyond FY20, Citi projects continued pressure on gross margins as claims inflation is expected to outweigh average premium rate increases.
Citi thinks the shares have been oversold and thus upgrades to Buy from Neutral. Target price falls to $5.60 from $5.80.
Oil Search (OSH) was upgraded to Accumulate from Hold by Ord Minnett
2019 net profit was broadly in line with Ord Minnett’s forecasts. Management has suggested that all partners are now aligned on a 3-train project in PNG.
While recognising it is difficult to predict the outcome of discussions, Ord Minnett does not believe the current share price is assigning value to the expansion.
Rating is upgraded to Accumulate from Hold. Target is raised to $7.20 from $6.85.
This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
Reliance Worldwide (RWC) was upgraded to Buy from Neutral by UBS
Reliance Worldwide’s result missed forecasts and guidance due to soft US revenues, which in turn were largely due to de-stocking of Sharkbite products by a US wholesaler pivoting to private label, UBS notes. The market has been wary of such events, the broker suggests, but management noted cycles of customer de-stocking and re-stocking are “normal” in this game.
That said, the broker feels this result adds concern to revenue growth expectations and hence a PE de-rate is appropriate. Target falls to $4.20 from $4.45 but on yesterday’s share price move, UBS upgrades to Buy.
See Downgraded below
Senex Energy (SXY) was upgraded to Outperform from Neutral by Credit Suisse
First half results were in line with expectations. Operating expenditure was ahead of expectations and this, along with sustaining capital expenditure, remains the key uncertainty and driver of value, Credit Suisse suggests.
The time to start accumulating the stock may be nearing and market concerns regarding pricing may be overdone. That said, Credit Suisse still asserts, for those who remain wary of being long CSG in the ramp-up phase, a preference for Strike Energy (STX).
Rating is upgraded to Outperform from Neutral. Target is $0.37.
Spark Infrastructure (SKI) was upgraded Outperform from Neutral by Credit Suisse and to Hold from Reduce by Morgans
2019 results were ahead of forecasts. The growth outlook for TransGrid has firmed, given the government/industry consensus that increased transmission interconnection is required, most notably with the NSW government plan to side-step regulatory approvals.
Rating is upgraded to Outperform from Neutral, given the discount to valuation and improved relative cash flow outlook. Target is raised to $2.40 from $2.30.
Spark Infrastructure posted a solid result that beat Morgans, albeit cash flows were weaker than expected. Maiden FY20 dividend guidance, of a -1.5c cut to 13.5c, indicates the anticipated decline has begun. The broker expects dividends may bottom out at 11c in FY22 and average 12.3c across FY21-25.
Target rises to $2.05 from $2.00. A combination of target increase and share price sell-off lifts forecast total shareholder return to 5%, hence Morgans upgrades to Hold.
In the not-so-good books
Oceanagold (OGC) was downgraded to Accumulate from Buy by Ord Minnett
Ord Minnett observes investors brushed aside the 2019 results to focus on Didipio. While the company is making progress it is taking longer than previously expected.
The broker pushes out the assumed re-start to 2021. This will come at a cost and means a slower ramp up to full production.
Still, value is envisaged in the underlying portfolio. Rating is downgraded to Accumulate from Buy. Target is reduced to $3.10 from $3.50.
This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
Reliance Worldwide (RWC) was downgraded to Neutral from Outperform by Credit Suisse–
First half revenue was in line, although operating earnings (EBITDA) were below expectations because of lower America’s volumes.
Given the company emphasised new products as a growth contributor and disappointed in this regard, Credit Suisse downgrades to Neutral from Outperform.
The broker believes, now, the current pipeline does not warrant the anticipated R&D and commercial expenditure, as first half sales have not materialised.
This points to lower growth in the future. Target is reduced to $3.75 from $4.80.
See Upgrade above.
Wagners (WGN) was downgraded to Neutral from Outperform by Credit Suisse
The company posted a net loss in the first half of -$1.2m and FY20 earnings guidance is reduced -40%. The change is attributed to major uncertainty over project timing, as well as concrete and cement market conditions in south-east Queensland.
Credit Suisse is most concerned about the second half earnings from south-east Queensland, while further commentary regarding Mozambique has pulled back in both likelihood and value.
Rating is downgraded to Neutral from Outperform. Target is reduced to $1.50 from $2.30.
The above was compiled from reports on FNArena. The FNArena database tabulates the views of seven major Australian and international stockbrokers: 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.
