In the good books
ALTIUM (ALU) was upgraded to Buy from Lighten by Ord Minnett
Ord Minnett notes the share price has fallen -23% over February. While FY20 guidance was lowered to the lower end of the prior range, amid uncertainty surrounding coronavirus, the broker still notes the stock has materially de-rated compared with software stocks globally. While there is a risk guidance may still prove optimistic, looking ahead to FY21, the broker is comfortable with forecasts which imply revenue growth of 20%. The stock now represents value to Ord Minnett and the rating is upgraded to Buy from Lighten. Target is reduced to $33.40 from $37.76.
AMCOR (AMC) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse upgrades to Outperform from Neutral because of the recent fall in the share price. Value has emerged, in the broker’s opinion, and Amcor did not fully participate in the recent market rally. The broker suspects revenue is less likely to be affected by an economic slowdown associated with the possible coronavirus pandemic. This stems from the fact Amcor manufactures packaging for defensive industries and its exposure to China is about 4% of revenue. Target is steady at $16.25.
ARISTOCRAT LEISURE (ALL) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse upgrades to Outperform from Neutral amid continued momentum in the digital business. The broker also notes Cashman game upgrades have lifted revenue well above the trough. A pandemic may have some impact on the land-based revenue, if people avoid casinos in North America and, to a lesser extent, Europe and Latin America. However, in Macau, the broker estimates that the company has virtually no revenue share exposure, as casinos there prefer outright purchases. Target is steady at $35.
BANK OF QUEENSLAND (BOQ) was upgraded to Equal-weight from Underweight by Morgan Stanley and to Hold from Reduce by Morgans
Morgan Stanley believes the bank’s revised strategy provides potential to stabilise returns and deal with several years of underperformance. The broker lifts forecasts by 4% for FY20 and FY21. However, cash profit forecasts remain below the lower end of guidance. While expecting ongoing revenue challenges, Morgan Stanley upgrades to Equal-weight from Underweight, given a clear strategy and a better cost outlook. Target is raised to $7.60 from $7.50. Industry view is In-Line.
Bank of Queensland has unveiled its 5-year strategy and is now guiding to FY20 cash earnings being -4-5% lower than FY19. Morgans increases cash earnings-per-share estimates, largely on expectations of higher home loan growth and lower operating expenses. Rating is upgraded to Hold from Reduce and the target is raised to $7.60 from $7.20.
BHP (BHP) was upgraded to Accumulate from Hold by Ord Minnett
The company’s share price is down -17% since the peak on January 20, amid significant uncertainty about how coronavirus will spread and the duration of the impact. Ord Minnett takes the view that, by mid-year, the market will look through the economic impact and this should drive a re-rating for some of the miners. Following the correction, BHP Group’s valuation metrics appear compelling and the broker upgrades to Accumulate from Hold. Target is $42. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
CROMWELL PROPERTY (CMW) was upgraded to Neutral from Underperform by Macquarie
First half earnings were well ahead of expectations. This was driven by development and performance fees. Despite the beat on expectations being driven by non-recurring items, Macquarie suspects there is upside risk to FY20 guidance. There is also a path for the funds management platform to generate stable earnings in the medium term. The broker upgrades to Neutral from Underperform. Target is reduced to $1.20 from $1.22.
COLES GROUP (COL) was upgraded to Outperform from Neutral by Macquarie and to Outperform from Neutral by Credit Suisse
Macquarie believes the market correction has provided an opportunity to buy a high-quality asset, and current supermarket trading is favouring Coles over Woolworths (WOW). The first seven weeks of 2020 have shown Coles is gaining share. The broker considers the valuation attractive at current levels and upgrades to Outperform from Neutral. Target is $17.20.
After FY20, Credit Suisse believes mid to high single-digit earnings growth will be largely driven by a targeted renewal program and the development of the supermarket range. While liquor is not central to the investment case, earnings should lift in FY21 with a clean inventory position. Fuel convenience remains the option, with earnings largely dependent on investment from Viva Energy ((VEA)) to drive fuel volumes. However, there is little downside envisaged for Coles in fuel convenience. Rating is upgraded to Outperform from Neutral. Target is raised to $17.80 from $17.72.
DOMINO’S PIZZA ENTERPRISES (DMP) was upgraded to Add from Hold by Morgans
Morgans believes Domino’s Pizza is well-placed, with limited exposure to coronavirus and a reasonably solid growth profile. The broker points out there are few large cap stocks with double-digit growth profiles and defensive attributes. Moreover, the company has noted its Japanese operations experienced a trading benefit during the SARS outbreak. Rating is lifted to Add from Reduce and the target raised to $60.30 from $57.61.
FORTESCUE METALS GROUP (FMG) was upgraded to Buy from Sell by UBS
UBS suspects, given commodity volatility stemming from the coronavirus outbreak, China is likely to introduce commodity-intensive stimulus to soften any economic downturn. The broker upgrades 2020 and 2021 iron ore prices by 9% and 7% respectively. With West Pilbara fines becoming a larger proportion of the product mix in late 2020, the broker lifts price realisation to 90%. Rating is upgraded to Buy from Sell and the target is lifted to $10.20 from $9.30.
FREEDOM FOODS (FNP) was upgraded to Add from Hold by Morgans
First half operating earnings (EBITDA) beat Morgans’ forecasts. The broker expects strong earnings growth because of strong demand for the company’s products across Australia and Asia. Following material share price weakness, the stock is now trading at an attractive forward multiple and the broker upgrades to Add from Hold. Target is steady at $5.16.
FRONTIER DIGITAL VENTURES (FDV) was upgraded to Add from Hold by Morgans
2019 results were strong and above expectations. Commission-style transaction fees from real estate portals continue to be the main engine of growth. Morgans observes the business has created significant value since investing in its portfolio companies and is expected to continue doing so. As the stock is now well below valuation the rating is upgraded to Add from Hold. Target is $1.09.
HARVEY NORMAN HOLDINGS (HVN) was upgraded to Hold from Lighten by Ord Minnett
First half results were slightly ahead of Ord Minnett’s forecasts. International and property were better than expected, while the core franchising operations disappointed. However, the broker assesses the recent decline in the share price makes the valuation more attractive and the rating is upgraded to Hold from Lighten. Target is lowered to $3.75 from $4.00. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
IRESS (IRE) was upgraded to Buy from Hold by Ord Minnett
FY20 guidance was slightly below Ord Minnett’s forecasts and the second half skew provides a slightly higher risk profile. However, the share price has fallen -15% throughout February and this is a noteworthy de-rating versus software stocks globally. Ord Minnett is comfortable with forecasts and assesses, while market volatility could persist for a few weeks yet, the stock now represents value. Target is raised to $12.90 from $12.85 and the rating upgraded to Buy from Hold. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
JB HI-FI (JBH) was upgraded to Add from Hold by Morgans
Morgans assesses investors will be best placed sticking with large, more defensive names such as JB Hi-Fi in the current environment. The company revealed resilient like-for-like sales growth in the recent results. Moreover, online expansion was still doing the heavy lifting and the business reported one of the highest rates of growth in this segment. The broker upgrades to Add from Hold. Target is $40.66.
NEWCREST MINING (NCM) was upgraded to Hold from Lighten by Ord Minnett
Having reviewed the gold sector after the recent results, Ord Minnett notes guidance ranges were retained and balance sheets are not unduly stretched. The main headwind for production and costs are declining grades. Newcrest Mining has pulled back recently so the broker upgrades to Hold from Lighten. Target is $26. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
REECE AUSTRALIA (REH) was upgraded to Add from Hold by Morgans
First half results were ahead of expectations. US sales revenue grew 19%. Morgans envisages a lot of potential in the US once the company deploys its accelerated bolt-on strategy and rolls out stores. Margins are expected to continue improving. The main risk centres on the slowing downstream construction activity. The broker upgrades to Add from Hold and raises the target to $12.84 from $12.45.
REGIS RESOURCES (RRL) was upgraded to Hold from Lighten by Ord Minnett
Having reviewed the gold sector after the recent results, Ord Minnett notes guidance ranges were retained and balance sheets are not unduly stretched. The main headwind for production and costs are declining grades. Regis Resources has pulled back recently so Ord Minnett upgrades to Hold from Lighten. Target is $3.90. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
RHINOMED (RNO) was upgraded to Add from Hold by Morgans
First half net losses were extended and weaker than Morgans expected. Higher costs occurred across most expense lines. Revenue increased 24% from sales of the traditional Turbine and Mute devices. Morgans revises forecasts lower in line with the higher operating cost base and lower sales traction but remains cautiously optimistic about new products. Target is reduced to $0.22 from $0.28. Rating is upgraded to Speculative Buy from Hold because of recent share price weakness.
SUPER RETAIL GROUP (SUL) was upgraded to Outperform from Neutral by Credit Suisse
Overall, Credit Suisse observes Super Retail has achieved solid revenue growth and built one of the better digital capabilities in the retail sector. While BCF has underperformed, its influence on the investment case is minor. The broker upgrades to Outperform from Neutral, believing the business is well-positioned for medium-term growth. Target is steady at $9.94.
WISETECH GLOBAL (WTC) was upgraded to Buy from Lighten by Ord Minnett
The share price has fallen -40% over February. Ord Minnett now assesses the stock is trading on a forward enterprise value/revenue multiple of 9.6x, around -40% below its two-year average. While there is a risk FY20 guidance may still prove too optimistic, Ord Minnett believes the stock represents value at current levels and upgrades to Buy from Lighten. Target is reduced to $19.00 from $19.34.
ZIP CO (Z1P) was upgraded to Add from Hold by Morgans
First half net loss was greater than Morgans expected. The broker downgrades FY20 and FY21 forecast by more than -50%, given lower cash earnings margin assumptions. While the Zip Co share price has retraced significantly, the broker envisages long-term value is re-emerging and therefore upgrades to Add from Hold. Target is reduced to $3.23 from $3.92.
In the not-so-good books
ANSELL (ANN) was downgraded to Underperform from Neutral by Macquarie
Macquarie considers the downside risks to organic revenue growth have increased and outweigh support from various business initiatives. This is particularly the case if confirmed cases of coronavirus continue to expand outside mainland China. Rating is downgraded to Underperform from Neutral and the target lowered to $27.50 from $30.00.
ACCENT GROUP (AX1) was downgraded to Hold from Add by Morgans
Morgans continues to like the business and the growth potential. Surprises on earnings are being driven by the store roll-out profile, which may continue should some of the new concepts gain traction. Yet, Morgans downgrades to Hold from Add, preferring other retail stocks at similar valuations in the current environment. Target is reduced to $1.92 from $2.15.
CHARTER HALL (CHC) was downgraded to Hold from Accumulate by Ord Minnett
First half operating earnings were ahead of forecasts. Ord Minnett observes Charter Hall is a strongly performing business but commercial property transaction volumes in Australia are likely to slow in response to travel restrictions and uncertainty over asset values. At least until the impact of coronavirus is better understood. The broker’s main concern is that, if vendors are not willing to take assets to the market, then the company’s growth in assets under management is likely to moderate. Rating is downgraded to Hold from Accumulate and the target lowered to $12.50 from $14.20. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
IDP EDUCATION (IEL) was downgraded to Hold from Add by Morgans
Given further deterioration in macro-economic conditions on the back of the coronavirus contagion, Morgans has become more cautious. Rating is downgraded to Hold from Add. The short-term nature of any impact makes the broker reluctant to change its long-term view but, at current multiples, the stock is more vulnerable to any impact from coronavirus. Target is $24.49.
XREF (XF1) was downgraded to Hold from Buy by Ord Minnett
Ord Minnett notes a slowing growth profile in sales has meant management has turned attention to self-activation via Xref Light and Template builder. There are no material signs yet the strategy is taking hold and the broker will need to witness a marked improvement in sales and a rationalisation of costs in the second half to become more confident. In the interim, the rating is downgraded to Hold from Speculative Buy and the target lowered to $0.25 from $0.60.
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.
