Against a background of escalating concerns about the potential economic fall-out from the spreading COVID-19 virus, FNArena’s daily monitored seven stockbrokers issued no less than 36 recommendation upgrades for individual listed ASX entities, against twelve downgrades.
The instantaneous result of the large gap between both is that total Buy recommendations for the seven brokers made a giant leap forward, narrowing the gap with Neutral/Hold rating, while total Sell ratings have declined noticeably.
As percentages stand on Friday, 6th March 2020, circa 41% of all ratings now comprises of a Buy, with Neutral/Holds on 44.39% and Sell ratings taking up the remaining 14.5%.
Equally remarkable, only one of the seven stockbrokers (Morgans) is presently carrying more Buy ratings than Neutral/Holds, by a thin margin only.
Eight of the 36 recommendation upgrades stopped at Neutral/Hold. BHP Group received two fresh Buy ratings throughout the week, but Coles attracted three fresh upgrades to Buy. Bank of Queensland also received two upgrades, but both went up to Neutral.
Downgrades were limited to twelve in total and three of those shifted to Sell. Ansell, Flight Centre and National Australia Bank were the unlucky receivers.
The week’s tables for amendments to earnings forecasts equally shows a strong bias for negative updates. Those enjoying positive revisions were led by Costa Group, Senex Energy, and Webjet, but most positive changes pale when compared to the sizable reductions that are dominating the local share market post February.
Humongous cuts befell Zip Co and Afterpay, followed by large reductions in earnings estimates for the likes of Myer, Unibail-Rodamco-Westfield, OceanaGold, Japara Healthcare, and many others.
With uncertainty about COVID-19 and its economic impact continuing to grip global equities, it seems investors will have to look elsewhere than broker updates for encouragement. Though the large number of recommendation upgrades suggest there will be buying opportunities when the selling stops.
In the good books
ASX LIMITED (ASX) was upgraded to Neutral from Underperform by Credit Suisse B/H/S: 0/3/4
Credit Suisse upgrades to Neutral from Underperform following the fall in the share price in recent weeks. Target is $70. The broker considers ASX the most defensive stock in the sector, with earnings somewhat insulated during risk-off events through increased velocity in equity markets, increased futures trading as interest rates are cut and the ability to re-price.
ALUMINA LIMITED (AWC) was upgraded to Buy from Neutral by Citi B/H/S: 2/2/2
Alumina Ltd has been upgraded to Buy from Neutral as part of a sector stress-test undertaken by commodity analysts at Citi. Taking guidance from global interest rates, Citi’s view is that 2020 will be a disappointing year for the sector overall. Citi considers Alumina Ltd a sector stand-out given the company’s ability to pay what is described as a “reasonable dividend”, even in an environment of depressed alumina prices.
BHP GROUP (BHP) was upgraded to Add from Hold by Morgans B/H/S: 3/4/0
While acknowledging there is difficulty in predicting the end of the equity market volatility or the immediate outlook for commodities, Morgans considers the current sell-off has pushed the big miners into value territory. The broker upgrades to Add from Hold. Target is $36.46. The preference shifts to Rio Tinto (RIO). Uncertain conditions in China are likely to be met with heavy stimulus while BHP Group’s energy exposure could become a source of a new discount if oil prices continue to weaken, in the broker’s view.
BREVILLE GROUP LIMITED (BRG) was upgraded to Buy from Neutral by UBS B/H/S: 1/2/0
UBS upgrades to Buy from Neutral, given strong top-line growth. The broker believes a premium multiple is justified because of the growth profile and business quality. Direct entry to a new region could add up to $5 per share to the valuation, the broker calculates. The main risk is potential supply chain disruption from coronavirus although the company has not been materially affected to date. Europe is now the second largest market for Breville and the broker forecasts more than $300m in sales by FY23. Target is raised to $22.70 from $17.85.
COMMONWEALTH BANK OF AUSTRALIA (CBA) was upgraded to Neutral from Underperform by Credit Suisse B/H/S: 0/1/5
Credit Suisse downgrades earnings estimates on the back of the reduction in official cash rates, but also taking note of an increase in bad debt provisions derived from economic stress. Bad debt provision estimates are increased for FY20 and FY21 because of the economic impact likely from coronavirus, with regard to small businesses linked to the supply chain in the tourism and education sectors. Rating is upgraded to Neutral from Underperform, given the bank’s capital strength. Target is reduced to $77.00 from $77.60.
COLES GROUP LIMITED (COL) was upgraded to Accumulate from Lighten by Ord Minnett B/H/S: 3/1/3
Ord Minnett has become more confident in the supermarket industry as food inflation is now likely to persist. Moreover, the broker likes the Coles strategy based on cost savings and tailoring of range and formats. Value now exists and the gap to Woolworths (WOW) is expected to continue narrowing. Rating is upgraded to Accumulate from Lighten and the target lifted to $16.75 from $15.00.
CROWN RESORTS LIMITED (CWN) was upgraded to Outperform from Neutral by Macquarie B/H/S: 1/5/0
Since January 17, Macquarie notes the market has wiped around -21% of the company’s market capitalisation. This is based on a mix of coronavirus-related concerns and the public hearing. The broker continues to believe that, while impacts on VIP visitors will be material in the near term, coronavirus is temporary and the domestic business should be more resilient. There is also material room for capital management following the opening of Crown Sydney in early 2021. Hence, Macquarie upgrades to Outperform from Neutral. Target is $11.95.
ILUKA RESOURCES LIMITED (ILU) was upgraded to Buy from Neutral by Citi B/H/S: 1/4/0
Iluka Resources has been upgraded to Buy from Neutral as part of a sector stress-test undertaken by commodity analysts at Citi. Taking guidance from global interest rates, Citi’s view is that 2020 will be a disappointing year for the sector overall. Price target has shifted to $9.80 from $9.70 on slightly higher forecasts for 2021.
OIL SEARCH LIMITED (OSH) was upgraded to Outperform from Neutral by Macquarie B/H/S: 4/3/0
Macquarie upgrades to Outperform from Neutral, given the recent fall in the share price. Despite the impasse on P’nyang, the broker highlights the stability of the current PNG LNG operations and the growth prospects in Alaska. Target is reduced -3% to $6.20. Earnings estimates are also decreased amid a lower near-term Brent forecast.
RIO TINTO LIMITED (RIO) was upgraded to Add from Hold by Morgans B/H/S: 3/3/1
While acknowledging there is difficulty in predicting the end of the equity market volatility or the immediate outlook for commodities, Morgans considers the current sell-off has pushed the big miners into value territory. The broker upgrades to Add from Hold, shifting its preference to Rio Tinto among the large caps. Target is $97.25. Uncertain conditions in China are likely to be met with heavy stimulus while BHP Group’s ((BHP)) energy exposure could become a source of a new discount if oil prices continue to weaken, in the broker’s view.
SONIC HEALTHCARE LIMITED (SHL) was upgraded to Buy from Neutral by Citi B/H/S: 5/1/1
Citi healthcare sector analysts have used a general re-assessment post the February reporting season to upgrade Sonic Healthcare to Buy from Neutral. There is always potential for upside through acquisitions, though Citi isn’t forecasting any for the time being. Outside further acquisitions, the analysts view Sonic Healthcare as a stable and well managed business. They remind investors organic revenue growth normally ranges from 3-6%, depending on the geography. In addition, it is rare for regulatory changes in multiple geographies in any given year. Price target lifts to $33.75 from $33.50.
TRANSURBAN GROUP (TCL) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 1/4/2
Ord Minnett increases earnings estimates and lifts free cash flow forecasts materially. This is based on tax stabilising at half previously assumed levels and lower capitalised interest for select developments. Improved returns from WestConnex are also expected. Rating is upgraded to Accumulate from Hold and the target raised to $17.00 from $15.65.
WOODSIDE PETROLEUM LIMITED ((WPL)) was upgraded to Outperform from Neutral by Macquarie .B/H/S: 4/3/0
Scarborough is progressing and set for a final investment decision in 2020. A tolling fee has been agreed and interest in the fields are now aligned for both Woodside Petroleum and BHP Group (BHP). Gas will be processed through the Pluto train 1 and the train 2 expansion. Woodside’s ability to manage capital investment over returns to shareholders will be a key driver of the share price in the medium term, Macquarie suggests. The broker upgrades to Outperform from Neutral, noting the payment of the dividend is now critical to a positive view. A 73% pay-out ratio is assumed for 2020. Target is reduced to $33 from $35.
In the not-so-good books
AIR NEW ZEALAND LIMITED (AIZ) was downgraded to Neutral from Buy by UBS B/H/S: 0/2/1
Air New Zealand’s outlook is now binary, UBS notes. If the virus is contained and international travel normalises by mid-year then significant upside awaits. Under a global pandemic scenario, material downside awaits. To reflect the heightened uncertainty, the broker has adjusted its valuation model, which leads to a target price drop to NZ$2.00 from NZ$2.85. Rating is pulled back to Neutral on the same basis.
COMPUTERSHARE LIMITED (CPU) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 0/4/2
Credit Suisse downgrades to Neutral from Outperform, reversing its call from some weeks ago when it did not assume such a rapid and large decline in global cash rates. Target is reduced to $15.25 from $19.40. In addition, equity market volatility and weaker activity levels could reduce employee share plan trading revenue, corporate actions and loan volumes in the mortgage servicing business.
CORPORATE TRAVEL MANAGEMENT LIMITED (CTD) was downgraded to Accumulate from Buy by Ord Minnett B/H/S: 4/2/0
Ord Minnett suggests the current concerns regarding the impact of coronavirus are well-founded given its ability to spread quickly and the high mortality rate. This presents a toxic combination for travel agencies. A number have suggested the virus could materially affect earnings for the remainder of 2020. While analysis suggests the stock offers value at current levels, Ord Minnett downgrades Corporate Travel to Accumulate from Buy and reduces the target to $13.55 from $20.42.
FLIGHT CENTRE LIMITED (FLT) was downgraded to Lighten from Hold by Ord Minnett B/H/S: 3/3/0
Ord Minnett suggests the current concerns regarding the impact of coronavirus are well-founded given its ability to spread quickly and the high mortality rate. This presents a toxic combination for travel agencies. A number have suggested the virus could materially affect earnings for the remainder of 2020. Ord Minnett assesses Flight Centre has potential for further downside and downgrades to Lighten from Hold. Target is reduced to $25.49 from $35.52.
GOODMAN GROUP (GMG) was downgraded to Neutral from Buy by UBS B/H/S: 3/3/0
Asia represents 33% of Goodman Group’s assets under management earnings, 23% of capital invested and 43% of development work in progress, UBS notes. Projects underway in Hong Kong are fully committed but in Japan it’s 65% and China 25%. None of the projects are scheduled for completion in FY20 hence no risk to FY20 guidance. Development sites in China are not yet operating but are anticipated to be operational in coming weeks. In FY20 to date, major tenants continue to implement long term supply chain initiatives. Virus-related risk is therefore a story for FY21-22, and on that risk UBS pulls back to Neutral. Target rises to $16.00 from $15.60 after updating for forex and net tangible asset valuation.
NATIONAL AUSTRALIA BANK LIMITED (NAB) was downgraded to Underperform from Neutral by Credit Suisse B/H/S: 2/3/2
Credit Suisse downgrades earnings estimates on the back of the reduction in official cash rates but also taking note of an increase in bad debt provisions derived from economic stress. Bad debt provision estimates are increased for FY20 and FY21 because of the economic impact likely from coronavirus, with regard to small businesses linked to the supply chain in the tourism and education sectors. Rating is downgraded to Underperform from Neutral and the target lowered to $22.90 from $27.90, because of the bank’s large exposure to the small-medium enterprise segment and lower relative capital position.
TPG TELECOM LIMITED (TPM) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 0/5/0
First half net profit was below Ord Minnett’s forecasts. The consumer business was better than expected because of recent NBN wholesale pricing changes. TPG Telecom shares have also received a boost as the ACCC announced it would not appeal the court decision allowing the merger with Vodafone Australia. The broker updates its modelling to reflect the merger. The stock is assessed as trading at fair value and the rating is downgraded to Hold from Accumulate. Target is raised to $8.25 from $7.25.
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 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.