In the good books
ALLIANCE AVIATION SERVICES (AQZ) was upgraded to Buy from Hold by Ord Minnett
Ord Minnett believes there are some important offsetting factors that will assist Alliance Aviation in the current crisis. Firstly, fly-in, fly-out and contract hours are growing as mining companies take additional measures to prevent outbreaks of the virus on site. Charter revenue remains strong and the fleet is deployed. As the stock is trading at a -20% discount to net tangible assets Ord Minnett upgrades to Buy from Hold. Target is reduced to $1.80 from $2.60. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
ALUMINA (AWC) was upgraded to Outperform from Neutral by Macquarie
Macquarie remains positive on bulk miners. Alumina Ltd shares have declined -35% in the year to date while alumina spot prices are currently tracking above the broker’s forecasts. Positive cash flow should mean the company returns to a net cash position in FY21/22, on the broker’s estimates. Rating is upgraded to Outperform from Neutral. Target is raised to $1.60 from $1.50.
AURIZON HOLDINGS (AZJ) was upgraded to Buy from Neutral by UBS
In theory, UBS assesses Aurizon carries a low risk to volumes even in the event of coal mine closures. The network generates a return on its asset base irrespective of volume and the above-rail business is also partially protected from capacity changes representing more than 50% of revenue. In this way, the broker considers Aurizon one of the more defensive companies in the Australian market. Only one coal mine accounts for more than 5% of coal volumes. UBS upgrades to Buy from Neutral, believing downside risks for the balance sheet liquidity and earnings are not as great as the share price suggests. Target is $5.55.
AUSTRALIA & NEW ZEALAND BANKING GROUP (ANZ) was upgraded to Buy from Neutral by Citi
Citi upgrades the banking sector to Buy. Even in a severe bad debt scenario the current crisis is not likely to de-stabilise the sector such as what occurred in the GFC, says the broker. Citi lowers ANZ cash earnings forecast by -6-7% for FY20 and FY21. Stronger net interest income assumptions and markets income are offset by higher bad debts. The broker cuts the second half dividend forecast by -18%. Rating is upgraded to Buy from Neutral and the target is lowered to $24.75 from $28.00.
BANK OF QUEENSLAND (BOQ) was upgraded to Buy from Neutral by Citi
Citi upgrades the banking sector to Buy. The broker lowers cash earnings forecasts for Bank of Queensland by -10% for FY20 but upgrades FY21 and FY22 by 9-11%. The broker believes the bank should benefit from industry-wide mortgage repricing amid less sensitivity to cash-linked small and medium enterprises. Bad debts may weigh, nevertheless. Rating is upgraded to Buy from Neutral and the target reduced to $6.50 from $7.75.
BEACH ENERGY (BPT) was upgraded to Buy from Neutral by Citi
Citi has revised down Brent oil forecasts significantly. The broker now expects US$30/bbl across 2020 and a trough of US$17/bbl in the second quarter. The bearish view is based on forecasts for supply and demand amid an unprecedented build up in global inventory. Citi upgrades to Buy/High Risk from Neutral as Beach Energy is largely self-funded, assuming it defers some non-core expenditure. Target is reduced to $1.73 from $2.44.
BENDIGO AND ADELAIDE BANK (BEN) was upgraded to Buy from Sell by Citi
Citi upgrades the banking sector to Buy. The broker lowers cash earnings forecasts by -6% for FY20 but upgrades FY21 by 5% and FY22 by 16%. The broker expects, while bad debts weigh, the bank will benefit from industry-wide mortgage repricing and a predominantly housing-related book. The dividend is expected to be cut to $0.24 in the second half. Rating is upgraded to Buy from Sell and the target reduced to $7.25 from $9.25.
BREVILLE GROUP (BRG) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse observes previous concerns around possible shortages of inventory have been largely forgotten and investors are now turning to the potential loss of revenue and the stability of the balance sheet. Government-mandated temporary store closures have been an increasing feature in European markets while the situation in Australia is extremely uncertain. The broker expects the company will have some ability to manage the inventory position and cost base over the coming months, estimating a -50% reduction in marketing and R&D expenditure in the second half could offset a -15% gross margin impact. Medium-term opportunities remain intact and Credit Suisse considers the recent decline in the share price a buying opportunity. Rating is upgraded to Outperform from Neutral. Target is reduced to $16.16 from $23.05.
CARSALES.COM (CAR) was upgraded to Add from Reduce by Morgans
The company has indicated its core business had strong momentum prior to the impact of coronavirus. As much of the population goes into shut-down, Morgan Stanley envisages a sharp drop in dealer leads, private listings and automotive display advertising. However, the company has indicated its South Korean and Brazilian businesses have not slowed. Overweight rating, Attractive industry view and $17.25 target maintained.
COMMONWEALTH BANK OF AUSTRALIA (CBA) was upgraded to Buy from Sell by Citi
Citi upgrades the banking sector to Buy. The broker maintains Commonwealth Bank’s near-term earnings estimates in FY20 and FY21. Stronger net interest income assumptions and markets income are offsetting higher bad debts, in the broker’s assessment. The dividend forecast for the second half is reduced to $1.90. Rating is upgraded to Buy from Sell and the target reduced to $68.75 from $72.50.
EVENT HOSPITALITY AND ENTERTAINMENT (EVT) was upgraded to Buy from Neutral by Citi
While the operating business has challenges, Citi believes there are multiple levers to cushion the impact on profitability in the current downturn. Following the drop of -52% in the share price since the first half result, the broker assesses shareholders are now getting the operating businesses for free, given a $2bn property portfolio. The broker factors in the closure of cinemas over the entire fourth quarter and hotel closures during April and May as well as lower occupancy in March and June. There is also a risk that the sale of the German cinemas is delayed into the second half of FY21. Rating is upgraded to Buy from Neutral and the target is lowered to $7.45 from $12.65.
GPT GROUP (GPT) was upgraded to Outperform from Neutral by Macquarie
Macquarie considers the balance sheet in a strong position. The industrial and office assets, around 57% of the portfolio, are likely to be less affected by the current crisis compared with retail. The broker believes the business can perform well in the current environment and upgrades to Outperform from Neutral. Target is reduced to $5.40 from $6.26.
HEALIUS (HLS) was upgraded to Buy from Neutral by Citi
Healius has withdrawn FY20 guidance. The company has indicated that trading in the year to date is in line with guidance but current conditions are now unpredictable. Citi assumes revenue declines by -10% in the fourth quarter and that costs decline by -5%. While demand for coronavirus testing is increasing, relative to the normal volume of tests, this is small. As the community isolates, Citi suggests the decline in the underlying business will be greater than any positive impact from virus testing. The broker reduces the target to $2.80 from $3.40, given the private equity bid was rejected last week. As the share price has declined materially, the rating is upgraded to Buy from Neutral.
JB HI-FI (JBH) was upgraded to Neutral from Underperform by Credit Suisse
Credit Suisse upgrades to Neutral from Underperform. The broker considers the business a relative safe haven in discretionary retail. There is also a sound funding position which would only be tested if there was an extended closure of retail stores and an inability to extend credit payments. While expecting cash flow will crimp expenditure, the broker notes the performance in the March quarter provides a cash buffer heading into the uncertain June quarter. Target is reduced to $26.98 from $31.97.
MAGELLAN FINANCIAL GROUP (MFG) was upgraded to Buy from Sell by Citi and Ord Minnett
Following the share price decline, Citi upgrades to Buy from Sell. The risk to earnings is likely to be skewed to the downside for the sector, given elevated market volatility. However, there is minimal balance sheet risk, given zero debt. Global asset managers are considered better placed than domestic peers, in part because of natural offsets from a lower Australian dollar. Target is reduced to $40 from $55.
Ord Minnett observes the sell-off in 2020 has been broad-based and indiscriminate. The broker believes Magellan Financial has de-rated beyond a reasonable point and upgrades to Buy from Sell. The stock is now trading on 16x headline FY21 price/earnings and 14x excluding cash and investments. Target is reduced to $44.25 from $60.18.
NAVIGATOR GLOBAL INVESTMENTS (NGI) was upgraded to Outperform from Neutral by Macquarie
Macquarie observes the company’s US-dollar denominated assets provide protection for Australian investors. Using the GFC experience to account for the risks to 2020 drives a material downgrade to the broker’s forecasts for FY21. However, FY20 guidance is yet to be withdrawn or revised. Rating is upgraded to Outperform from Neutral and the target is steady at $3.36.
NEWCREST MINING (NCM) was upgraded to Buy from Neutral by Citi
Citi observes Newcrest Mining is one of the few companies that can deliver organic growth and this should help the stock return to its valuation premium. The newest projects highlight the opportunity for asset diversification and value. If the company can successfully deliver growth by the development of Wafi Golpu or Red Chris this should dilute concentration risk, in the broker’s view. There is also exposure to the longer-dated Cascabel. While not calling the bottom and acknowledging the risk to operating expenditure from the disruptions stemming from coronavirus, the broker believes there is value emerging. Rating is upgraded to Buy from Neutral. Target is steady at $30.40.
PLATINUM ASSET MANAGEMENT (PTM) was upgraded to Hold from Sell by Ord Minnett
Ord Minnett observes the sell-off in 2020 has been broad-based and indiscriminate. The broker takes the opportunity to neutralise its view on Platinum Asset, upgrading to Hold from Sell. Target is reduced to $2.74 from $3.83.
REA GROUP (REA) was upgraded to Outperform from Neutral by Macquarie
Macquarie revises estimates as new property listings are expected to decline by -50-60% in April-July. Against the difficult backdrop, the broker believes the business is well-positioned and can recover profitability as activity returns. Rating is upgraded to Outperform from Neutral. Target price reduced to $90 from $110.
SEEK (SEK) was upgraded to Add from Reduce by Morgans
Morgans has downgraded its Seek forecasts for a second time due to the virus. Remodelling to assess the company’s banking covenants suggests, in a worst case scenario of economic downturn worse than the GFC, Seek would need to raise $300m in capital to remain comfortably within its debt/equity benchmark. Target falls to $20.55 from $21.72 but given the share price has fallen much further, Morgans (double) upgrades to Add from Reduce.
STOCKLAND (SGP) was upgraded to Neutral from Underperform by Macquarie
Macquarie notes headwinds include rental abatements in retail, lower residential sales and settlements amid downside risk to retirement earnings. Still, the balance sheet is healthy, with enough liquidity envisaged through to FY22. Rating is upgraded to Neutral from Underperform. Target is reduced to $3.36 from $4.71.
WESTPAC BANKING CORPORATION (WBC) was upgraded to Accumulate from Hold by Ord Minnett and to Buy from Neutral by Citi
Given the emergence of significant valuation support, Ord Minnett upgrades Westpac to Accumulate from Hold. Target is reduced to $18.40 from $23.40. Valuation satisfactorily compensates investors for concerns regarding fines from AUSTRAC and other regulators as well as a possible restructuring charge from the new CEO to address IT complexities, in the broker’s view. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
Citi upgrades the banking sector to Buy. The broker lowers cash earnings forecasts for Westpac by -4-7% for FY20 and FY21. FY22 estimates are upgraded by 6% on the back of higher net interest income from the re-pricing of risks as bad debts recede. The second half dividend forecast is cut to $0.65. Rating is upgraded to Buy from Neutral. Target is lowered to $26.00 from $27.25.
WOODSIDE PETROLEUM (WPL) was upgraded to Buy from Neutral by Citi
Citi has revised down Brent oil forecasts significantly. The broker now expects US$30/bbl across 2020 and a trough of US$17/bbl in the second quarter. The bearish view is based on forecast for supply and demand amid an unprecedented build up in global inventory. The broker’s top pick in the sector is Woodside Petroleum, upgraded to Buy/High Risk from Neutral, given its balance sheet and low break-even oil price. Target is reduced to $23.88 from $33.64.
WESFARMERS (WES) was upgraded to Neutral from Underperform by Credit Suisse
Credit Suisse upgrades to Neutral from Underperform. Wesfarmers has one of the strongest funding positions in the broker’s coverage which should enable it to withstand a prolonged enforced closure of its retail stores. Moreover, most of the businesses have fundamentally sound positions. While the business has been challenged by lower earnings growth from several of its segments, the broker notes the current crisis offers potential for M&A. Target is reduced to $30.07 from $34.43.
In the not-so-good books
ADAIRS (ADH) was downgraded to Hold from Add by Morgans
Managing liquidity is now primary focus for the company as, while the first 11 weeks of the second half produced buoyant trading, subsequently there has been a marked slowdown. Guidance is now withdrawn. The board will no longer pay the interim dividend. The main risk is that non-essential retail stores may close and, in the above scenario, the balance sheet could come under pressure, Morgans points out. Rating is downgraded to Hold from Add and the target lowered to $1.60 from $2.26.
AIR NEW ZEALAND (AIZ) was downgraded to Sell from Neutral by UBS
UBS is surprised the bail-out package did not reflect any form of subsidy to cover the large cash burn as New Zealand closes its border. The extent of the negative impact to equity value depends on the duration of the closure and the subsequent pace of recovery in travel. Cash burn is -NZ$1.9bn under the broker’s base case scenario which assumes the border is closed for nine months. The NZ government has the option to convert its bridging loan into equity after six months. UBS downgrades to Sell from Neutral and reduces the target to NZ$0.45 from NZ$1.86.
FLEXIGROUP (FXL) was downgraded to Hold from Add by Morgans
Guidance has been withdrawn. Morgans observes the company faces several challenges, particularly given its exposure to travel, point-of-sale retail and solar. There is also a risk to the balance sheet if a steep increase in impairments is experienced. Morgans notes the company has not disclosed covenants, which makes understanding the risk difficult. The broker regards the stock has high risk until more certainty is achieved and downgrades to Hold from Add. Target is reduced to $0.62 from $2.25.
LENDLEASE (LLC) was downgraded to Neutral from Outperform by Macquarie
Macquarie believes the balance sheet and short-term earnings profile will be negatively affected by a reduction in transaction activity. The broker downgrades to Neutral from Outperform and reduces the target to $14.22 from $16.86.
MONASH IVF GROUP (MVF) was downgraded to Hold from Add by Morgans
FY20 guidance has been withdrawn. Morgans believes it appropriate to revise forecasts and adjust dividend expectations, as cash conservation is paramount. While the balance sheet is in a reasonable position, the broker reduces the valuation and applies a further -20% discount, setting the target at $0.66 from $1.15. Rating is downgraded to Hold from Add for the short term.
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.