In the good books

ALS (ALQ) was upgraded to Add from Hold by Morgans

Macquarie observes life sciences are now a larger proportion of the group. The company has also drawn down sufficient funds to meet the maturing debt tranche at the end of 2020. The broker notes gearing is reasonable and the stock has fallen further than peers, partially reflecting its minerals exposure. This is considered overdone. Outperform maintained. Target is reduced to $7.03 from $9.64.

ALUMINA (AWC) was upgraded to Neutral from Sell by UBS

UBS upgrades to Neutral from Sell, assessing the current share price now reflects the uncertainty in the alumina market. The broker envisages short-term headwinds, amid disruptions to secondary demand for aluminium. As China returns to work the risk is that demand for finished goods by the rest of the world will not be sufficient to support sustained production. The broker remains concerned that aluminium in Europe and India is entering a period of extended lock-down and restriction. Target is reduced to $1.50 from $1.90.

ANSELL (ANN) was upgraded to Buy from Neutral by Citi, to Outperform from Neutral by Credit Suisse and to Hold from Lighten by Ord Minnett

The company has reiterated FY20 guidance. Citi observes there is little risk on the balance sheet, given significant liquidity and positive operating cash flow. Ansell also continues to buy back shares. While the coronavirus has increased demand for surgical gloves and protective health equipment, it has had negative impact on the demand for industrial gloves, given manufacturing shut-downs. The broker finds the net impact impossible to predict at this stage. Citi upgrades to Buy from Neutral. Target is raised to $34.50 from $32.00.

There is strong demand for single use gloves, surgical gloves and chemical protection. Credit Suisse estimates these divisions account for up to 45% of group sales and are likely to offset the weakness in industrial end-user demand. Yet, the fixed cost nature of industrial items and the increased supply costs will likely limit the benefit. The main tailwinds are in raw materials, including the fact Brent is down -60% since February and spot butadiene prices are down -15%. Credit Suisse upgrades to Outperform from Neutral. Target is $32.

Sales have held up better than Ord Minnett expected, as coronavirus has caused extreme shortages in the supply of protective equipment in the health and hygiene sector. The broker expects Ansell will obtain the lower end of its guidance range, even in the face of a substantial drop in demand for industrial safety gloves. As FY20 forecasts are already in the guidance range, the broker makes no changes. Rating is upgraded to Hold from Lighten. Target is $28.

ATLAS ARTERIA (ALX) was upgraded to Add from Hold by Morgans

Morgans materially downgrades FY20 forecasts, reflecting the company’s decision to suspend distribution guidance and the initial traffic impact from coronavirus. Rating is upgraded to Add from Hold, despite the fact short-term news flow is likely to be negative. The coronavirus impact in 2020 appears likely to cause the one and three-year distribution lock-up tests to fail while the material step-up in debt service from FY22 will make the tests difficult to pass, Morgans points out. The broker assumes the tests will not be passed until FY26 and, hence, trapped cash will continue to accumulate. Success with toll escalation applications may improve this view. Target is raised to $8.12 from $7.57.

AURIZON HOLDINGS (AZJ) was upgraded to Buy from Neutral by Citi

Citi upgrades to Buy from Neutral noting the yield appeal along with the defensive earnings mix. Coal export data have been strong, particularly in Queensland since the coronavirus outbreak. The broker considers the current valuation provides an ideal risk/return for investors. Further upside could be derived from cost efficiencies and new contracts in the bulks segment. Target is reduced to $5.40 from $5.60.

BRAMBLES (BXB) was upgraded to Overweight from Equal-weight by Morgan Stanley and to Outperform from Underperform by Credit Suisse

Morgan Stanley believes Brambles is well-positioned as it has largely defensive end markets and an ongoing buyback. The company derives 85% of its revenue from staples, which allows it to participate in the surge in supermarket traffic. The main issue for the broker is the margin outlook, given a mix of increased volume, price momentum, increased variable operating costs and fractionalisation of overheads. To date, FY20 guidance for mid single-digit revenue and operating profit growth remains in place. While the stock has outperformed the market over the last three months this is not to the same extent as others that have participated in the “essentials” supply chain. Hence, Morgan Stanley upgrades to Overweight from Equal-weight. Target is raised to $13.00 from $12.80. Industry view is In-Line.

With higher demand for packaged food, fresh produce and beverages through supermarket channels as restaurants close, Brambles is exposed to the current crisis in a positive way, Credit Suisse asserts. Brambles obtains around 80% of revenue from producers of packaged/fresh food and beverages. While margins have suffered in the Americas in recent years because of high cost inflation, Credit Suisse expects the economic slowdown will significantly reduce these costs for some time. Rating is upgraded to Outperform from Underperform and the target lifted to $12.50 from $12.00.

CHALLENGER (CGF) was upgraded to Buy from Neutral by Citi and to Hold from Sell by Ord Minnett

Citi observes the risks on the balance sheet have been significantly reduced as the business increases the defensiveness of its asset portfolio. As the stock is sold off substantially, the broker envisages scope for it to rally a little and raises the rating to Buy from Neutral. While Challenger has reiterated FY20 normalised pre-tax profit guidance of $500-550m, this is a wide range and the broker notes the changes only affect FY20 profit for 3-4 months. The larger earnings impact is likely to be felt in FY21, but then only to the extent the cash is not been redeployed. Target is $5.45.

Challenger has updated the market on the extent of its de-risking. The capital position has improved significantly yet Ord Minnett still has reservations. There is still downside risk on property and sub investment-grade fixed income, suggest the analysts. The broker considers the return on equity very low for the risks the business takes, suspecting in the short-term dividends on assets may be reduced. Rating is upgraded to Hold from Sell and the target lowered to $4.00 from $4.70..

CLOVER CORPORATION (CLV) was upgraded to Buy from Neutral by UBS

First half results were softer than UBS expected. The miss was attributed to Australasia and Asia sales growth. The broker believes the medium-term growth story is intact and upgrades to Buy from Neutral. UBS points to defensive qualities, changes in European regulations and exposure to structural growth markets as underpinning the stock. Target is reduced to $2.20 from $2.75.

COCA-COLA AMATIL (CCL) was upgraded to Outperform from Neutral by Credit Suisse

Credit Suisse considers Coca-Cola Amatil is well placed to meet financial obligations. The broker assesses leverage could remain around 1.3x in 2020 reducing to 1.0x in 2021. Flat revenue is assumed for Australia in 2020 and the key December quarter is expected to be largely unaffected by coronavirus restrictions. A -10% volume decline is assumed in Indonesia and 2% volume growth in New Zealand. The broker upgrades to Outperform from Neutral because of recent weakness in the share price. Target is reduced to $10.70 from $11.40.

CROWN RESORTS (CWN) was upgraded to Buy from Neutral by UBS

UBS suggests the market is discounting the longer-term outlook for Crown Resorts. The broker estimates cash burn of -$40m per month during the period the casinos are shut down. This provides significant flexibility against a cash balance of around $850m. Nevertheless, the broker assumes construction of Crown Sydney slows down. Liquidity and gearing should not be an issue after the re-opening, if the company can collect on its estimated $800m of apartment sales. The main downside risk is the NSW public casino inquiry, which has been postponed. Rating is upgraded to Buy from Neutral and the target reduced to $9.15 from $11.40.

G.U.D. HOLDINGS (GUD) was upgraded to Buy from Neutral by Citi

Citi upgrades to Buy from Neutral. Demand is expected to increase over the medium term as higher unemployment and reduced wages translate to consumers holding onto existing vehicles for longer and shifting from original equipment manufacturer services to cheaper independent services. The broker also suspects the weak environment could assist the company in consolidating the automotive aftermarket. Moreover, the relatively non-discretionary nature of the automotive and water businesses should translate to a faster recovery when the crisis ends. Target is reduced to $10.30 from $12.10.

IGO (IGO) was upgraded to Buy from Neutral by UBS

IGO Group remains a preferred nickel exposure and UBS upgrades to Buy from Neutral. The stock has fallen -29% in the year to date. The broker now believes that a US$4.00/lb nickel price is factored in and exploration success is a free option. The balance sheet is also very strong. Target is reduced to $6.00 from $6.75.

INVOCARE (IVC) was upgraded to Buy from Neutral by Citi

The company is beginning to experience an impact on the core business as a result of social distancing measures. The government has restricted the number of people able to attend funerals in Australia to 10 and this will result in a loss of revenue as InvoCare will not be able to offer the same range of services. Citi reduces FY20 and FY21 forecasts by -10% and -5% respectively and now assumes social distancing lasts three months. The broker expects the share price to re-rate higher once any uncertainty around the amount of headroom on the balance sheet is removed. Target is reduced to $13.50 from $14.50. Rating is upgraded to Buy from Neutral.

MACQUARIE GROUP (MQG) was upgraded to Buy from Hold by Ord Minnett

Ord Minnett suggests the stock has now overshot fundamentals, pointing out the market was slow to factor in the downside risks from the coronavirus outbreak. Ord Minnett makes further reductions to forecasts but considers the -40% drop in the share price from the February peak presents a strong buying opportunity. While further risks cannot be dismissed the extraordinary support being offered by governments is expected to ensure the coming recession is shortened. Rating is upgraded to Buy from Hold. Target is lowered to $112 from $132.

NORTHERN STAR RESOURCES (NST) was upgraded to Neutral from Underperform by Credit Suisse

Northern Star has announced a -10-15% reduction to March quarter production, withdrawing FY20 production and cost guidance. All mines are operating but at reduced rates. Credit Suisse reduces estimates for FY20 earnings per share by -35%, assuming the impact involves two weeks of the March quarter and two months of the June quarter. Liquidity appears sound. The broker upgrades to Neutral from Underperform and raises the target to $11.50 from $10.30.

PERSEUS MINING (PRU) was upgraded to Neutral from Underperform by Credit Suisse

Credit Suisse implements a revised gold price deck. The performance at Edikan is meeting budget and provides cash flow to support the wider business. The risk of forced mine suspensions remains. The broker upgrades to Neutral from Underperform and raises the target to $1.09 from $1.03.

REGIS RESOURCES (RRL) was upgraded to Outperform from Neutral by Credit Suisse

Credit Suisse increases estimates for earnings per share by 7% and 27% in FY20 and FY21 respectively, implementing higher gold and lower FX estimates. Rating is upgraded to Outperform from Neutral and the target reduced to $4.70 from $4.75.

RESAPP HEALTH (RAP) was upgraded to Speculative Buy from Hold by Morgans

ResApp Health has announced it has completed initial integration with its first major commercial partner, Coviu, and signed binding commercial terms for the non-exclusive two-year license for the technology, which Morgans sees as a significant step. The broker has reduced its discount to valuation due to a view that the recently announced Medicare rebate for telehealth consultations will likely drive increased demand for remote diagnostics. Target rises to 24c from 8.6c. Rating upgraded to Speculative Buy from Hold.

SCENTRE GROUP (SCG) was upgraded to Neutral from Sell by UBS

The viability of retail tenant businesses is being undermined worldwide. Longer-term, UBS anticipates a re-basing of specialty retail rents -20% lower. In the current period of uncertainty, the broker expects Scentre Group will resort to capital preservation to ensure a flexible balance sheet. While gearing is elevated, the broker believes the capital position is sound. To preserve long-term gearing UBS lowers distribution forecasts by -35%. Rating is upgraded to Neutral from Sell as the current share price implies a -40% decline in asset prices. Target is reduced to $1.53 from $3.70.

STAR ENTERTAINMENT GROUP (SGR) was upgraded to Buy from Neutral by UBS

UBS assumes debt covenants will be relaxed by lenders over the next year. The broker also assumes the company will undertake a range of measures to ensure gearing remains under 3x thereafter. These include a deferral of dividends, a -15% reduction in labour costs and a slowdown in construction at Queens Wharf as well as deferral of the second Gold Coast tower. The broker upgrades to Buy from Neutral on the basis the value is backed by hard assets with long-dated casino licenses that are currently being discounted by over -50% versus historical averages. Target is to reduce to $3.00 from $4.40.

TASSAL GROUP (TGR) was upgraded to Outperform from Neutral by Credit Suisse

The analysts suggest Tassal Group is well-placed in terms of both demand for product and ability to supply. That said, Credit Suisse expects some disruption will occur. The company has pointed to the restaurants segment for domestic wholesale salmon shutting down, while parts of the takeaway, online and home delivery business are showing growth. Credit Suisse upgrades to Outperform from Neutral and reduces the target to $3.90 from $4.90.

WESTERN AREAS (WSA) was upgraded to Buy from Neutral by UBS

UBS upgrades to Buy from Neutral and lowers the target to $2.50 from $2.90. Despite the risks, the broker considers the valuation attractive. The stock is considered highly leveraged to nickel prices and, while there is downside risk in the short term, the broker suspects the Indonesian nickel ore ban and the uptake of electric vehicles will resume importance.

WOODSIDE PETROLEUM (WPL) was upgraded to Buy from Neutral by UBS

UBS cuts oil price forecasts by -15-30% for the next five years. Brent is now expected to remain below US$60/bbl until 2024. This will mean a material impact on earnings. The broker lowers assumptions for oil stocks to reflect the value of the base business, as investors are not expected to pay for growth in this environment. Woodside Petroleum is upgraded to Buy from Neutral as it is trading at a -21% discount to valuation and has the strongest balance sheet. Target is reduced to $22.60 from $34.60.

In the not-so-good books

AUTOSPORTS GROUP (ASG) was downgraded to Neutral from Outperform by Macquarie

Although Macquarie considers the luxury exposure of the business a positive, the company’s earnings are not immune to the current crisis. New and used volumes are expected to decline. The broker revises new vehicle sales estimates because of disruptions and expects a slowdown in back-end revenue under the current isolation directives. Rating is downgraded to Neutral from Outperform and the target lowered to $1.10 from $1.75.

HASTINGS TECHNOLOGY METALS (HAS) was downgraded to Hold from Buy by Ord Minnett

Ord Minnett reduces the valuation and target to 15c from 30c and downgrades to Hold from Speculative Buy. The valuation is sensitive to delays and changes in capital expenditure. Negotiations for project funding are ongoing, the broker notes, and the issues regarding the German state debt appear complex, albeit not insurmountable.

OCEANAGOLD (OGC) was downgraded to Neutral from Outperform by Credit Suisse

Credit Suisse decreases FY20 earnings estimates to nil, removing Didipio entirely from forecasts. A six-week closure in New Zealand is assumed. The duration of the shut-down of mines may have implications for liquidity, which the broker suspects will become increasingly tight. A resolution at Didipio would act as a considerable positive catalyst but the market has no insight into when this may be achieved. Rating is downgraded to Neutral from Outperform and the target is lowered to $1.72 from $4.20.

SG FLEET (SGF) was downgraded to Neutral from Outperform by Macquarie

The company has withdrawn guidance. Macquarie reassesses earnings estimates and adjusts for the anticipated economic impacts. Upfront and end-of-life lease fees are considered the major drivers of reduced earnings. Working capital risk also increases because of the potential for delayed credit collection, asset value risk and reduced revenue. Rating is downgraded to Neutral from Outperform and the target lowered to $1.85 from $2.60.

TECHNOLOGYONE (TNE) was downgraded to Lighten from Hold by Ord Minnett

Ord Minnett adjusts forecasts to account for the potential impact of coronavirus. The broker believes it prudent to factor in the potential risks and downgrades to Lighten from Hold. Revenue forecasts are reduced by -3%. The broker now forecasts pre-tax profit growth of 11.5% in FY20. Target is reduced to $7.30 from $7.50.

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.