The French call it Le Deluge, which has a different meaning altogether when used in the proverb “Apres nous, le deluge”, but otherwise the expression seems but fitting for what is happening in the Australian share market right now.

The Big Sell Off, inspired by the global covid-19 pandemic and related economic recession, has been replaced with calmer seas and no doubt calmer investor nerves. Analysts updating their modelling and assumptions end up mostly upgrading stocks, which has become the new trend.

For the week ending Friday, 3 April 2020, FNArena registered 44 upgrades for individual ASX-listed entities against 15 downgrades. Total Buy and equivalent ratings for the seven stockbrokerages monitored daily by FNArena has now exceeded 49% versus 41% Neutral/Hold ratings and 9.80% Sells.

History shows total Buy ratings are likely to rise well beyond 50% during Bear Markets like the one the local share market has been subjected to since February. At this rate, it won’t be long before 50%-plus is in place.

Twelve of the 44 upgrades did not move higher than Neutral/Hold. Five of the downgrades shifted to Sell. The unlucky receivers of a fresh Sell rating are Redbubble, Qantas, Sydney Airport, TechnologyOne, and Transurban.

Stocks receiving multiple upgrades during the week include Ansell, Brambles, Challenger, IDP Education, Pendal Group, and Scentre Group.

A handful of companies are enjoying some meaty increases to earnings estimates, led by Virgin Money UK, Unibail-Rodamco-Westfield and Whitehaven Coal. But don’t expect to see low numbers when you check out the week’s Top Ten Table for reductions to forecasts.

Enormous, comes to mind.

The week’s heaviest blows to forecasts was reserved for Nufarm, oOh!media, and Woodside Petroleum. Investors should expect more of the same in the week(s) ahead.

In the good books

AGL ENERGY LIMITED (AGL) was upgraded to Neutral from Sell by UBS B/H/S: 0/4/3

UBS upgrades to Neutral from Sell, believing the share price is now at fair value. The broker considers the balance sheet enviable along with the dividend yield. The fundamental concern is that the stock is over-exposed to falling wholesale electricity prices while securing value-accretive growth is challenged. Target is reduced to $18.00 from $18.80.

See downgrade below.

BRAMBLES LIMITED (BXB) was upgraded to Outperform from Neutral by Macquarie B/H/S: 4/2/0

Consumable product volumes are being supported by panic buying, benefiting pallet volumes, although there are higher costs Macquarie notes. Given the company’s highly defensive end-product exposure, the broker expects earnings should be resilient during a global recession. Profit estimates are marginally increased for FY20/21. Rating is upgraded to Outperform from Neutral and the target raised to $12.90 from $12.50.

CHARTER HALL LONG WALE REIT (CLW) was upgraded to Outperform from Neutral by Macquarie B/H/S: 3/1/0

Charter Hall Long WALE REIT has long lease terms and strong tenant covenants. The balance sheet is also strong, Macquarie observes, with no refinancing risk until FY23. One of the key risks is pub/hotels, which provide 13% of earnings. While it is unclear how much funding landlords will provide, the broker notes this will have a short-term impact. Rating is upgraded to Outperform from Neutral as Macquarie expects the solid balance sheet will underpin the distribution in the medium term and the risk from rental abatements is lower versus peers. Target is reduced to $5.50 from $5.61.

CALTEX AUSTRALIA LIMITED (CTX) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 1/4/0

Ord Minnett upgrades to Accumulate from Hold, having reviewed earnings estimates for the oil refining stocks. Restrictions on international air travel and a significant reduction in domestic flights should dramatically reduce demand for jet fuel. Meanwhile, retail fuel margins have been very strong in February and March, a positive. Ord Minnett prefers Caltex Australia versus Viva Energy (VEA) as the latter’s product mix is a headwind and there is limited potential for cost savings. Target is reduced to $26.50 from $30.00.

IDP EDUCATION LIMITED (IEL) was upgraded to Buy from Accumulate by Ord Minnett, to Buy from Sell by UBS and to Add from Hold by Morgans B/H/S: 5/0/0

The company has raised $240m, and increased the size of its debt facility by $150m. There is also a series of cost reduction initiatives announced. The coronavirus crisis is likely to cause a material disruption to the business but Ord Minnett asserts structural drivers underpinning international student mobility have not changed. With enhanced capital flexibility and a strong long-term outlook the broker upgrades to Buy from Accumulate. Target is reduced to $16.98 from $22.34.

While the next 6-9 months will be challenging, UBS assesses the $190m capital raising and incremental debt facilities provide ample flexibility. While student-related revenue should return to normal after the coronavirus disruptions, the broker envisages some risk to business/immigration related IELTS testing. Valuation previously held UBS back but now the stock is trading on an FY22 PE estimate of 22.6x the rating is upgraded to Buy from Sell. Target is reduced to $13.95 from $18.90.

IDP Education was travelling along fine at the beginning of the year before the wheels fell off in March, a trading update revealed. This has prompted a $240m capital raising and debt refinancing. Morgans has cut earnings per share forecast by over -40% and does not expect a full recovery until FY22. The broker notes, nonetheless, the nature of IDP’s business means it may recover faster than expected, and a strengthened balance sheet will make the company better positioned, operating as a large global player with limited competition. Target falls to $15.07 from $24.49. Upgrade to Add from Hold.

IOOF HOLDINGS LIMITED (IFL) was upgraded to Hold from Lighten by Ord Minnett B/H/S: 1/5/0

Ord Minnett upgrades to Hold from Lighten. Earnings estimates are reduced as a result of marking to market. The broker suspects the current crisis will likely change the short-term focus of the corporate and prudential regulators. There remains some risk the market slump may create other issues within the sector, but large operators such as IOOF are likely to fare better than smaller ones in the broker’s opinion. Target is reduced to $4.50 from $7.00.

MAGELLAN FINANCIAL GROUP LIMITED (MFG) was upgraded to Neutral from Underperform by Macquarie B/H/S: 2/3/2

Macquarie continues to believe Magellan Financial is the highest quality fund manager on the ASX. However, following the recent rally and perceived flight to quality, the stock is considered fairly valued. Marking to market reduces funds under management by -12% in February and March. Rating is upgraded to Neutral from Underperform and the target reduced to $50 from $60.

MOUNT GIBSON IRON LIMITED (MGX) was upgraded to Neutral from Sell by Citi B/H/S: 1/1/0

Citi’s commodity analysts have shifted from a base case to a bear case in the short term, leading to cuts to all metal and mineral price forecasts and a subsequent cut to earnings for the miners, net of forex. For iron ore, earnings actually rise initially on a mark-to-market basis, but the broker expects the price to fall to US$70/t. My Gibson Iron’s earnings forecasts are also impacted by the virus disrupting volumes on Koolan Island, but given the company has $400m in cash, it’s in a very different situation to peers. A big fall in share price leads the broker to upgrade to Neutral (High Risk) from Sell. Target falls to 75c from 80c.

PENDAL GROUP LIMITED (PDL) was upgraded to Neutral from Underperform by Credit Suisse and to Outperform from Neutral by Macquarie B/H/S: 4/3/0

Credit Suisse lowers estimates for earnings by -11% in FY20, -25% FY21 and -25% in FY22. This is driven by lower funds under management from the drop in equity markets and an assumption that markets will remain flat for the remainder of 2020. The broker estimates that only around 5% of JO Hambro retail is outperforming over one year and only 50% over three and five years as of the end of February 2020. As the share price is down -44% over the last three months, and having downgraded estimates, the broker is more comfortable with its earnings forecasts. Target is reduced to $4.90 from $6.60 and the rating upgraded to Neutral from Underperform.

Following recent market movements, Macquarie reviews the impact on Pendal Group. The relative performance is improving and, following a recent de-rating, the stock is now trading around -27% below the five-year average. Macquarie considers this an attractive entry point and upgrades to Outperform from Neutral. Target is reduced to $6.00 from $8.75.

PERPETUAL LIMITED (PPT) was upgraded to Neutral from Underperform by Macquarie B/H/S: 1/5/1

Following recent market movements, Macquarie reviews the impact on Perpetual. The relative equities performance is improving and fixed income has moderated. The broker has no issues with the balance sheet and does not expect Perpetual to pursue any additional offshore acquisitions in the current environment. Macquarie considers the valuation more appealing now and upgrades to Neutral from Underperform. Target is reduced to $27.50 from $40.00.

SCENTRE GROUP (SCG) was upgraded to Overweight from Underweight by Morgan Stanley B/H/S: 3/1/2

Morgan Stanley upgrades to Overweight from Underweight, believing Scentre Group is one of the best placed stocks to outperform after the crisis has passed. There is valuation support and the broker considers the demographics exposure enviable. Morgan Stanley acknowledges retail sentiment is low and there are headwinds, but the company’s shopping centres are located in the wealthiest suburbs. Target is reduced to $2.20 from $3.11. Industry view: In Line.

SHOPPING CENTRES AUSTRALASIA PROPERTY GROUP (SCP) was upgraded to Overweight from Underweight by Morgan Stanley B/H/S: 1/4/1

Morgan Stanley upgrades to Overweight from Underweight, believing the company is one of the best placed to outperform after the crisis has passed. The stock has one of the best defensive aspects, in terms of its shopping centres being located in regional areas where housing affordability and serviceability are superior compared with peers. There is also the highest exposure to supermarkets and lowest exposure to the shrinking department store sector compared with the rest of the sector under the broker’s coverage. In-Line industry view. Target is raised to $2.90 from $2.45.

TRANSURBAN GROUP (TCL) was upgraded to Buy from Neutral by UBS B/H/S: 3/2/2

UBS assumes a three-month shock to traffic, whereby Australian private vehicle traffic declines -50% and heavy vehicles -20%. This is slightly greater than the current rate, but more moderate than international anecdotes. While the duration of the disruption is unclear, the broker points out traffic should be one of the first activities to recover. The company has disclosed $3.5bn in liquidity against $2.9bn of capital expenditure requirements and debt refinancing to June 2021. This suggests to the broker that the disruption in the bond market should be manageable. UBS upgrades to Buy from Neutral and reduces the target to $13.85 from $16.05.

See downgrade below.

WEBJET LIMITED (WEB) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 3/1/1

The company has addressed liquidity for the short term and Credit Suisse upgrades to Outperform from Neutral. The main focus is now on managing the cash burn and collecting debts. The broker assesses the market disruption could create a significant opportunity for the company’s “bedbank” division by way of industry consolidation. The equity raising is expected to raise a total of $346m. Target is $4.50.

In the not-so-good books

AGL ENERGY LIMITED (AGL) was downgraded to Hold from Add by Morgans B/H/S: 0/4/3

A drop in European electricity demand is a sign of what’s ahead in Australia. Morgans expects demand to remain resilient in essential retail and heavy industries but bad debts are expected to grow among retail customers. Spot prices are now significantly weaker. The balance sheets of both AGL Energy and Origin Energy are strong, the broker notes, but cash flow will be challenging for Origin in FY21. AGL downgraded to Hold from Add. Target falls to $17.39 from $18.35.

See upgrade above.

DOMINO’S PIZZA ENTERPRISES LIMITED (DMP) was downgraded to Hold from Add by Morgans B/H/S: 2/3/2

It’s a case of pros and cons for fast food chains at this time, Morgans notes, as an increase in home delivery demand is offset by a drop-off in store pick-ups, pantry loading and a lack of footy on TV to drive demand. Store closures in France and NZ add to the issues for Domino’s Pizza, and an update shows slowing sales. The broker does not see a significant earnings hit, but is mindful that the stock fell only -8% in March compared to -21% for the index, thus there is a risk of earnings disappointment. All will revert quickly on the other side, but for now the broker pulls back to Hold from Add and awaits further updates. Target falls to $57.19 from $58.67.

NIB HOLDINGS LIMITED (NHF) was downgraded to Neutral from Buy by UBS B/H/S: 2/4/1

A drop in private health insurance claim costs is increasingly likely, although UBS suggests the potential earnings implications are less clear. Moreover, postponing premium rises, providing hardship relief and other initiatives could reduce net benefits for listed insurers. Hence, value upside appears constrained and the broker downgrades to Neutral from Buy. Target is raised to $5.10 from $4.75.

NEXTDC LIMITED (NXT) was downgraded to Neutral from Outperform by Macquarie B/H/S: 4/2/0

The company has raised $672m to provide flexibility and accelerate the development of S3. Macquarie notes demand from hyper-scale and enterprise customers remains strong. NextDC is one of the few businesses to benefit from the current crisis and has reaffirmed FY20 guidance. Still, while remaining positive on the outlook, the broker considers the stock fully valued. Rating is downgraded to Neutral from Outperform and the target lowered to $8.50 from $8.80.

QANTAS AIRWAYS LIMITED (QAN) was downgraded to Underperform from Neutral by Credit Suisse B/H/S: 3/1/1

Credit Suisse forecasts Qantas to gain a $290m benefit from the federal government’s JobKeeper subsidies. However, the longer the shut-down, the more difficult and costly the re-start will be, in the broker’s view. Credit Suisse pushes out expectations for a full recovery to FY23. Cash flow is expected to be steered towards balance sheet repair and fleet renewal once the crisis is over. Rating is lowered to Underperform from Neutral. Target is $2.20.

REDBUBBLE LIMITED (RBL) was downgraded to Reduce from Add by Morgans B/H/S: 0/0/1

Redbubbles’ sales growth has slowed and become more volatile due to the increasing toll on consumer finances. The company had $31m in cash at the end of March, Morgans notes, and has taken steps to reduce costs. Guidance for becoming cash flow positive has nevertheless been withdrawn. The broker cuts forecasts and now anticipates a capital raising in the second half of 2020. Target falls to 50c from $1.53, double-downgrade to Reduce from Add.

SONIC HEALTHCARE LIMITED (SHL) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 4/2/1

Ord Minnett reviews its forecasts, resulting in further reductions to estimates, albeit partially offset by a higher contribution from coronavirus testing. The broker expects the business will recover rapidly when the lock-down is lifted but remains wary about the market underestimating the hit to earnings in the short term. Rating is downgraded to Hold from Accumulate and the target is lowered to $27.50 from $28.50.

SYDNEY AIRPORT HOLDINGS LIMITED (SYD) was downgraded to Underperform from Neutral by Credit Suisse B/H/S: 4/1/2

Credit Suisse expects international passengers will be down -70% and domestic down -58% in 2020. A slower recovery is expected after the crisis, with the broker now expecting full passenger recovery will be delayed until 2023 for domestic and 2024 for international. No dividend is expected in 2020. Credit Suisse assumes Sydney Airport grants some level of rent relief to tenants, or tenants default. Rating is downgraded to Underperform from Neutral. Target is reduced to $4.50 from $5.00.

TRANSURBAN GROUP (TCL) was downgraded to Underperform from Neutral by Credit Suisse B/H/S: 3/2/2

Traffic deteriorated through March although heavy vehicle traffic was resilient. Credit Suisse forecasts a -40% decline in traffic over the next six months. The broker notes the company’s liquidity is sufficient, with unrestricted cash of $400m and undrawn credit facilities of $3.1bn. FY21 distribution estimates are reduced by -38%. The broker suspects companies may become more risk averse after the crisis, which could lead to more conservative capital structures and cash being steered to strengthen balance sheets rather than restoring dividend pay-outs to historical levels. Rating is downgraded to Underperform from Neutral and the target is $10.65.

See upgrade above.

VIVA ENERGY GROUP LIMITED (VEA) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 2/4/0

Ord Minnett reviews earnings estimates for the oil refining & marketing sector. The broker downgrades to Hold from Accumulate, despite recent share price weakness. The company’s product mix is considered a headwind and there is limited potential for cost savings. Hence, the broker prefers Caltex Australia (CTX). Target is reduced to $1.40 from $2.25.

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.