In the good books
- ABACUS PROPERTY GROUP (ABP) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett notes, since the pandemic has affected markets, A-REITs have fallen -40% while the S&P ASX 200 index has declined -27%. As a result, the broker makes changes to recommendations for around half of its coverage. December 2019 book values are expected to be impaired for all property sectors over the next 12-18 months, from revised cash flow and growth assumptions and higher capitalisation rates. Abacus Property is upgraded to Accumulate from Hold and the target is lowered to $2.70 from $3.30. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
- ARENA REIT (ARF) was upgraded to Outperform from Neutral by Macquarie
Macquarie observes government policy has tilted to support the sector and the valuation is attractive. Childcare operators will receive a subsidy if services are kept open and not charged. The funding will apply from April 6. While downside risks may exist for commercial leases in the broader sense, Macquarie believes any regulatory headwinds will be directed towards financially-distressed tenants. Rating is upgraded to Outperform from Neutral. Target is reduced to $2.45 from $3.20.
- AUSNET SERVICES (AST) was upgraded to Outperform from Neutral by Macquarie
Macquarie considers the valuation compelling, although growth may be limited in the current transmission investment phase. The industry has limited direct sensitivity to the pandemic and the stock is seen as defensive with a sustainable dividend. Rating is upgraded to Outperform from Neutral and the target lowered to $1.87 from $1.90.
- BHP GROUP (BHP) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse believes this is a rare opportunity to buy BHP Group and upgrades to Outperform from Neutral. The company has a portfolio of large projects in attractive markets. As BHP looks to exit the thermal coal business, Credit Suisse expects proceeds will be handed over to shareholders as no further de-leveraging is required. Even in more extreme downside scenarios, no pressure on the balance sheet and dividend is expected over the next 12 months. Target is reduced to $39 from $41.
- CARINDALE PROPERTY TRUST (CDP) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett has made changes to recommendations for around half of its coverage of A-REITs (See Abacus Property Group upgrade above). Carindale Property is upgraded to Accumulate from Hold. Target is reduced to $3.60 from $5.20.
- COLES GROUP (COL) was upgraded to Overweight from Underweight by Morgan Stanley
Morgan Stanley is more confident in the improved top-line prospects of supermarkets. Medium-term support is predicated on a view that the current disruption (panic buying) will be followed by a broader recession. This should be supportive of the supermarkets’ share of consumption. Coles is considered best placed to weather the disruption and its lower PE and higher pay-out ratio are likely to be increasingly attractive, in the broker’s view. Rating is upgraded to Overweight from Underweight and the target raised to $17.75 from $14.50. Industry view: Cautious.
- COMPUTERSHARE (CPU) was upgraded to Neutral from Underperform by Macquarie
The company has downgraded FY20 and FY21 guidance by further -5% and -3% respectively. Macquarie incorporates a further -11% downside to margin income in FY21. Despite this, the broker believes the stock is beginning to show signs of value and upgrades to Neutral from Underperform. Target is reduced to $10.90 from $12.13.
- DOWNER EDI (DOW) was upgraded to Outperform from Underperform by Credit Suisse
Credit Suisse expects Spotless will breach its debt covenants by the end of the year. Downer EDI is expected to remain within its debt covenants. The broker suspects the company can survive the current crisis without a capital raising but would not rule one out. Spotless is expected to be severely impacted for up to 6 months because of restrictions on public events. Most of costs in the business are labour and the company is likely to cut costs by standing down staff. Rating is upgraded to Outperform from Underperform. Target is reduced to $4 from $6.80.
- FLIGHT CENTRE (FLT) was upgraded to Add from Hold by Morgans
Flight Centre has raised $700m in new capital, increasing shares on issue by 96%. Morgans’ earnings per share forecasts fall -248% and -153% in FY20-21. Large losses are expected in FY20 and FY21, before a recovery in FY22-23. The broker now believes the company has enough capital to weather the storm. Looking forward to normalised earnings in FY22-23, the broker sees an attractive valuation. Upgrade to Add from Hold. Target falls to $13.00 from $20.98.
- GROWTHPOINT PROPERTIES AUSTRALIA (GOZ) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett has made changes to recommendations for around half of its coverage of A-REITs (See Abacus Property Group upgrade above). The broker upgrades to Accumulate from Hold and reduces the target to $3.00 from $3.65.
- GPT GROUP (GPT) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett has made changes to recommendations for around half of its coverage of A-REITs (See Abacus Property Group upgrade above). GPT is upgraded to Accumulate from Hold. Target is reduced to $4.30 from $5.80.
- ALE PROPERTY GROUP (LEP) was upgraded to Hold from Lighten by Ord Minnett
Ord Minnett has made changes to recommendations for around half of its coverage of A-REITs (See Abacus Property Group upgrade above). Ord Minnett upgrades to Hold from Lighten and reduces the target to $4.00 from $4.10.
- MEGAPORT (MP1) was upgraded to Buy from Neutral by UBS
The company has delivered the acceleration UBS was looking for in the second quarter result. The broker is a strong believer in the long-term structural shift to the cloud. Moreover, the current period of self-isolation could accelerate the uptake of the cloud and multi-cloud services. UBS expects a maiden quarterly positive operating earnings result in the fourth quarter of FY21, which is likely to be a major turning point for the business. Rating is upgraded to Buy from Neutral and the target raised to $11.90 from $11.75.
- MIRVAC GROUP (MGR) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett has made changes to recommendations for around half of its coverage of A-REITs (See Abacus Property Group upgrade above). Mirvac is upgraded to Accumulate from Hold. The target is reduced to $2.40 from $2.90.
- OIL SEARCH (OSH) was upgraded to Accumulate from Hold by Ord Minnett
Oil Search has raised US$700m to address concerns over the balance sheet. Ord Minnett considers this prudent, although the unfortunate consequence of the drop in oil prices is that the company has raised up to 36% of its market capitalisation at a price well below valuation. Still, the assets remain of high quality and there is corporate appeal. Hence, the broker upgrades to Accumulate from Hold. Target is reduced to $3.40 from $3.50. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
- REECE (REH) was upgraded to Neutral from Sell by Citi
Reece has announced a $600m equity raising to reduce net debt and improve liquidity, and provide some optionality for growth, Citi notes. The broker sees the move as logical, but has slashed earnings forecasts to reflect subsequent dilution and lower revenue in the new construction market. At the moment, sales both domestically and in the US are holding up well, management noted, but risk is dependent on the duration of the shutdown. Target falls to $8.85 from $10.50. Upgrade to Neutral from Sell.
See downgrade below.
- SANTOS (STO) was upgraded to Overweight from Equal-weight by Morgan Stanley
The stock has sold off along with the broader energy market but Morgan Stanley suspects Santos is on firm ground, given its actions since 2016. The company has the balance sheet to withstand a number of years of very low oil prices and has growth options in its assets. The broker is looking to position in companies that can handle depressed prices over the medium term in case it takes longer for oil to recover. Rating is upgraded to Overweight from Equal -weighted and the target raised to $5.00 from $4.25. Cautious industry view.
- STOCKLAND (SGP) was upgraded to Accumulate from Lighten by Ord Minnett
Ord Minnett has made changes to recommendations for around half of its coverage of A-REITs (See Abacus Property Group upgrade above). Stockland is upgraded to Accumulate from Lighten and the target reduced to $3.10 from $3.90.
- SUNCORP GROUP (SUN) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett expects the general insurance business could benefit from reduced claims in motor vehicles, offset partially by possible landlord insurance claims. The broker expects the banking division will suffer from margin pressures and a rise in bad debts, although this will be less than for the major banks. The broker reviews earnings forecasts and upgrades to Accumulate from Hold as a result. Target is reduced to $12.83 from $13.41.
- VICINITY CENTRES (VCX) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett has made changes to recommendations for around half of its coverage of A-REITs (See Abacus Property Group upgrade above). The broker’s analysis suggests impairments of around -30% are likely for retail malls. Rating is upgraded to Accumulate from Hold and the target lowered to $1.50 from $1.85.
- WEBJET (WEB) was upgraded to Equal-weight from Underweight by Morgan Stanley
The company has recapitalised, raising around $346m, which results in a -150% dilution. Morgan Stanley notes unusual events and the lack of a buffer have led to significant value dilution. Morgan Stanley reduces FY20 earnings estimates by -93% and FY21 by -84%. The broker does not have a conviction on earnings in order to maintain a strong view on the valuation. Rating is upgraded to Equal-weight from Underweight, largely because of the improved liquidity and minimal visibility on earnings. The market is expected to look through the FY20 and FY21 results. Target is reduced to $2.50 from $10.00. Industry View is In-Line.
In the not-so-good books
- CHARTER HALL LONG WALE REIT (CLW) was downgraded to Hold from Buy by Ord Minnett
Ord Minnett has made changes to recommendations for around half of its coverage of A-REITs (See Abacus Property Group upgrade above). The broker’s analysis suggests impairments of around -5% are likely for neighbourhood centres, long WALE and industrial assets. Rating is downgraded to Hold from Buy and the target lowered to $3.90 from $5.10.
- CHARTER HALL RETAIL REIT (CQR) was downgraded to Lighten from Hold by Ord Minnett
Ord Minnett has made changes to recommendations for around half of its coverage of A-REITs (See Abacus Property Group upgrade above). The broker’s analysis suggests impairments of around -5% are likely for neighbourhood centres, long WALE and industrial assets. The broker downgrades to Lighten from Hold and reduces the target to $2.60 from $4.00.
- DEXUS PROPERTY GROUP (DXS) was downgraded to Hold from Accumulate from Ord Minnett
Ord Minnett has made changes to recommendations for around half of its coverage of A-REITs (See Abacus Property Group upgrade above). The broker’s analysis suggests impairments of around -15-25% for office assets. Rating is downgraded to Hold from Accumulate and the target lowered to $8.50 from $12.40.
- METCASH (MTS) was downgraded to Equal-weight from Overweight by Morgan Stanley
Morgan Stanley is more confident in the improved top-line prospects of supermarkets. Medium-term support is predicated on a view that the current disruption (panic buying) will be followed by a broader recession. This should be supportive of the supermarkets’ share of consumption. Morgan Stanley downgrades to Equal-weight from Overweight as the stock has materially outperformed peers. Industry view: Cautious. Target is reduced to $2.90 from $2.95.
- NEXTDC (NXT) was downgraded to Hold from Add by Morgans
NextDC has announced a $672 capital raising at $7.80 to accelerate current fit-outs for third generation data centres in Sydney and Melbourne. The raising will ensure the balance sheet is in good shape, Morgans notes. Target is slightly reduced to $8.56 from $8.73 to account for a higher share-count but the raising significantly de-risks the stock and broker views the medium term outlook as positive. So does the market, hence following a strong share price run Morgans pulls back to Hold from Add.
- OTTO ENERGY (OEL) was downgraded to Reduce from Add by Morgans
The company’s risk profile has greatly increased, Morgans assesses, given the unprecedented conditions. The company is seeking to raise $17.5m, more than its current market capitalisation, to try and put its balance sheet back on firmer ground. If the current conditions persist, the broker finds little earnings potential over the remainder of 2020 and 2021. While the broker is positive about the portfolio, the pressure on the balance sheet and the major headwinds for oil have affected confidence. Rating is downgraded to Reduce from Add and the target lowered to 0.4c from 5.5c.
- REECE (REH) was downgraded to Hold from Add by Morgans
Shutdowns are likely to put significant pressure on underlying demand for Reece products and thus revenue generation over FY20-21, Morgans warns. This will likely lead to reduced growth plans. The company will keep its stores open for essential water and sanitation product supply. Current uncertainty and high gearing see Morgans pull back to Hold from Add, while still highlighting the longer term potential of the business. Target falls to $10.16 from $12.84.
See upgrade above.
- SCENTRE GROUP (SCG) was downgraded to Hold from Accumulate by Ord Minnett
Ord Minnett has made changes to recommendations for around half of its coverage of A-REITs (See Abacus Property Group upgrade above). The broker’s analysis suggests impairments of around -30% are likely for retail malls. Rating is downgraded to Hold from Accumulate. Target is lowered to $1.90 from $2.50.
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.
