IN THE GOOD BOOKS
G8 EDUCATION (GEM) was upgraded to Neutral from Underperform by Macquarie and to Buy from Neutral by UBS
G8 Education has raised $301m in 377 million new shares representing 82% of the prior issue. Government assistance is keeping the child care sector viable, Macquarie notes, with G8’s revenues and cash costs expected to be breakeven, but includes a -20% rent reduction not yet locked in. The raising has reduced balance sheet concerns and the broker has lifted its target to 78c from 50c, upgrading to Neutral from Underperform on expectation of short term share price strength. But Macquarie sees ongoing demand/supply challenges for the sector through to the end of 2021 and a structural drop in occupancy as a result of the virus.
UBS believes the government decision to support the childcare industry makes sense. The $301m equity raising has dramatically improved the balance sheet and should support the business through a period of weak conditions, the broker assesses. This should also provide additional ability to fund acquisitions. On balance, UBS considers the risk/return is skewed to the upside and upgrades to Buy from Neutral. Target is reduced to $1.30 from $1.75.
JB HI-FI (JBH) was upgraded to Buy from Neutral by UBS
UBS expects the current crisis to have a significant drag on the housing sector, characterised by falling house prices, a slowdown in completions and a drop in turnover. This is likely to be a headwind to household goods sales in FY21. Nevertheless, retailers such as JB Hi-Fi are envisaged having significant capacity to withstand the downturn. UBS upgrades to Buy from Neutral and believes the market is not factoring in the potential for market consolidation once the pandemic is over. Target is reduced to $39.70 from $43.00.
OIL SEARCH (OSH) was upgraded to Add from Hold by Morgans
Morgans does not find the capital raising surprising, given the pressure on some of the company’s debt, where a key interest covenant would be tested by the end of the year. This should now be a significant liquidity buffer for the next couple of years, even if oil prices are depressed. However, what this does not do is supply the company with adequate capital resources to support the development of its growth projects in Alaska and PNG. Nevertheless, given the improvement in the risk profile and the extent of recent weakness in the share price, the broker upgrades to Add from Hold. Target is raised to $3.53 from $3.16.
PENDAL GROUP (PDL) was upgraded to Add from Hold by Morgans
Funds under management were down -15.2% in the March quarter. Net outflows were largely concentrated in the Westpac-managed funds under management. Morgans considers market and share price volatility are likely to continue although, given a relatively undemanding valuation, the business is leveraged to any marked improvement. Rating is upgraded to Add from Hold on valuation support. Target is raised to $6.37 from $5.81.
PROSPA GROUP (PGL) was upgraded to Neutral from Underperform by Macquarie
Prospa Group has received access to the government’s SME scheme to help small businesses through the lock down, while the government’s Structured Finance Support Fund will materially assist non-ADI financial companies to manage customer assistance claims in a manner afforded ADIs (i.e. banks), Macquarie notes. The SME scheme, and potential SFSF access, alter the outlook for Prospa, the broker suggests. Upgrade to Neutral from Outperform. Target unchanged at 94c.
SMARTGROUP CORPORATION (SIQ) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse suggests SmartGroup is the type of stock where equity market dislocation provides an opportunity. There is a material revenue stream that is very defensive – salary packaging – and the business is light on capital requirements. The broker assesses the valuation is compelling on a 12-month view and upgrades to Outperform from Neutral. Target is reduced to $5.90 from $7.25.
IN THE NOT-SO-GOOD BOOKS
AFTERPAY (APT) was downgraded to Sell from Neutral by UBS
Afterpay has provided a trading update and details of measures taken in response to the virus. The company has enjoyed robust sales in the face of macro headwinds, the broker notes, and is managing risk exposures well at this stage. The update highlights levers Afterpay can pull to get the business through this period, backed by a strong balance sheet. The broker has trimmed earnings forecasts near term but not changed its long-term growth thesis. Outperform retained, target falls to $36 from $42.
ALTIUM (ALU) was downgraded to Hold from Buy by Ord Minnett
Ord Minnett reassesses the stock since upgrading to Buy on February 28, noting it has outperformed the ASX 200 by 17%. Hence, the rating is downgraded to Hold from Buy. Target is reduced to $28.30 from $32.50.
BLUESCOPE STEEL (BSL) was downgraded to Neutral from Buy by Citi
Citi now expects global GDP to contract by -2.3% in 2020, with advanced economies contracting by more than -4.5%. The broker expects the first half of FY21 to be the most affected, with domestic despatches of steel down -11%. Citi forecasts US steel demand to fall by -20% in 2020. EBIT estimates for BlueScope are cut by -37% for FY20. Rating is downgraded to Neutral from Buy. Target is lowered to $12 from $13.
COCA-COLA AMATIL (CCL) was downgraded to Hold from Accumulate by Ord Minnett
Ord Minnett reviews its investment thesis for Coca-Cola Amatil in light of the pandemic and resultant social distancing amid reduced tourism and weaker consumer activity. Estimates are reduced by -19% for FY20 and -14% for FY21. The potential for cost savings is unclear, giving previous cost-saving initiatives. Despite the recent decline in the share price, the broker assesses valuation support has been removed and the rating is downgraded to Hold from Accumulate. Target is lowered to $9.00 from $12.50. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
CSL (CSL) was downgraded to Neutral from Buy by Citi
CSL has reiterated FY20 guidance and Citi retains forecasts at the top end of this range of US$2.11-2.17bn. While CSL is yet to witness an impact from the pandemic on its specialty business and hospitals appear to be increasing stocks of immunoglobulin, plasma collections have dipped in late March. Citi expects the slowdown will be temporary and collections should return to normal around July. Rating is downgraded to Neutral from Buy as a result of the recent increase in the share price. Target is raised to $334 from $332.
GWA GROUP (GWA) was downgraded to Underperform from Neutral by Credit Suisse
Lock-down measures in New Zealand and the UK are expected to substantially affect volumes, as Credit Suisse understands only emergency repairs are permitted. Government wage subsidies are available in both regions. The broker models revenue to decline -14% in FY21 and end markets to trough in FY22. The broker also notes the commercial exposure to aged care and the hotel sectors, which face challenges from social distancing and travel constraints. Rating is downgraded to Underperform from Neutral and the target lowered to $2.20 from $3.65.
JAMES HARDIE INDUSTRIES (JHX) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse envisages a higher risk of an abrupt decrease in activity for the company, given its exposure to the repair & remodelling segments. This is around 60% of US sales. FY21 group net profit estimates are reduced by -39%. Gearing is also uncomfortably high for the broker, although not expected to test covenants. Rating is downgraded to Neutral from Outperform and the target lowered to $21.50 from $33.50.
NAVIGATOR GLOBAL INVESTMENTS (NGI) was downgraded to Neutral from Outperform by Macquarie and to Hold from Buy by Ord Minnett
Given underperformance in the March quarter, Navigator Global Investments is unable to accurately predict how this might impact assets under management flows and revenues and as such has withdrawn FY20 guidance. Until the level of outflows is clear, the outlook for the fund manager is uncertain, Macquarie warns. Downgrade to Neutral from Outperform. Target falls to $1.72 from $3.36.
The quarterly performance was below Ord Minnett’s expectations. Multi-strategy funds were the main source of disappointment, down -18% in the March quarter. Navigator Global has withdrawn FY20 operating earnings (EBITDA) guidance. Ord Minnett downgrades to Hold from Buy and lowers the target to $1.70 from $3.90. The broker prefers to sit on the sidelines to observe how Lighthouse Partners weathers the current crisis.
NETWEALTH GROUP (NWL) was downgraded to Hold from Buy by Ord Minnett
Specialist platforms have been resilient in the March quarter, amid ongoing net inflows that have supported funds under management in both bull and bear markets. Rising cash balances and higher transaction volumes have also provided a further buffer to revenue in soft markets. As Netwealth has rallied 60% from recent intraday lows, Ord Minnett downgrades to Hold from Buy. Target is raised to $7.70 from $7.55.
NEW HOPE CORPORATION (NHC) was downgraded to Neutral from Outperform by Macquarie
Macquarie has marked to market for March quarter bulk commodity prices and incorporated provisional pricing adjustments. Recent strong share price moves have eroded value upside. The broker retains a preference for iron ore miners on significant FY22 earnings upside at current spot prices. Recent declines in alumina and coal prices have increased downside risk for relevant miners. New Hope Corp downgraded to Neutral from Outperform, target unchanged at $1.50.
TREASURY WINE ESTATES (TWE) was downgraded to Underperform from Neutral by Macquarie
Treasury Wine Estates has warned of difficult trading conditions in the US and China and proposed the spin-off its jewel in the crown, Penfolds. Macquarie notes diversified alcohol brands tend to trade at a premium to individual brands. Penfolds has strong appeal but value in the rump of Treasury Wines would be diminished, the broker suggests. A spin-off would result in negative cost synergies and a likely rise in the cost of debt. Macquarie downgrades to Underperform from Neutral, with risks to the downside. Target falls to $9.50 from $9.90.
WHITEHAVEN COAL (WHC) was downgraded to Neutral from Outperform by Macquarie
Macquarie has marked to market for March quarter bulk commodity prices and incorporated provisional pricing adjustments (see New Hope Corporation downgrade above). Whitehaven Coal downgraded to Neutral from Outperform, target rises to $2.10 from $1.90.
WISETECH GLOBAL (WTC) was downgraded to Hold from Buy by Ord Minnett
Ord Minnett reassesses the stock since upgrading to Buy on February 28. As a result, the rating is downgraded to Hold from Buy and the target lowered to $16.70 from $18.70. Earnings estimates are unchanged.
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.