For the week ending Friday 17 April 2020, FNArena registered 12 upgrades in recommendations for individual ASX-listed stocks against 15 downgrades.
It means that total Buy recommendations carried by the seven stockbrokers monitored daily has failed to rise above 50%; at least for now. As at Friday, total Buy recommendations stood at 49.61% while Neutral/Hold ratings represent 41% of the total and Sell recommendations are on 9.3%.
Only three out of the seven stockbrokers carry more Buy ratings than Neutral/Holds; Citi, Macquarie and Morgans.
Six out of the twelve upgrades went to Buy (50%) while only four fresh Sell ratings were counted among the 15 downgrades. One went to Whitehaven Coal (disappointing quarterly update) which received two downgrades in total.
Afterpay, Flight Centre and WiseTech Global were responsible for the remaining three downgrades to Sell.
Metcash, OZ Minerals and Pushpay Holdings enjoyed mild increases to earnings estimates. On the opposite side of the week’s ledger, we find scorched earth and chainsaw carnage has been applied to forecasts for companies including Flight Centre, Qantas, QBE Insurance, G8 Education, and Sydney Airport.
As investors are increasingly showing their willingness to look beyond the immediate economic fall-out from the global pandemic, it will become of paramount importance to separate winners from losers, as illustrated by the week’s changes.
In the good books
ADELAIDE BRIGHTON LIMITED (ABC) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 3/3/1
Despite the prospects of a recession, Ord Minnett believes there is significant potential value in quality companies, such as those that are category leaders with proven business models, strong liquidity and significant valuation support. Adelaide Brighton’s rating is upgraded to Accumulate from Hold and the target is lowered to $3.00 from $3.20.
BWP TRUST (BWP) was upgraded to Neutral from Sell by UBS B/H/S: 0/1/1
UBS has reviewed its retail REIT valuations in light of the government’s new landlord/tenant “code of conduct”. While the code is tenant-friendly, the broker notes, there could be some offset for landlords in the form of state/local tax relief and covenant relief from banks. Balance sheets and liquidity positions are generally sound but the broker expects June half dividends to be withheld and longer term payout ratios reduced to preserve capital. Overall impact varies by REIT, subject to retail exposure. Upgrade to Neutral from Sell for BWP Trust, target rises to $3.37 from $3.24.
COCA-COLA AMATIL LIMITED (CCL) was upgraded to Neutral from Sell by Citi B/H/S: 2/5/0
Citi expects 2020 Australian earnings will drop -1% and New Zealand -9%, given reduced sales in the out-of-home channel. This channel represents around 40% of volume but may be around 50% of earnings (EBIT) on the broker’s estimates. Moreover, coronavirus cases continue to grow in Indonesia and the company’s products are likely to be adversely affected if celebrations around Ramadan are suppressed. While shareholders are attracted to the high and consistent dividend pay-out, Citi envisages the dividend will drop, but only modestly to $0.46 from $0.51 in 2020, with Citi suggesting there is potential for it to fall as low as $0.42. Rating is upgraded to Neutral from Sell, given the de-rating in the stock. Target is reduced to $10.10 from $10.60.
CHARTER HALL RETAIL REIT (CQR) was upgraded to Buy from Neutral by UBS B/H/S: 2/1/2
UBS has reviewed its retail REIT valuations in light of the government’s new landlord/tenant “code of conduct” (see BWP Trust upgrade above). Upgrade to Buy from Neutral for Charter Hall Retail, target falls to $3.50 from $4.80.
CSR LIMITED (CSR) was upgraded to Hold from Lighten by Ord Minnett B/H/S: 2/2/2
Despite the prospects of a recession, Ord Minnett believes there is significant potential value in quality companies, such as those that are category leaders with proven business models, strong liquidity and significant valuation support. CSR’s rating is upgraded to Hold from Lighten and the target lowered to $3.80 from $4.00.
INVOCARE LIMITED (IVC) Upgrade to Neutral from Sell by UBS B/H/S: 3/3/0
InvoCare’s business has been impacted by the government’s funeral restrictions but UBS sees a greater risk ahead stemming from lower flu-related deaths this year due to measures imposed on the elderly for Covid-19. InvoCare has de-risked its balance sheet in raising -$200m of new capital, which more importantly underpins the company’s Protect & Grow and acquisition strategies. The broker forecasts a -5% drop in volumes in FY20, with earnings gradually normalising by FY22. Target falls to $11.85 from $12.35. Upgrade to Neutral from Sell.
OZ MINERALS LIMITED (OZL) was upgraded to Add from Hold by Morgans B/H/S: 6/0/1
Morgans observes OZ Minerals was quick to implement mitigation strategies in view of the coronavirus crisis and has reported no material adverse effects to date. Carrapateena’s ramp up is ahead of schedule. Deferral of $150m in 2020 expenditure has eased any pressure on what was already a strong balance sheet, the broker points out. With the stock now trading at a -18% discount to valuation the rating is upgraded to Add from Hold. Target is reduced to $10.65 from $10.85. Morgans trims 2020-21 estimates by -8-10% because of weaker copper prices.
TRANSURBAN GROUP (TCL) was upgraded to Add from Hold by Morgans B/H/S: 4/1/2
Morgans makes further slight downgrades to reflect a deteriorating traffic profile. FY20-21 operating earnings (EBITDA) estimates are downgraded -2-3%. The broker now assumes 2022 will be the year when traffic will fully recover. While the traffic risk is heightened, the broker believes there is sufficient long-term value at current prices to accumulate the stock. Rating is upgraded to Add from Hold. Target is reduced to $13.71 from $13.78.
In the not-so-good books
AUSTRALIAN FINANCE GROUP LTD (AFG) was downgraded to Hold from Add by Morgans B/H/S: 1/1/0
Morgans expects most lenders will offer moratoriums on debt of up to 6 months for home-loan borrowers facing hardship. The interest is expected to be capitalised and the loans unlikely to be classified as arrears or non-performing. However, the issue the broker ponders is whether lenders will continue to pay trailing commissions in cases where moratoriums have been granted. Morgans expects Australian Finance’s board will be more conservative with dividend settings and significantly reduces earnings and dividend forecasts. Rating is downgraded to Hold from Add and the target lowered to $1.70 from $3.25.
AFTERPAY LIMITED (APT) was downgraded to Neutral from Buy by Citi B/H/S: 3/2/1
Citi continues to expect the business model will survive a recession and there is sufficient capital to accelerate growth when the situation normalises. However, growth is expected to slow significantly in the near term. Merchant sales are expected to be negatively affected by weak consumer discretionary expenditure and more stringent risk controls. Citi downgrades to Neutral/High Risk from Buy/High Risk. Target raised to $27.10 from $21.10.
FLIGHT CENTRE LIMITED (FLT) was downgraded to Lighten from Hold by Ord Minnett B/H/S: 5/0/0
The capital raising has served to illustrate the severity of the impact of the pandemic on the travel sector. Ord Minnett remains unconvinced of whether Flight Centre has enough cash to survive the crisis, assuming little or no revenue for the next 12-18 months. However, the prospect domestic travel opens up sooner than previously expected is a positive that could assist. Rating is downgraded to Lighten from Hold. The target is reduced to $8.96 from $21.54.
PENDAL GROUP LIMITED (PDL) was downgraded to Neutral from Buy by UBS B/H/S: 4/3/0
A reduction in Pendal Group’s March quarter assets under management of -15.2% outpaced that of the MSCI world index of -9% due to record outflows, UBS notes. The broker expects an improvement into FY21 as virus-related volatility subsides, but still sees headwinds for flows and performance fees in the higher margin JOHCM funds, posing a key risk to consensus forecasts. Given revenue pressures UBS expects cost controls to be a feature in the second half, but as the stock has rallied 55% off its lows the broker downgrades to Neutral. Target unchanged at $5.55.
RESOLUTE MINING LIMITED (RSG) was downgraded to Neutral from Outperform by Macquarie B/H/S: 1/1/0
The company has updated on the Syama oxide project in Mali. Strong results have been returned from satellite projects. The company is evaluating an underground sulphide operation, although Macquarie believes an extension of the high-grade oxide open pit would be more meaningful for the near term. The broker downgrades to Neutral from Outperform following recent strength in the share price. Target is lifted 5% to $1.05.
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.