In the good books
CENTURIA OFFICE REIT (COF) was upgraded to Buy from Neutral by UBS
UBS expects the pandemic will affect Centuria Office less than the broader sector. While earnings guidance has been withdrawn the distribution guidance is maintained. The broker upgrades to Buy from Neutral, assessing the reaction is overdone and given a -10% underperformance compared with the sector. Target is reduced to $2.50 from $3.02.
GPT GROUP (GPT) was upgraded to Buy from Neutral by UBS
UBS upgrades GPT to Buy from Neutral on valuation grounds. The broker expects the east coast office and logistics market should remain attractive to global investors. The broker allows for short-term abatements for relevant tenants and has also revised longer-term assumptions. Funds management earnings are also revised down. Target is reduced to $4.70 from $6.35.
INCITEC PIVOT (IPL) was upgraded to Buy from Hold by Ord Minnett
Ord Minnett notes the near-term outlook for fertiliser prices is soft but the company should benefit from improved weather conditions in Australia and the US. Currency movements are also favourable and the broker upgrades to Buy from Hold. Target is reduced to $2.95 from $3.40.
ORICA (ORI) was upgraded to Buy from Neutral by UBS and to Hold from Lighten by Ord Minnett
The stock has dropped -25% over the past 2 months yet UBS expects explosives volumes will remain relatively resilient over the medium term. The broker points out Orica is Australia’s largest mining services company and, globally, a leading supplier of explosives to the mining sector. FY20 and FY21 forecasts for earnings per share are reduced by -6%. UBS upgrades to Buy from Neutral and reduces the target to $21.38 from $23.90.
Ord Minnett upgrades to Hold from Lighten based on valuation, supported by favourable currency movements for the company’s US earnings. Target is reduced to $17.80 from $18.10.
OIL SEARCH (OSH) was upgraded to Neutral from Underperform by Credit Suisse
Credit Suisse found no major surprises in the March quarter result. The sell-off in the stock has brought back the value proposition and the broker considers growth is now appropriately priced. The main concern is that growth may not return even if oil prices recover. In 2021 PNG government negotiations could once again weigh on the share price. On the back of the sell-off in the stock the broker upgrades to Neutral from Underperform. Target is reduced to $2.45 from $2.47.
SCENTRE GROUP (SCG) was upgraded to Neutral from Underperform by Macquarie
A review of the discretionary mall outlook in Australia suggests to Macquarie rents need to decline by -15%, leading to an earnings decline for Scentre Group of -27%, increasing gearing to 38%. To reduce gearing to 35%, Scentre would need to sell $2bn of assets or raise $1.2bn of new capital, the broker calculates. However were either to occur, the stock would still be offering a 7.6-7.9% dividend yield and a price to net asset value discount of -32%. Given the value on offer, Macquarie upgrades to Neutral from Underperform. Target falls to $2.18 from $2.34.
VICINITY CENTRES (VCX) was upgraded to Outperform from Underperform by Macquarie
Macquarie has reviewed the discretionary retail REIT sector and assessed the implications for Vicinity Centres. The broker believes the balance sheet can sustain a -15% fall in asset values, but capital may need to be raised if value falls further. The broker is assuming a -25% fall in values in its $1.70 target price, plus an additional -5% risk discount. However, this still suggests value is on offer, hence despite cyclical and structural headwinds and a share price bounce from the bottom, while noting Vicinity has a strong balance sheet, Macquarie double-upgrades to Outperform from Underperform.
In the not-so-good books
APA GROUP (APA) was downgraded to Hold from Add by Morgans
APA Group has revised down FY20 operating earnings (EBITDA) guidance to $1635-1655m, i.e. 4-6% growth, as a result of delays in reaching commercial operations on the Orbost gas processing plant. Distribution guidance is unchanged. Morgans notes since lifting the stock to Add on March 12 the share price has lifted 11%. Hence, the rating moves back to Hold. Target is reduced to $10.81 from $10.90.
EVOLUTION MINING (EVN) was downgraded to Sell from Hold by Ord Minnett
Ord Minnett notes ASX-listed gold stocks have continued to rally, with some outperforming the Australian dollar gold price by a further 25% since the beginning of April. Margins remain elevated, although some valuations are becoming stretched. Evolution Mining’s rating is downgraded to Sell from Hold. Target is steady at $3.70.
FINEOS CORPORATION HOLDINGS (FCL) was downgraded to Hold from Buy by Ord Minnett
Ord Minnett assesses, since the market peak on February 21, the company has outperformed the ASX 200 by 25%. The main issue for the broker is whether the fall-out from the pandemic causes a short delay in revenue growth or a more protracted slowdown. Rating is downgraded to Hold from Buy and the target lowered to $3.59 from $3.85.
G8 EDUCATION (GEM) was downgraded to Underperform from Neutral by Macquarie
The institutional placement portion (182m shares) of G8 Education’s $301m raising begins trading tomorrow. The raising shores up the company’s balance sheet, while the government assistance package should lead to a break-even of revenues and costs, management suggests. Macquarie nevertheless sees excess supply to continue until 2022 as development projects complete and ramp up post-virus. On the demand side, the broker sees a drop when government assistance ends due to higher unemployment. Ahead of the new shares coming on, the broker downgrades to Underperform from Neutral. Target unchanged at 78c.
GOLD ROAD RESOURCES (GOR) was downgraded to Neutral from Outperform by Macquarie
Gold Road’s March quarter production was below expectation due to planned mill shutdowns. The company has maintained Gruyere guidance but warned the virus has the potential to drive downgrades or complete withdrawal. However, management believes the shutdowns will add stability and consistency to progressing performance. Due to the run up in the share price, Macquarie pulls back to Neutral from Outperform. Target unchanged at $1.60.
LIVETILES (LVT) was downgraded to Neutral from Buy by Citi
Citi considers the company’s move to materially reduce cash burn is prudent. Further afield, a permanent increase in working from home could accelerate the adoption of the digital workplace solutions over the medium term. Citi lowers FY20-22 revenue forecasts by -13-26%, assuming customers delay or cancel transformation projects because of the recession. Rating is downgraded to Neutral/High Risk from Buy/High Risk. Target is reduced to $0.28 from $0.39.
MAGELLAN FINANCIAL GROUP (MFG) was downgraded to Hold from Buy by Ord Minnett
Despite meaningfully upgrading forecasts, Ord Minnett considers Magellan Financial is trading at fair value and downgrades to Hold from Buy. Target is raised to $48.60 from $44.25. That said, the business remains one of the best performing global managers under coverage, in the broker’s view, with a strong foundation for growth in retail flows as the business emerges from the pandemic crisis.
METCASH (MTS) was downgraded to Hold from Accumulate by Ord Minnett
Metcash will raise $330m in equity to provide a liquidity buffer. The company has noted very strong supermarket sales, up 40% in March, ex tobacco and Drakes. Liquor has been more negatively affected by the on-premises and NZ closures. Citi retains a Neutral rating, noting the underlying performance has stabilised although the capital raising dilutes growth and there is a weak growth profile. Target is reduced to $2.95 from $3.
NORTHERN STAR RESOURCES (NST) was downgraded to Lighten from Hold by Ord Minnett
Ord Minnett notes ASX-listed gold stocks have continued to rally (see Evolution Mining downgrade above). Forecasts are largely unchanged, although Northern Star has experienced some pandemic-related productivity losses. Rating is downgraded to Lighten from Hold. Target is $11.20.
OCEANAGOLD CORPORATION (OGC) was downgraded to Hold from Accumulate by Ord Minnett
Ord Minnett notes ASX-listed gold stocks have continued to rally (see Evolution Mining downgrade above). Forecasts for OceanaGold are tweaked to allow for the closures in New Zealand. Margins remain elevated, although some valuations are becoming stretched. Rating is downgraded to Hold from Accumulate. Target is reduced to $2.20 from $2.80.
SOUTH32 (S32) was downgraded to Neutral from Outperform by Macquarie
South32’s quarterly update revealed production of most key commodities falling short of Macquarie’s expectations. Headwinds are increasing, with current spot prices suggesting -35% lower earnings than the broker’s FY21-22 forecasts. Free cash flow becomes marginal at current spot prices, the broker warns. Downgrade to Neutral from Outperform, target falls to $2.10 from $2.40.
SYDNEY AIRPORT HOLDINGS (SYD) was downgraded to Hold from Accumulate by Ord Minnett
Sydney Airport is taking a range of measures to mitigate the loss of traffic, which declined -96% in the first 16 days of April. The interim distribution has been cancelled and liquidity is increased via new bank facilities. Ord Minnett believes this is a great infrastructure asset which will recover, although the extent of the headwinds and duration is likely to be greater than previously assumed, particularly for international travel. Rating is downgraded to Hold from Accumulate and the target lowered to $5.60 from $5.80.
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.