The Australian share market has taken a breather from the strong rally off the 4400 sell-off low point and stockbroking recommendations are finding an equilibrium between downgrades and upgrades for individual ASX-listed entities.
For the week ending Friday, 24th April 2020 FNArena registered 15 upgrades and 17 downgrades, confirming a slight bias towards downgrades is creeping into the market as stocks made up for previously lost ground.
Total Buy recommendations for the seven stockbrokers monitored daily now sits at 49.45%, with 41.45% in Neutral/Holds and the remaining 9.09% in Sell ratings.
Only one stock received two upgrades during the week, Australian Pharmaceutical Industries, of which only one shifted to Buy. On the other side of the ledger, only one stock was downgraded twice, Evolution Mining, of which only one descended to Sell.
Five upgrades didn’t move beyond Neutral/Hold while only three of the downgrades shifted to a fresh Sell. Apart from Evolution Mining, fellow gold miner Northern Star and perennial disappointer G8 Education also received a fresh Sell rating.
Galaxy Resources leads a full table of upward adjustments to profit forecasts, which also includes Evolution Mining, a2 Milk, and Nearmap.
All of the above turns to grey when looked at the week’s table for negative adjustments to earnings estimates. Here the realisation kicks in that in order to make it into the week’s bottom top ten consensus forecasts had to fall by a minimum -25%.
Sydney Airport and Flight Centre took the biggest hits last week, followed by QBE Insurance, Cooper Energy, and others. The first recession in Australia since the early 1990s is having a devastating effect on corporate profit prospects, and it is very noticeable indeed.
In the good books
AUSTRALIAN PHARMACEUTICAL INDUSTRIES (API) was upgraded to Neutral from Underperform by Credit Suisse and to Buy from Neutral by Citi B/H/S: 1/1/1
First half operating earnings were slightly ahead of estimates. The company experienced increased demand for pharmaceuticals in March, as a result of both the pandemic and panic buying. Credit Suisse assumes a material slowdown over the next 3-6 months. No guidance was provided for the second half. All Priceline stores remain open but sales have slowed in April because of social distancing. Credit Suisse expects no dividend in the second half. Rating is upgraded to Neutral from Underperform and the target is reduced to $1.10 from $1.25.
First half results will were in line with indications by the company in late March. The result does not reflect any impact from the pandemic. In the light of an uncertain environment, Australian Pharmaceutical has suspended the dividend and provided no guidance for FY20. The biggest variable for the second half is the removal of the lock-down, which Citi assumes will be June 1 2020. The broker reduces estimates for FY20-22 by -17-22%. Rating is upgraded to Buy from Neutral and the target is reduced to $1.15 from $1.40.
ALUMINA LIMITED (AWC) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 3/3/0
The alumina market is weak, with the company effectively receiving no distributions in February and March. The June quarter will also be soft, although Credit Suisse notes the balance sheet is in good shape. While the environment remains tough and there are probably opportunities to buy the stock at a cheaper price the broker’s rating system triggers a move to Outperform from Neutral. Target is reduced to $1.80 from $2.40.
See downgrade below.
CARSALES.COM LIMITED (CAR) was upgraded to Outperform from Neutral by Macquarie B/H/S: 3/3/0
Most parts of Carsales’ business have been impacted, Macquarie notes. The company moved early to waive advertising costs in April and this will extend to a -50% discount in May, with further discounts possible. The payment of the dividend in April has not dented a robust balance sheet nonetheless, which should see Carsales through, the broker believes. To that end Macquarie upgrades to Outperform from Neutral, noting Carsales will remain a core and dominant platform as sales begin to recover over time. Target falls to $15.30 from $18.60.
CSR LIMITED (CSR) was upgraded to Outperform from Neutral by Macquarie B/H/S: 3/1/2
Macquarie assesses CSR has the strongest balance sheet in the sector while the valuation is attractive. Market conditions remain choppy, nevertheless, and housing market data is expected to get worse over coming months. While the risks are elevated, the broker considers the valuation and balance sheet compensate and upgrades to Outperform from Neutral. Target is reduced to $4.10 from $4.80.
INSURANCE AUSTRALIA GROUP LIMITED (IAG) was upgraded to Overweight from Equal-weight by Morgan Stanley B/H/S: 2/5/0
Morgan Stanley expects general insurers will be relatively resilient during the recession. Insurance Australia’s rating is upgraded to Overweight from Equal-weight. The broker considers the stock presents compelling value and warrants a premium in the current environment as it is a defensive pure domestic insurer. Target is reduced to $7.00 from $7.90. Industry view: In Line.
VOLPARA HEALTH TECHNOLOGIES LIMITED (VHT) was upgraded to Hold from Lighten by Ord Minnett B/H/S: 1/1/0
The company has announced a $35m capital raising, expecting revenue of NZ$16.2m in FY20 and operating loss of -NZ$16.4m. Ord Minnett considers the business model more resilient than most as its revenue is substantially underpinned by recurring software-as-a-service fees, charged annually in advance. However, disruptions could affect the business, particularly in some parts of the US, and may impede sales activity for the year ahead. The capital raising is ensuring the balance sheet is in good shape, nevertheless, and the broker upgrades to Hold from Lighten. Target is reduced to $1.47 from $1.62.
In the not-so-good books
ALUMINA LIMITED (AWC) was downgraded to Neutral from Outperform by Macquarie B/H/S: 3/3/0
Alumina posted a solid March quarter result, Macquarie suggests, with production, sales and the share of AWAC earnings all in line with expectations. Distributions from the AWAC joint venture with Alcoa were 7% higher than forecast and AWAC is looking to cut capex to offset weaker alumina prices. Downside risk for alumina prices is nevertheless increasing, Macquarie warns, with spot currently -21% below the broker’s 2020 forecast. Were the broker to run spot prices in its valuation, forecast earnings would fall -57% and -66% in 2020-21. Downgrade to Neutral from Outperform. Target falls to $1.50 from $1.90.
See upgrade above.
CHALLENGER LIMITED (CGF) was downgraded to Neutral from Buy by Citi B/H/S: 0/7/0
March quarter sales were largely in line with expectations and appear resilient. This reflects the trend of strong Japanese and institutional sales, offset by weak domestic retail sales. Citi assesses there is still likely to be a high risk of defaults in the investment portfolio. Moreover, the company is in a dilemma in that it has likely locked in around half of its investment losses and cannot re-invest while it is somewhat capital constrained. Rating is downgraded to Neutral from Buy and the target lowered to $4.60 from $5.45.
EVOLUTION MINING LIMITED (EVN) was downgraded to Neutral from Buy by Citi B/H/S: 4/2/1
Citi is pleased with the consistent cash flow, asset diversity and growth potential but considers the stock priced for success. Hence, the rating is downgraded to Neutral from Buy.
The company has guided to 195,000 ounces in the June quarter, ex Red Lake, up 15% on the March quarter. Citi increases the target to $4.90 from $4.40.
MYER HOLDINGS LIMITED ((MYR)) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 1/2/0
Myer has extended store closures until at least May 11, while noting online sales growth has been strong. Ord Minnett assesses the shape of a recovery in sales is uncertain. Despite the valuation support the broker finds the risk/reward proposition less attractive and downgrades to Hold from Accumulate. Target is steady at $0.20.
RAMSAY HEALTH CARE LIMITED (RHC) was downgraded to Neutral from Buy by Citi B/H/S: 3/3/1
Ramsay Health Care has raised $1.2bn in a placement and another $200m in the share purchase plan. Citi assesses the raising is -7% dilutive to earnings per share in FY21. The broker believes the magnitude of the capital raising is more than required but now has a more positive view on the timeframe for health systems to return to normal. Moreover, there may be opportunities for acquisitions down the track. Rating is downgraded to Neutral from Buy. Target is lowered to $69 from $70.
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.
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