The final week of April saw the continuation of market optimism, quickly followed up with a severe sell-off on May 1 for the first weekly stand-still in a while.
By then, stockbroking analysts had already responded by issuing more upgrades in recommendations for individual ASX-listed stocks. FNArena counted 20 upgrades versus 17 downgrades for the week.
Stocks popular among the upgrades were Charter Hall Retail REIT and supermarket operator Coles with both receiving two upgrades while the rest of the field is made up predominantly of share market laggards, including banks and property developers and owners.
In an illustration of just how tricky this market can be, and of opposing views and forces that reign in it, the table of downgrades for the week equally includes banks and property related exposures, this time accompanied by various gold producers. It’s probably fitting then that Regis Resources is the sole recipient of two downgrades for the week.
Investors will be pleased to know the week saw some hefty increases to earnings estimates. The largest increase was reserved for QBE Insurance, followed by Premier Investments, Alacer Gold, and Regis Resources. The top ten shows noticeable increases for all companies included.
However, in line with the times, the week’s top ten for decreases to profit forecasts shows how it is done properly with far, far, far bigger reductions for the likes of oOh!media, Coronado Global Resources, AP Eagers, and Pilbara Minerals.
One of the key reasons as to why many an expert believes the share market cannot continue its rally in May is because analysts will continue reducing forecasts and thus valuations and price targets, and this will provide a reality check for too optimistic sentiment that has driven quite the sizeable rally off the March sell-off bottom (25%).
Expect more of the same in the week(s) ahead, except probably without the day-to-day uptrend for share market indices.
In the good books
AP EAGERS LIMITED (APE) was upgraded to Add from Hold by Morgans B/H/S: 4/1/0
AP Eagers has reduced its workforce, applied for JobKeeper, been granted rental relief and has deferred all non-essential capex, Morgans notes. Importantly, the company has secured additional working capital facilities, taking its liquidity to $392m, greater than the broker previously assumed. The outlook for new car sales at this point is not worth considering, but AP Eagers’ liquidity position, experienced management and exposure to whenever there may be a rebound has Morgans upgrading to Add from Hold, noting patience will be required. Target falls to $7.30 from $8.92.
CREDIT CORP GROUP LIMITED (CCP) was upgraded to Add from Hold by Morgans B/H/S: 2/0/0
Credit Corp has raised $120m to increase capacity on the balance sheet. In the absence of an acquisition, Morgans expects the company will have no debt by December 2020. There are still risks to earnings for the short term, but the broker assesses the business is a strong contender for capital deployment in potential industry consolidation over the next two years. Rating is upgraded to Add from Hold and the target raised to $18.50 from $17.70.
CENTURIA OFFICE REIT (COF) was upgraded to Add from Hold by Morgans B/H/S: 2/1/0
Centuria Office REIT, the only pure-play office REIT on the ASX, has withdrawn FY20 funds from operations guidance, but retained dividend guidance of 17.8c. Uncertainty stems from the government’s Code of Conduct with regard rents and a tougher outlook for leasing markets ahead, Morgans notes. That said, the broker believes the stock has been oversold and upgrades to Add from Hold. Target falls $2.33 from $2.98.
COLES GROUP LIMITED (COL) was upgraded to Buy from Neutral by Citi and Upgrade to Hold from Reduce by Morgans B/H/S: 5/2/0
The main take-out from Coles quarterly update for Citi is a -30% drop in sales in April compared to March, as pantry hoarding swings to de-stocking. However, the broker does see sales growth improving from this level given April this year included none of the usual Easter/Anzac Day buying spree and as cooking at home settles in to be more popular than it was previously. The offset will be falling food inflation and lower household spending from those on reduced incomes. Lower petrol volumes have hit earnings, but these will improve as restrictions are eased. Put it all together, and the broker cuts its target by -1% to $17.40 but upgrades to Buy from Neutral.
Strong growth in sales across all divisions occurred in the March quarter. However, this has come with extra costs which Morgans expects to remain elevated for the remainder of FY20. Still, supermarkets and liquor sales will benefit from social gathering restrictions and Morgans assesses Coles is a very defensive business. Now the stock is closer to fair value the rating is upgraded to Hold from Reduce. Target is raised to $15.20
GPT GROUP (GPT) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 4/1/1
Subsequent to the first quarter update, Credit Suisse cuts estimates by -13.3% for FY20 and -10.2% for FY21 and lowers the target to $4.56 from $6.15. Revaluations of the entire GWOF/GWSCF portfolios resulted in -2% and -11% declines in book value. This was driven, as commentary suggests, by lower rental assumptions rather than a softening of capitalisation rates. Credit Suisse assesses the market continues to discount GPT because of its retail exposure but this is excessive. The broker remains of the view that the capital position provides a bulwark against an economic downturn and upgrades to Outperform from Neutral.
LENDLEASE GROUP (LLC) was upgraded to Buy from Neutral by UBS B/H/S: 4/1/0
Lendlease has raised up to $1.15bn. UBS assesses the proceeds will be used to strengthen the balance sheet and also allow the company to take a larger share in development pipeline/profits and acquire opportunistically. Given the improved funding position UBS upgrades to Buy from Neutral. The broker now assesses there is sufficient capital to withstand negative scenarios. Target is reduced to $15.50 from $18.00.
ORICA LIMITED (ORI) was upgraded to Outperform from Neutral by Macquarie B/H/S: 2/5/0
Macquarie assesses Orica’s production-related earnings have proven to be relatively defensive in the past and, while there is likely to be short-term effects of the pandemic, the business has cyclical leverage globally to a recovery. Burrup is on track to start up and the balance sheet is solid. Macquarie upgrades to Outperform from Neutral and reduces the target to $21.51 from $23.25. Orica reports its first half result on May 8.
PEOPLE INFRASTRUCTURE LTD (PPE) was upgraded to Buy from Accumulate by Ord Minnett B/H/S: 1/1/0
People Infrastructure has announced a $17.5m capital raising. The company has also indicated revenue and operating earnings (EBITDA) were up 44% and 53% respectively in the year to February. Since the coronavirus crisis spread the company has experienced disruption across several aspects of the business but this has not been widespread. Disability, mining and food processing have proven resilient while IT and childcare volumes are depressed. There is also some disruption to nursing but this is expected to be short lived. Ord Minnett upgrades to Buy from Accumulate and reduces the target to $2.49 from $4.05.
QUBE HOLDINGS LIMITED (QUB) was upgraded to Buy from Sell by Citi B/H/S: 2/3/1
Citi upgrades to Buy/High Risk from Sell and reduces the target to $2.75 from $2.80, assessing the de-risked balance sheet provides scope for a strategic accretive acquisition and cost controls that will generate value for shareholders. Operating weakness is likely in FY20-21 that may weigh on growth. The broker does not envisage scope for port volumes to improve prior to the second quarter of FY21.
In the not-so-good books
ADELAIDE BRIGHTON LIMITED (ABC) was downgraded to Hold from Add by Morgans B/H/S: 2/4/1
Since the withdrawal of guidance early in April, Adelaide Brighton’s share price has risen 32%, to be within 5% of Morgans unchanged $2.85 target. Hence the broker pulls back to Hold from Add. The broker nevertheless highlights a strong balance sheet, a favourable concentration of exposure domestically, with Australia containing the virus, and the potential for government stimulus for construction alongside low interest rates.
MIDWAY LIMITED (MWY) was downgraded to Hold from Buy by Ord Minnett B/H/S: 0/2/0
Midway now expects FY20 operating earnings (EBITDA) of $10-14m, which reflects a -27-52% downgrade from consensus estimates last reaffirmed in late March. The company has cited a deterioration in export demand driven by the impact of the pandemic in key export markets. Ord Minnett now expects pricing and volumes will be more difficult into FY21 as the disruption plays out. Rating is downgraded to Hold from Buy and the target reduced to $1.12 from $2.07.
ORORA LIMITED (ORA) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 1/5/0
Orora has completed the sale of its fibre business to Nippon Paper. Credit Suisse assumes distributions of $750m by way of a special dividend. The broker downgrades to Neutral from Outperform as the rally in the share price has closed out much of the available return, in its assessment. Target is $2.15.
REGIS RESOURCES LIMITED ((RRL)) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 3/4/0
March quarter production was -11% below Ord Minnett’s estimates. Improvement is expected in the June quarter as first underground ore from Rosemont is delivered. The broker observes a clear strategy is emerging which, while incremental, presents upside to valuation. The stock is now trading at a slight premium to the target and the rating is downgraded to Hold from Accumulate. Target is reduced to $4.20 from $4.30.
TABCORP HOLDINGS LIMITED (TAH) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/3/0
Credit Suisse downgrades to Neutral from Outperform. The share price has rallied 45% since the trough and is now approaching the broker’s target. Target is $3.20. An equity issue is also included in forecasts in the near future as Credit Suisse suspects the board will come to realise that the balance sheet is not as well prepared for the disruption as it may have thought. However, this has a minimal effect on valuation.
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.
