In the good books
ADAIRS (ADH) was upgraded to Add from Hold by Morgans
A 221% surge in online sales has helped to offset sales losses due to Adairs store closures, netting to total sales down -37% in five weeks, Morgans notes. Stores are set to progressively reopen over May-June, and liquidity is sufficient to ensure no intention to raise capital. While earnings forecasting remains difficult, the company’s liquidity position and online strength lead the broker to increase its target to $2.17 from $1.22, and upgrade to Add from Hold.
AGL ENERGY (AGL) was upgraded to Add from Hold by Morgans
Australia’s electricity demand looks to be resilient in the face of the virus, Morgans suggests, but the challenge for retailers will be a spike in bad debts. Weaker wholesale prices have not much impacted default retail pricing. The broker sees increasing value in AGL Energy and Origin Energy. The broker upgrades both to Add from Hold on share price weakness. AGL target falls to $17.15 from $17.39.
COLLINS FOODS (CKF) was upgraded to Buy from Neutral by UBS
UBS observes the company’s KFC Australia business appears to be one of the better performing fast food operations during this pandemic. The business was an early beneficiary from the easing of lock-down restrictions. It is also likely to be a beneficiary of domestic car-based holiday activity when this resumes. UBS considers the stock has defensive qualities and the multiples are not overly demanding.
MONASH IVF GROUP (MVF) was upgraded to Add from Hold by Morgans
Monash IVF was performing in line with expectations through to late February, but March saw a material slowdown. The government’s permission to reopen IVF clinics from April 27 will lead to a gradual return to normal, Morgans suggests. Monash has raised $80m to clear debt concerns and provide for acquisitions. Target falls to 63c from 83 on dilution. Upgrade to Add from Hold.
NICK SCALI (NCK) was upgraded to Outperform from Neutral by Macquarie
Macquarie has been out visiting furniture stores in Sydney — both Nick Scali and small unlisted competitors — to find that while sales in some stores were down over -50% at the low point, the last two weeks of April saw a pick-up in foot traffic. Declining housing turnover will nevertheless remain a headwind. The broker suggests the drop in activity is not as bad as the market is assuming, and a well-managed Nick Scali, with meaningful property ownership, has an opportunity to pick up market share, and larger furniture businesses may end up swallowing up struggling SMEs if the situation gets worse. Upgrade to Outperform from Neutral. Target falls to $5.20 from $5.30.
ORICA (ORI) was upgraded to Buy from Neutral by Citi
Orica has a strong position in the global explosives sector because of its intellectual property, particularly in wireless blasting systems. Citi also notes the diversified earnings are underpinned by multi-year contracts with major miners. The outlook for end markets remains mixed, but increased strip ratios in the mining industry are favourable for explosive volumes. As the share price has fallen, and given the assessment of risk around earnings, Citi upgrades to Buy from Neutral. Target is reduced to $19.40 from $24.50.
ORIGIN ENERGY (ORG) was upgraded to Add from Hold by Morgans
Australia’s electricity demand looks to be resilient in the face of the virus, Morgans suggests (see AGL Energy upgrade above). Origin target rises to $5.50 from $5.15.
QUBE HOLDINGS (QUB) was upgraded to Outperform from Underperform by Credit Suisse and to Buy from Neutral by UBS
Qube Holdings has announced a fully underwritten entitlement offer of $500m, reducing net debt. Following the pandemic Credit Suisse assesses attractive consolidation opportunities should emerge in the logistics sector. The company has indicated bulk operations, 50% of revenue, are relatively unaffected by the pandemic. The partial sale process of Moorebank is proceeding, although it is likely to be slow, Credit Suisse observes. The broker upgrades to Outperform from Underperform. Target of $2.80 retained.
Qube believes it can generate returns at the top or beyond its 12-15% internal rate of return target. While UBS has made material downgrades on dilution, it recommends investors take up the rights issue given the potential for a 25% total shareholder return at the offer price. Target falls to $2.38 from $3.01. Hold retained.
In the not-so-good books
AUSTAL (ASB) was downgraded to Lighten from Hold by Ord Minnett
Where Austal won a $324m contract to construct patrol boats for the Australian Navy, it also lost out on a US Navy contract with a starting value of US$795m rendering the long-term earnings profile of the company uncertain, comments Ord Minnett. The outlook for the company would be a balancing act between the shipbuilding contracts from the US and Australia versus a subdued commercial ferry market, suggests the broker. Rating downgraded to Lighten from Hold with target price decreased to $2.40 from $4.10.
INFIGEN ENERGY (IFN) was downgraded to Hold from Add by Morgans
Australia’s electricity demand looks to be resilient in the face of the virus, Morgans suggests, but the challenge for retailers will be a spike in bad debts. Weaker wholesale prices have not much impacted default retail pricing. The broker sees increasing value in AGL Energy and Origin Energy. The broker still sees medium-term value in Infigen Energy but with the growth slowing it is difficult to see catalysts in the short term to lift the share price. Downgrade to Hold from Add. Target falls to 57c from 71c.
JB HI-FI (JBH) was downgraded to Neutral from Outperform by Macquarie
Following the recent share price performance Macquarie downgrades to Neutral from Outperform. The stock is up 29% since March 23 and has now reached the broker’s valuation. Macquarie remains confident in the short-term outlook for revenue but is becoming more cautious about the medium-term outlook for discretionary expenditure as the economy slows. Target is reduced to $34.80 from $38.80.
NEW HOPE CORPORATION (NHC) was downgraded to Neutral from Buy by Citi
Coal prices have turned down sharply, with Newcastle thermal coal dropping to US$50/t and spot hard coking coal to US$109/t. The weaker prices reflect the re-start of Richards Bay exports and weaker demand from key markets. Citi reduces New Hope’s FY20 and FY21 operating earnings (EBITDA) estimates by -3% and -14%, respectively. Low coal prices and a stronger Australian dollar remain headwinds. The broker reduces the target to $1.60 from $1.70 and downgrades to Neutral from Buy.
RESMED (RMD) was downgraded to Lighten from Hold by Ord Minnett
A strong lift in mask sales meant March quarter revenue was ahead of Ord Minnett’s forecast. As expected, strong demand for ventilators in the midst of the pandemic provided a boost. Beyond the current quarter, the broker expects much weaker economic conditions will weigh on a recovery in core sleep devices, especially in the US where individual health expenditure is more closely correlated to economic conditions. Rating is downgraded to Lighten from Hold. The target is reduced to $21.90 from $22.60.
TRANSURBAN GROUP (TCL) was downgraded to Hold from Accumulate by Ord Minnett and to Hold from Add by Morgans
Transurban traffic has been materially impacted, declining 60-70% for its US assets with the toll price falling to US$1.50 from US$8 per trip, observes Ord Minnett. The traffic growth forecast by the broker for FY20 remains at -11% with DPS forecast for the second half unchanged at $0.12. The broker expects the company to rebalance capital structure at the next acquisition, increasing the dilution risk. The stock is downgraded to Hold from Accumulate with target price at $13.50.
Transurban has indicated traffic deteriorated in early April but the deterioration has now moderated. Large vehicles continue to be more resilient and weekday traffic stronger than weekends. Morgans makes slight upgrades to revenue forecasts, which assumes severe traffic weakness until September and a full recovery not occurring until 2022. Upside may come from traffic recovering quicker than previously assumed as government restrictions are eased. Rating is downgraded to Hold from Add as the potential shareholder returns are compressed to 1% as a result of the share price increase. Target is reduced to $13.52 from $13.71.
VIRGIN MONEY UK (VUK) was downgraded to Hold from Add by Morgans
Virgin Money is due to report interim earnings on Wednesday after the bell. Morgans expects the result to beat consensus, but also sees concerns over the outlook for the UK economy continuing to weigh on the share price. The stock is trading at only 0.3x net tangible assets but the broker sees this as fair, after significantly downgrading forecasts on the virus threat. Risk remains to the downside. Morgans downgrades to Hold from Add. Target falls to $1.44 from $4.23.
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.