As the share market effectively moves sideways, through a lot of volatility, stockbroker changes in ratings for ASX-listed stocks stay fairly balanced between upgrades and downgrades.
For the week ending Friday, 15 May 2020, FNArena registered 15 upgrades and 16 downgrades.
As a direct result, total Buy (and equivalent) recommendations for Australian stocks by the seven stockbrokers monitored daily has thus far failed to break above 50% of total stock recommendations.
As at Friday, the net breakdown in percentages stands at 49.46% in Buy recommendations, with Neutral/Holds representing 41.66% and the remaining 8.88% in Sell ratings.
Equally noteworthy, only two of the seven stockbrokers – Citi and Morgans – carry more Buy ratings than Neutral/Holds.
Two of the week’s upgrades did not move beyond Neutral/Hold, and both went to CSR post results release.
Pretty much all of the fresh Buy ratings went to stocks that have thus far lagged the strong share market recovery, including Suncorp, Stockland, BHP Group, and Charter Hall.
Among the downgrades, one sole Sell rating went to AusNet Services whose results update included a future cut to the dividend.
Here the field looks a lot more diverse, with laggards such as Ainsworth Gaming and the aforementioned CSR still receiving a downgrade on disappointing market updates.
REA Group and AusNet Services were the sole recipients of two downgrades during the week.
The week revealed a few bright spots in terms of positive revisions to valuations and price targets, and they remain few and far between.
The number of positive revisions to earnings estimates is noticeably growing, with Xero commanding the week’s top spot, but the damage done on the opposite side is many times over greater in size.
Out-of-season reporting season continues in the week ahead, while trade wars and domestic politics remain in focus for investors seemingly looking for firm direction.
In the good books
BHP GROUP (BHP) was upgraded to Buy from Neutral by UBS B/H/S: 7/0/0
UBS observes the stock has declined -20% since February because of the pandemic and the breakdown of the OPEC negotiations which have affected oil prices. Yet, UBS assesses the company is in a strong position and should be able to return surplus cash to shareholders at a time when other more traditional dividend-paying stocks cannot. Rating is upgraded to Buy from Neutral and the target reduced to $38 from $39. Meanwhile, the easing of lockdown restrictions across Europe and the US is a positive and the broker flags the fact India opening up will mean coal imports resume.
CHARTER HALL GROUP (CHC) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 4/2/0
Ord Minnett’s medium to long term outlook on Charter Hall Group is mostly unchanged despite covid-19. With a weighted average lease expiry (WALE) of 8.9-years and annual rent increases of 3.5%, the broker considers the portfolio as one the least-risky and most defensive among REITs. The broker estimates a three-year EPS compound annual growth rate (CAGR) of 8% while assets under management (AUM) for FY21 are forecasted at $38.9bn and expected to rise to $57bn by FY25. Rating upgraded to Accumulate from Hold with target price increased to $9 from $8.40.
GPT GROUP (GPT) was upgraded to Buy from Neutral by Citi B/H/S: 5/0/1
Falling market rents have caused Citi to lower office income forecasts. While Sydney and Melbourne entered the pandemic restrictions in a strong position, with rents near historical highs and vacancies at their lows, economic conditions have deteriorated. The broker believes the pandemic will significantly accelerate the structural tailwinds that have driven the strong performance of industrial property and the increase in e-commerce is likely to be sustained. Citi currently forecasts office asset values to decline more than -15% while industrial asset values could hold up relatively well. GPT’s rating is upgraded to Buy from Neutral as the stock appears attractive to the broker, given relatively low gearing. Target is reduced to $4.49 from $6.17.
INTEGRAL DIAGNOSTICS LIMITED (IDX) was upgraded to Buy from Accumulate by Ord Minnett B/H/S: 4/1/0
Integral Diagnostics has experienced a material decline in volumes in April which are only just beginning to recover, given Australasian success in controlling the pandemic outbreak. In the event the restrictions continue to be unwound, Ord Minnett expects volumes will recover incrementally. Meanwhile the fundamental drivers of industry growth remain intact and the broker upgrades to a Buy rating from Accumulate. Target is reduced to $4.07 from $4.58.
JAMES HARDIE INDUSTRIES N.V. (JHX) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 6/0/0
US reports signal to Credit Suisse there was a -20% US market decline in April yet the outlook is improving. The broker observes James Hardie has re-established market share gains, validating the success of its commercial strategy. The broker also notes the downside scenario is diminishing as end markets stabilise. Rating is upgraded to Outperform from Neutral and the target raised to $26.90 from $21.50.
STOCKLAND (SGP) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 2/3/1
The company has provided no certainty over the quantum of deferrals or abatements within the commercial tenant portfolio. Hence, earnings uncertainty continues, although Credit Suisse suggests this applies to most A-REITs. The broker lowers rental income estimates and also believes it may be a stretch to hit the company’s original FY20 target of over 5200 residential settlement lots. FY20-22 estimates are downgraded and the target is reduced to $3.56 from $4.97. Still, the land bank and relatively strong balance sheet mean Stockland is well-positioned and considered an undervalued asset play, and the rating is upgraded to Outperform from Neutral.
In the not-so-good books
AINSWORTH GAME TECHNOLOGY LIMITED (AGI) was downgraded to Neutral from Outperform by Macquarie B/H/S: 0/1/1
Macquarie expects reduced demand over the medium term across all geographies. The company’s largest exposure is outright sales which have traditionally accounted for more than 70% of revenue. However, buyers have constrained budgets at present. The broker considers it fortunate Ainsworth Game is conservatively positioned financially. Estimates are materially reduced and the broker downgrades to Neutral from Outperform. Target is lowered to $0.50 from $0.80.
ALTIUM LIMITED (ALU) was downgraded to Neutral from Buy by UBS B/H/S: 2/2/0
The pandemic lockdowns are affecting the company to a greater extent than UBS previously expected for the North American and European business. Small business customers are preserving cash and this is affecting sales conversions in the seasonally strongest months of May and June. In response, the company has accelerated its online sales functionality and launched discounted pricing. The discounting is expected to be a driver of lower revenue over the short term. UBS downgrades to Neutral from Buy and the target is reduced to $37 from $37.50.
AUSNET SERVICES (AST) was downgraded to Neutral from Buy by UBS B/H/S: 1/3/2
Underlying net profit in FY20 beat UBS estimates. The broker estimates the current pandemic relief package reduces FY21 revenue by around -1.5%. However, the bigger issue arises from the recent rule change proposed by the regulator to extend retailer payment terms to networks to six months, from 10 days. This could strain FY21 working capital if applied in Victoria. With credit metrics under pressure until capital is raised, UBS downgrades to Neutral from Buy. Target is raised to $1.90 from $1.85.
DEXUS PROPERTY GROUP (DXS) was downgraded to Neutral from Buy by Citi B/H/S: 4/2/0
Falling market rents have caused Citi to lower office income forecasts. While Sydney and Melbourne entered the pandemic restrictions in a strong position, with rents near historical highs and vacancies at their lows, economic conditions have deteriorated. The broker believes the pandemic will significantly accelerate the structural tailwinds that have driven the strong performance of industrial property and the increase in e-commerce is likely to be sustained. Citi currently forecasts office asset values to decline more than -15% while industrial asset values could hold up relatively well. Dexus Property is downgraded to Neutral from Buy as falling office values are considered a headwind. Target is reduced to $9.44 from $14.47.
KOGAN.COM LTD (KGN) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 0/2/0
Sales growth accelerated in April and, while marketing expenses remain high, profit was likely supported by Marketplace sales and reduced price competition, Credit Suisse notes. The broker is comfortable holding the stock for now following a period of strong share price performance and downgrades to Neutral from Outperform. Target is raised to $8.36 from $6.64.
OIL SEARCH LIMITED (OSH) was downgraded to Hold from Add by Morgans B/H/S: 2/4/0
Morgans notes Australian oil & gas stocks are pricing in a rapid V-shaped recovery in oil prices that is looking increasingly unlikely. Global supply may be curtailed (beyond OPEC+) but demand will remain weak for some time even as lockdowns are lifted. The broker does not see consumption reaching 2019 levels before 2022. Oil Search downgraded to Hold from Add. Target falls to $2.82 from $3.55.
SANTOS LIMITED (STO) was downgraded to Hold from Add by Morgans B/H/S: 4/2/0
Morgans notes Australian oil & gas stocks are pricing in a rapid V-shaped recovery in oil prices that is looking increasingly unlikely. Global supply may be curtailed (beyond OPEC-plus) but demand will remain weak for some time even as lockdowns are lifted. The broker does not see consumption reaching 2019 levels before 2022. Santos downgraded to Hold from Add. Target falls to $4.29 from $4.72.
WOODSIDE PETROLEUM LIMITED (WPL) was downgraded to Hold from Add by Morgans B/H/S: 4/3/0
Morgans notes Australian oil & gas stocks are pricing in a rapid V-shaped recovery in oil prices that is looking increasingly unlikely. Global supply may be curtailed (beyond OPEC-plus) but demand will remain weak for some time even as lockdowns are lifted. The broker does not see consumption reaching 2019 levels before 2022. Woodside Petroleum downgraded to Hold from Add. Target falls to $22.56 from $26.23.
XERO LIMITED (XRO) was downgraded to Neutral from Outperform by Macquarie B/H/S: 2/2/1
FY20 results revealed the company is executing well, although Macquarie notes the pandemic is creating uncertainty over the short term. The main challenge is to drive subscriber business in Australasia to join the broader platform and this is likely to be difficult, given the pandemic. Still, the broker notes the business is in the early stages of growth in an industry with structural tailwinds. Rating is downgraded to Neutral from Outperform and the target is lowered to $75 from $80.50.
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.