In the good books
ACCENT GROUP (AX1) was upgraded to Add from Hold by Morgans
Accent Group stores reopened in early May and the group is pursuing rent relief to cater to in-store sales deficits. While store rollout has been a major growth driver, Morgans expects this to become difficult with an increase in online penetration. The broker believes this to be an enduring trend. The factors in the group’s favour are a dominant market position and covid-19 stimulus packages which could lead to a quicker pick up in sales. Morgans upgrades its rating to Add from Hold and its target almost doubled to $1.45 from $0.74.
CENTURIA OFFICE REIT (COF) was upgraded to Outperform from Neutral by Credit Suisse
While the company has withdrawn guidance for free funds from operations, distribution guidance is maintained for 17.8c, with 13.4c already paid. In the short term, Credit Suisse considers a defensive equity raising unlikely, with a reduction to dividends a more likely scenario. While mindful of the risk, the broker considers these are priced into the stock and upgrades to Outperform from Neutral. Target is reduced to $2.16 from $2.91.
FINEOS CORPORATION HOLDINGS (FCL) was upgraded to Buy from Hold by Ord Minnett
Ord Minnett updates forecasts to account for the modestly better third quarter result and takes a slightly more conservative view on professional services. The company has underperformed both domestic and global peers since late April, despite offering an attractive growth outlook. Looking forward, the broker upgrades to Buy from Hold. Target edges up to $3.60 from $3.59.
INSURANCE AUSTRALIA GROUP (IAG) was upgraded to Outperform from Neutral by Credit Suisse
The share price has significantly underperformed over the past two months, Credit Suisse observes. To date, there is no indication of a significant fall in commercial lines although the broker acknowledges there are more developments likely to ensue in coming months. Having allowed for a higher perils allowance and lower bond yields, Credit Suisse continues to expect premium rates will exceed claims inflation. Rating is upgraded to Outperform from Neutral as the entry price is now considered attractive. Target is raised to $6.40 from $5.70.
METCASH (MTS) was upgraded to Buy from Neutral by UBS
UBS notes Metcash has underperformed the ASX 200 since its capital raising in April, despite ongoing strength in the grocery sector. The strong market backdrop and the outperformance of independent grocers as well as an improving outlook for hardware has caused the broker to upgrade to Buy from Neutral. Forecasts remain unchanged but the near-term upside risk is building, UBS suspects, because of the favourable trends. Target is $2.85.
MONADELPHOUS GROUP (MND) was upgraded to Buy from Neutral by Citi
The company’s balance sheet is the strongest in Citi’s coverage, courtesy of having negligible debt. The broker likes the combination of relative resilience in mining, coupled with optimism regarding the pace of recovery in energy from 2021. The broker expects mining will be underpinned by the iron ore mine replacement cycle into FY22. Rating is upgraded to Buy/High Risk from Neutral and the target reduced to $14.35 from $15.90.
NEWCREST MINING (NCM) was upgraded to Neutral from Sell by UBS
UBS reviews the economics of Red Chris and Haveiron and, based on this work, upgrades to Neutral from Sell. Target is raised to $33 from $26. The inclusion of these projects challenges market perceptions that production is peaking in 2020-21, the broker points out. The broker estimates that Newcrest’s interest in Red Chris could be worth around US$2bn or $3.50 while Haveiron could turn Telfer into a tier-2 asset.
NAVIGATOR GLOBAL INVESTMENTS (NGI) was upgraded to Outperform from Neutral by Macquarie
Funds under management in April were flat as the market impact offset the outflows. Macquarie finds the valuation attractive, and while the company has previously highlighted an increase in redemptions, the vast majority are from a single platform client cutting hedge fund exposure. To reflect the uncertainty over outflows, Macquarie includes around -US$3.1bn of net outflows across the second half and FY21. The broker upgrades to Outperform from Neutral, supported by a valuation which already discounts the redemption risk. Target is reduced to $1.65 from $1.72.
SMARTGROUP CORPORATION (SIQ) was upgraded to Add from Hold by Morgans
Morgans suspects the operating environment is improving faster than previously expected. The broker also observes Smartgroup’s balance sheet is solid and any earnings recovery is likely to be undiluted. That said, earnings are not expected to recover to historical levels in FY21, primarily because of a material loss in revenue from add-on insurance sales. However, the broker envisages value on base case expectations and upgrades to Add from Hold. Target is raised to $6.95 from $6.58.
TPG TELECOM (TPM) was upgraded to Add from Hold by Morgans
Vodafone Australia is set to acquire a 50.1% stake in TPG Telecom on July 13, 2020, the largest telecom merger so far in Australia. Morgans believes the merger is all about combining cashflows to fund mobile capital expenditure and saving on costs. The broker estimates all-in capital expenditure to be circa $1bn, about $0.7bn of which will come from TPG’s free cash flow. Limited guidance for now. Morgans upgrades its rating to Add from Hold with target price increased to $9.14 from $8.37.
VOCUS GROUP (VOC) was upgraded to Buy from Hold by Ord Minnett
Vocus is part way through a growth strategy over three years that is expected to generate higher returns in the network segment. Ord Minnett envisages upside in the risk/reward balance during FY21. The company has assets in desirable areas of market growth that are on track to generate higher free cash flow and returns on capital, in the broker’s view. Meanwhile, the company is seeking to refinance debt facilities and Ord Minnett expects this will be supported. Organic growth is expected to support free cash flow growth in debt repayments during FY21 and FY22. Rating is upgraded to Buy from Hold. Target is reduced to $3.47 from $4.00.
In the not-so-good books
AIR NEW ZEALAND (AIZ) was downgraded to Underperform from Neutral by Credit Suisse
As a result of actions to cut expenditure, Air New Zealand expects its FY21 monthly cash burn to reduce a further -NZ$50-60m, excluding any benefit from passenger revenue. This suggests to Credit Suisse the cash burn reduces to -NZ$100m per month. A labour reduction of -30% has been confirmed. The broker downgrades to Underperform from Neutral, forecasting material losses in both FY20 and FY21. Target is reduced to NZ$0.84 from NZ$0.95.
CITY CHIC COLLECTIVE (CCX) was downgraded to Neutral from Buy by Citi
The company’s trading update has revealed online growth has accelerated. The impact of the pandemic on sales has been slight but is offset by the news that gross margins are lower. The stock has rallied substantially from the March lows and the business remains well-positioned but, at the prevailing share price, Citi assesses good sales and margin results from Avenue are necessary. There is no margin of safety, hence the broker downgrades to Neutral from Buy. Target is raised to $2.85 from $2.50.
COCA-COLA AMATIL (CCL) was downgraded to Neutral from Outperform by Macquarie
Coca-Cola Amatil has noted Australian grocery volumes were down -10% in April as consumers appeared to be disinclined to replicate restaurant consumption at home. New Zealand was strong, despite more stringent restrictions on movement. Indonesia remains weak with a negative impact from social distancing that affected Ramadan consumption. Volumes are improving as Australia’s restrictions ease, although Macquarie notes profitability remains challenged. The broker remains concerned that some consumption habits may have structurally changed, downgrading to Neutral from Outperform and lowering the target to $9.30 from $10.00.
DOWNER EDI (DOW) was downgraded to Neutral from Buy by Citi
Citi downgrades to Neutral and adds a High Risk to its rating, given the earnings uncertainty and the resulting implications for the balance sheet. The broker cannot rule out the need for new equity, given the uncertainty. Moreover, productivity impacts from social distancing and supply chain dislocations may put pressure on margins. Citi remains unconvinced transport will experience a significant increase in projects from government stimulus, given the approvals process, access to skilled labour and raw materials. Target is reduced to $4.90 from $8.70.
WESTERN AREAS NL (WSA) was downgraded to Accumulate from Buy by Ord Minnett
Western Areas will take a 19.9% stake in Panoramic Resources (PAN) for $29m. The stake, Citi notes, buys the company an option for less than 5% of its market cap and precludes another coming on board. The broker considers this an investment rather than a precursor for an acquisition. Neutral rating and $2.50 target maintained.
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.
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