It is not a combination that is common practice in and around the Australian share market but last week, when share prices were rallying higher, stockbroking analysts continued to issue more upgrades than downgrades in ratings for individual ASX-listed stocks. 

For the week ending Friday 29 May 2020, FNArena registered 18 upgrades and 11 downgrades. Fourteen of the upgrades moved to a fresh Buy, including for CSL, Monadelphous, Smartgroup Corp, and TPG Telecom. 

Among the downgrades, only one moved to a fresh Sell rating, with Air New Zealand the unlucky target. Beach Energy was the only stock to receive two downgrades during the week; the result of having experienced a strong rally in line with other oil & gas stocks. 

The week’s tables for positive and negative changes to earnings forecasts continue showing wild swings either way. 

Senex Energy enjoyed the largest increase, beating City Chic Collective, Atlas Arteria, Accent Group, and Arena REIT. All enjoyed double digit percentage gains. 

On the negative side, QBE Insurance stands miles apart from the rest of the pack, including Aristocrat Leisure, Monadelphous, Air New Zealand, Downer EDI, and ALS Ltd. 

In the good books 

AUSNET SERVICES (AST) was upgraded to Hold from Lighten by Ord Minnett B/H/S: 1/4/2 

As Ausnet Services is trading in line with Ord Minnett’s $1.75 target the rating is upgraded to Hold from Lighten. The business is one of the broker’s preferred regulated utility companies on the basis of its strong dividend cover. Strong growth is also anticipated in the contracted asset base. 

 

BENDIGO AND ADELAIDE BANK LIMITED (BEN) was upgraded to Neutral from Underperform by Credit Suisse B/H/S: 1/4/1 

The bank has announced extra provisioning of $148.3m to allow for the future impact from the pandemic. Credit Suisse suspects the market will be surprised by the size of the provisioning, which is larger than regional peers. However, the broker envisages less downside risk now, downgrading estimates by -16-28% across the forecast horizon. Target is reduced to $7 from $9 and the rating is upgraded to Neutral from Underperform. 

BLACKMORES LIMITED (BKL) was upgraded to Neutral from Underperform by Macquarie B/H/S: 0/5/1 

Blackmores has undertaken a capital raising, which Macquarie considers is logical given the uncertainty around trading patterns heading into the first half. The broker takes a more positive view now concerns regarding the balance sheet are removed. The company is pushing ahead with growth plans in Southeast Asia and India, supported by a $40m investment in working capital and operating costs. Macquarie upgrades to Neutral from Underperform. Target is raised to $73 from $64. 

BRICKWORKS LIMITED (BKW) was upgraded to Outperform from Neutral by Macquarie B/H/S: 2/1/0 

Market conditions are improving and Macquarie assesses the stock is trading at a -27% discount to the inferred value of the assets, underperforming peers in the recent recovery. The broker suspects the market is yet to fully price in the strength of the property assets and upgrades to Outperform from Neutral. Target is raised to $16.30 from $15.25. 

CSL LIMITED (CSL) was upgraded to Buy from Neutral by Citi B/H/S: 3/4/0 

With the shares having underperformed the broader market by no less than -19% over the month past, including a noticeable drubbing in yesterday’s session, Citi analysts have upgraded CSL to Buy from Neutral. The analysts note the global race for a covid-19 vaccine is running in full force now. CSL may or may not get involved with a successful end product, but financial implications should be benign, in case a competitor wins the prize, concludes Citi. Today’s update also includes the following sentence: “The risk to earnings in the medium-term remains to the upside as the company should continue to take market share due to its superior plasma collection position”. Forecasts are unchanged. Price target remains intact at $334. 

MOTORCYCLE HOLDINGS LIMITED (MTO) was upgraded to Add from Hold by Morgans B/H/S: 1/0/0 

The trading update revealed May has returned to more normal trading while April was materially affected by the lockdowns. Rental relief tied to turnover is expected to be minimal in May, from which Morgans assesses “decent” sales are likely. The broker believes Motorcycle Holdings has done a commendable job in reducing costs and managing cash flow. The material cost reductions provide leverage to a recovery in demand. Rating is upgraded to Add from Hold and the target raised to $1.86 from $1.24. 

NATIONAL TYRE & WHEEL LIMITED (NTD) was upgraded to Add from Hold by Morgans B/H/S: 1/0/0 

Trade was better than expected for National Tyre and Wheel, notes Morgans, leading the group to increase its FY20 operating earnings guidance above the broker’s estimate by circa 15%. This and a strong balance sheet prompted the company to restore dividends. Morgans expects a distribution yield of circa 7%. Future strategy main themes are expected to be on volume, scale and diversification, feels the broker. Rating upgraded to Add from Hold with target increased to $0.45 from $0.26. 

In the not-so-good books 

AGL ENERGY LIMITED (AGL) was downgraded to Hold from Add by Morgans B/H/S: 0/4/3 

Morgans observes the share price has slowly gained during May. Electricity futures prices have shown some early signs of improvement although they are still much cheaper than six months ago. The broker expects underlying weakness in FY21 earnings with a one-off offset from the pending insurance claim covering the Loy Yang outage in 2019. The broker considers the yield on FY20 forecasts is reasonable but there is only limited upside from here. Rating is downgraded to Hold from Add and the target is steady at $17.15. 

 

BEACH ENERGY LIMITED (BPT) was downgraded to Neutral from Outperform by Macquarie and to Hold from Add by Morgans B/H/S: 3/3/0 

Beach Energy shares are up 19% over the last week and Macquarie reviews the outlook for growth in expenditure, assessing there is more upside elsewhere in the sector. The business retains solid fundamentals but the broker assesses prior cash flow outlook is at risk because of the downturn in oil and delays to projects. Rating is downgraded to Neutral from Outperform. Target is reduced by -5.8% to $1.60. 

Morgans notes Beach Energy has outperformed the energy index over the last 30 days and beat the broker’s target of $1.66. However, volatility will persist, cautions the broker, with the market trying to find a balance. Beach Energy has a number of high return brownfield projects along with greenfield options in the long run, reminds Morgans. The broker also expects the company to re-contract an offshore rig in the Otway basin in early FY21. The share’s strong price performance coupled with a volatile market prompts a downgrade by the broker to Hold from Add with a target price of $1.66. 

CORPORATE TRAVEL MANAGEMENT LIMITED (CTD) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 3/3/0 

At present, Credit Suisse believes the share price is reflecting the FY19 earnings base, which will take some time to achieve. Nevertheless, the broker assesses a capital raising will not be required. As conditions improve in the northern hemisphere and restrictions reduce, Credit Suisse would become more confident as the opportunity remains robust. Rating is downgraded to Neutral from Outperform. Target is $12. 

NEW HOPE CORPORATION LIMITED (NHC) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 1/2/1 

Higher sales volumes were able to largely offset the impact of the weather and the ramp down of Acland in the latest quarter. Credit Suisse assesses the investment case is tough although acknowledges conditions and the market can change quickly. Still, until some risk dissipates or there is a recovery in the coal price, the broker believes it likely New Hope will remain under pressure. Bengalla is a quality asset but Credit Suisse finds it hard to devise a compelling case for jumping into the stock. Rating is downgraded to Neutral from Outperform. Target is reduced to $1.50 from $2.00. 

WEBJET LIMITED (WEB) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/3/0 

Credit Suisse eventually expects upside to the FY19 earnings base, primarily driven by the B2B division. However, with this division exposed to onerous travel restrictions in the northern hemisphere, the broker tempers expectations and will look to get upbeat again once intra-regional leisure travel improves. Meanwhile, the B2C division, which is two thirds domestic travel, is looking increasingly attractive with the opening up of Australia, and potentially New Zealand. Rating is downgraded to Neutral from Outperform. Target is $4.50. 

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.