Since our last report one week ago, the stockbrokers monitored by FNArena have issued 14 upgrades and 9 downgrades. 

In the good books 

ARENA REIT (ARF) was upgraded to Overweight from Equal-weight by Morgan Stanley 

Arena REIT is raising $60m via a placement in order to fund growth opportunities over the next 18 months. Despite the pandemic, the company has confirmed FY20 distribution guidance of 13.9-14.0c. Gearing will decline to less than 18% post the capital raising, which Morgan Stanley assesses will provide plenty of room to fund the expenditure required in the pipeline over the next 18 months and also provide potential for acquisitions. Rating is upgraded to Overweight from Equal-weight and the target is raised to $2.68 from $2.40. Industry view is In-Line. 

ALUMINA (AWC) was upgraded to Buy from Neutral by UBS 

The market in 2020 has experienced reduced demand because of lockdowns associated with the pandemic, amidst limited supply cuts. As restrictions are lifted, prices are expected to lift. UBS envisages a surplus in the aluminium market in 2020 but a balanced alumina market. While alumina prices are now 10% above the mid April lows, rising input costs are likely to further steepen the cost curve. The broker assesses Alumina Ltd is poised to benefit from this through margin expansion. Rating is upgraded to Buy from Neutral and the target raised to $2.10 from $1.50. 

BENDIGO AND ADELAIDE BANK (BEN) was upgraded to Accumulate from Hold by Ord Minnett 

Ord Minnett has greater confidence in the economic outlook, finding evidence of an improving funding cost environment and anticipating less downside from the economic downturn for Bendigo and Adelaide Bank compared with peers. The broker notes the capital position appears solid and should be less pro-cyclical. Rating is upgraded to Accumulate from Hold, with the target raised to $8.10 from $6.00. 

BWP TRUST (BWP) was upgraded to Buy from Hold by Ord Minnett 

Ord Minnett assesses assets with long lease expiries are typically -20% undervalued. Early indicators suggest equity inflows are returning to preferred property sectors quickly. Ord Minnett recommends increasing exposure to long weighted average lease expiry (WALE) A-REITs as part of its view on the recovery post the pandemic. The broker upgrades to Buy from Hold and raises the target to $4.40 from $3.50. 

CHARTER HALL LONG WALE REIT (CLW) was upgraded to Buy from Hold by Ord Minnett 

Ord Minnett upgrades to Buy from Hold. The broker assesses assets with long lease expiries are typically -20% undervalued. Early indicators suggest equity inflows are returning to preferred property sectors quickly. Ord Minnett recommends increasing exposure to long weighted average lease expiry (WALE) A-REITs as part of its view on the recovery post the pandemic. Target is raised to $5.80 from $4.80. 

GWA GROUP (GWA) was upgraded to Neutral from Underperform by Credit Suisse 

Home improvement activity has been supported by changes to working arrangements during the pandemic. Credit Suisse believes GWA Group will be a beneficiary although growth has historically been more modest compared with hardware sales. The broker likes the primary exposure to new housing and is less concerned about a decline in demand for interior projects as restrictions ease. Rating is upgraded to Neutral from Underperform and the target is raised to $3.15 from $2.20. 

HEALIUS (HLS) was upgraded to Outperform from Neutral by Macquarie 

Macquarie reviews the near-term growth assumptions and assumes a less substantial impact from the pandemic. The broker believes Healius is positively leveraged to improved activity levels heading into FY21. The company has highlighted the potential divestment of its medical centres, and if proceeds are used to repay debt, Macquarie calculates this would reduce pro forma gearing to 1.5x from 2.7x. Rating is upgraded to Outperform from Neutral and the target is raised to $3.00 from $2.70. 

NATIONAL AUSTRALIA BANK (NAB) was upgraded to Buy from Neutral by UBS 

While the numerous pressures on banks have weighed over recent years and the stocks have consistently underperformed, UBS suggests the outlook may not be so bleak. While the economy is not emerging from its problems as yet, the broker believes the market is likely to factor in a recovery in bank returns unless there is further deterioration. National Australia Bank is upgraded to Buy from Neutral. In a good environment credit losses could fall back to mid-cycle levels by FY22 and asset inflation may begin to normalise. A sector return of around 9% still appears possible, in the broker’s view. Target is raised to $20.50 from $16.50. 

SANTOS (STO) was upgraded to Add from Hold by Morgans 

Morgans believes the hurdles to new growth have increased substantially. Oil is recovering and large producers have regained profitability, which is an essential improvement in fundamentals. Santos is considered best placed to resume growth with a significant competitive advantage over close peers. Dorado is likely to provide an attractive growth option and the increased stake in Darwin LNG has raised confidence in the Barossa development. PNG remains the risky proposition. Rating is upgraded to Add from Hold and the target to $6.30 from $4.39. 

SIMS METAL MANAGEMENT (SGM) was upgraded to Buy from Neutral by UBS 

UBS assesses limited visibility and volatile trading have driven the stock to trade at, or below, net tangible assets. However, scrap markets are expected to improve as the US economy re-opens. UBS upgrades to Buy from Neutral as a result. In addition, the push into cloud recycling offers the opportunity for more stable volumes. Target is reduced to $10.20 from $10.80. 

SOUTH32 (S32) was upgraded to Buy from Neutral by UBS 

UBS upgrades to Buy from Neutral, assessing the risk/reward is attractive. There is upside risk to spot alumina, aluminium and metallurgical coal in the medium term, partly offset by manganese. Moreover, there is a strong balance sheet and the business is reshaping the portfolio with the Hermosa project, Ambler & Eagle Downs and via the exit of South African energy coal and manganese alloy smelters. UBS envisages a number of potential catalysts. Estimates are reduced for FY20 by -6% and for FY21 by -14% to reflect new guidance. Target is reduced to $2.80 from $2.90. 

STOCKLAND (SGP) was upgraded to Overweight from Equal-weight by Morgan Stanley 

Residential stimulus and the restructure of stamp duty are expected to provide support for Stockland. Morgan Stanley lifts FY21 and FY22 settlement estimates to 5000 and 5400 lots, respectively. The broker takes a more positive view, given housing stimulus at both federal and state levels and support for retail as stores re-open faster than expected. Rating is upgraded to Overweight from Equal-weight and the target raised to $4.30 from $3.10. In-Line industry view. 

WESTPAC BANKING CORPORATION (WBC) was upgraded to Buy from Neutral by UBS 

Westpac has completed its investigation into the AML/CTF compliance issues. The assessment was some areas of risk were not sufficiently understood and accountability for managing compliance end to end was unclear There are also failures acknowledged in other areas which occurred because of a mix of technology and human error. The bank believes appropriate action has been taken. A -$900m provision for an AUSTRAC penalty was raised in the first half and Morgan Stanley does not expect further charges to be included. Morgan Stanley retains an Underweight rating. Target is $15.00. Industry view: In Line. 

WORLEY (WOR) was upgraded to Outperform from Neutral by Credit Suisse 

Credit Suisse assesses the company has more exposure to less volatile industries and a recovery in the next 6-12 months is expected. Worley is now less exposed to oil & gas capital projects but has a higher exposure to oil & gas customer operating activities. There is also around 37% of revenue emanating from the chemical sector. The broker expects an update on trading conditions at the investor briefing on June 10. Rating is upgraded to Outperform from Neutral on valuation grounds and the target is lowered to $10.50 from $15.00. 

In the not-so-good books 

ASX (ASX) was downgraded to Underperform from Neutral by Credit Suisse 

Cash equity activity remained strong in May with the ASX on track for a record second half. ASX 24 derivatives activity was very weak, which Credit Suisse suggests was likely the result of the RBA rate targeting initiatives. Equity raisings also remained elevated. However, going into FY21 revenue growth is expected to slow and the fall in the BBSW rate will create a further obstacle. The broker assesses earnings estimates are starting to look stretched and downgrades to Underperform from Neutral as the stock has outperformed the market over the last three months. Target is steady at $73. 

AURELIA METALS (AMI) was downgraded to Accumulate from Buy by Ord Minnett 

The stock has rallied 66% over the past month and is approaching Ord Minnett’s valuation. Hence, the rating is downgraded to Accumulate from Buy and the target is raised to $0.55 from $0.45. The broker assesses investor sentiment has shifted to a view that the worst is now behind the business. Recent exploration updates have broadly confirmed expectations for mine life extensions at higher grades. 

DOMINO’S PIZZA ENTERPRISES (DMP) was downgraded to Hold from Add by Morgans 

Domino’s Pizza stores are now open for business with carry-out back to normal levels and store rollout being ramped up. Morgans points towards an increase in delivery growth during the pandemic-led lockdown, driven by new customers. Reinforced by the increase in delivery, store rollout will be an important part of the group’s strategy, highlights the broker. The target increases to $63.22 from $55.57. Although the group has been a very well-placed domestic consumer discretionary stock during and post-pandemic, Morgans downgrades its ratings to Hold from Add due to the recent share price strength. 

IGO (IGO) was downgraded to Neutral from Buy by Citi 

Citi has become more constructive about the pick up in China. The rally in copper is expected to continue against a backdrop of stronger Chinese activity and higher oil prices. Base metal stocks are, however, downgraded against the recent rally. The cheapest entry point is behind the market but the broker still envisages value as a rebound in base metals is not fully priced in. Rating is downgraded to Neutral from Buy and the target is raised to $5.70 from $5.60. 

NUFARM (NUF) was downgraded to Underperform from Neutral by Macquarie and to Reduce from Hold by Morgans 

Macquarie was disappointed with the trading update and the outlook for the fourth quarter as the impact of the pandemic creates uncertainties and challenges. The fourth quarter is Nufarm’s largest seasonal quarter. Europe is experiencing the greatest impact from the pandemic and earnings are likely to be well behind in the second half. Meanwhile, North America has been affected by changed consumer demand in the turf and ornamental segments, although improved crop protection performance has more than offset this weakness in the third quarter. Macquarie downgrades to Underperform from Neutral and reduces the target to $4.85 from $5.10. 

Covid-19 is starting to impact Nufarm’s fourth quarter and Europe’s second-half earnings forecast has been lowered by Morgans. The broker also expects an increase in finance costs with more FX volatility. The balance sheet looks fine following the sale of the South American operations for $1bn. Morgans downgrades its rating to Reduce from Hold due to uncertainty over earnings with target price increased to $4.76 from $4.60. 

SANDFIRE RESOURCES (SFR) was downgraded to Neutral from Buy by Citi 

Citi has become more constructive about the pick up in China (see IGO downgrade above). Rating is downgraded to Neutral/High Risk from Buy/High Risk. Target is raised to $5.60 from $5.50. 

VICINITY CENTRES (VCX) was downgraded to Neutral from Outperform by Macquarie 

Macquarie has returned from research restriction following Vicinity Centres’ capital raising to downgrade to Neutral from Outperform. The prior rating was based on a belief the market was more pessimistic than the broker’s -20-30% decline in asset value forecast, but the stock has since re-rated on the reopening theme. Downside protection is provided by the raising vis a vis gearing, but the broker believes further upside is limited by asset value decline to come. Target $1.75 (was $1.70). 

ZIP CO (Z1P) was downgraded to Neutral from Buy by UBS 

The company has announced the scrip acquisition of Quadpay, a US business in which it held a 14% stake previously. The broker envisages a number of positives, including exposure to the world’s largest retail market. Quadpay has been a strong performer during the pandemic. Through a capital raising of up to $200m the company has resolved near-term equity funding concerns, say the analysts. However, UBS suggests there are some unknowns, including the precise economics of Quadpay. There is also intense competition in the US. UBS believes it prudent to take a conservative approach to the acquisition and downgrades to Neutral from Buy. Target is raised to $5.60 from $3.70. 

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.