In the good books
COSTA GROUP (CGC) was upgraded to Neutral from Underperform by Macquarie
Pandemic-related restrictions are being eased in Australia with sequential improvement in the food service sector. Meanwhile, Macquarie notes produce pricing remains solid and seasonal conditions robust. Rating is upgraded to Neutral from Underperform. While Costa Group is at the higher end of the investment risk spectrum, Macquarie believes the bar is now set lower after a recent decline in the share price. Target is $2.87.
CROWN RESORTS (CWN) was upgraded to Overweight from Equal-weight by Morgan Stanley
Morgan Stanley switches its preference to Crown Resorts and upgrades to Overweight from Equal-weight. Target is raised to $12.00 from $6.60. The broker believes there is now more reliance on the domestic market, given travel restrictions. This will become a fight for market share and Crown Sydney, which opens in December, is expected to be the winner. With capacity restrictions, Morgan Stanley does not forecast a recovery until FY22. Industry view: Cautious.
FISHER & PAYKEL HEALTHCARE CORPORATION (FPH) was upgraded to Outperform from Neutral by Macquarie
In the US, Macquarie has research that indicates hospitalisation rates for the pandemic imply a high severity flu season. For the company, hospitalisation rates are a key driver of demand for consumables. The broker assesses earnings momentum, combined with upside risk presented by second coronavirus wave, is compelling. Rating is upgraded to Outperform from Neutral. Target is raised to NZ$30.97 from NZ$25.02.
HEALIUS (HLS) was upgraded to Outperform from Neutral by Credit Suisse
Healius will sell its 69 medical centres, 13 Health & Co practices and 62 dental clinics for $500m. Proceeds of $470m are expected on completion. The sale to BGH Capital requires approval from the Foreign Investment Review Board and should be completed this year. Meanwhile, trading conditions have improved in recent weeks with pathology revenue close to prior year levels and radiology revenue down in just single digits. Credit Suisse raises FY20 earnings estimates by 20% and FY21 by 14%, expecting a stronger recovery from the pandemic. Rating is upgraded to Outperform from Neutral, as the broker assesses the stock is trading in line with the multiple paid for medical centres, which is the least attractive and lowest-return business unit. Target is raised to $3.25 from $2.47.
See downgrade below.
METCASH (MTS) was upgraded to Overweight from Equal-weight by Morgan Stanley
Morgan Stanley anticipates a strong update for April and May. The broker believes Metcash merits a higher multiple, given its earnings diversification and balance sheet strength. Industry feedback suggests the company’s food business has taken share over the period of the lockdowns. Morgan Stanley remains positive on the supermarket segment because of easing food deflation and discounters being less of a headwind. Rating is upgraded to Overweight from Equal-weight and the target raised to $3.30 from $2.90. Cautious industry view.
RELIANCE WORLDWIDE CORPORATION (RWC) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse increases estimates for net profit by 53% in FY20 and 22% in FY21. The contractor outlook in the US has improved materially. Reports are more mixed in the UK and sales are expected to be down -20-30% amid weakness in the renovation segment. The broker is more confident Reliance Worldwide can outperform peers and upgrades to Outperform from Neutral. Target is raised to $3.25 from $2.70.
SUPER RETAIL (SUL) was upgraded to Add from Hold by Morgans
A sharp fall in Super Retail’s sales in April was offset by an equivalent rebound in May, to a net -1.7% loss over the two months, Clearly the company has come out of the lockdowns relatively unscathed, Morgans notes, and it would have performed better but for more stringent restrictions in NZ. Success represents a balance of a big increase in online sales and a reduction in costs per unit. Super Retail now wants to beef up its digital offering after paying down debt hence a $203m capital raising. While the raising is -6% dilutive to FY21 earnings, Morgans believes the resilience the business has shown over the period deserves a higher market rating. Target rises to $9.25 from $7.84. Upgrade to Add from Hold.
VIVA ENERGY GROUP (VEA) was upgraded to Accumulate from Hold by Ord Minnett
The first half update was ahead of Ord Minnett’s forecasts. Costs and capital expenditure have been managed better than the broker expected. The announcement of the Geelong energy hub provides an option but the broker has become more positive on the stock because of retail fuel margins, cost management and capital management. Rating is upgraded to Accumulate from Hold. Target is raised to $2.00 from $1.40.
WAGNERS HOLDING (WGN) was upgraded to Add from Hold by Morgans
Australia’s weak economic outlook will likely weigh on construction activity over the next 6-12 months, Morgans suggests, but government infrastructure spending will play an important role in the recovery. Wagner’s has contracts in place and a pipeline of tenders as of its first half result which should see the company well-positioned. Leverage will peak as earnings trough in FY20, but Morgans believes the balance sheet can be managed and a debt facility extended, ahead of an earnings recovery in FY21. On share price weakness, the broker upgrades to Add from Hold. Target unchanged at $1.20.
In the not-so-good books
ASX (ASX) was downgraded to Lighten from Hold by Ord Minnett
Ord Minnett notes listing volumes and equity value traded are at high levels, although they have likely peaked and futures volumes may be under pressure. The broker also expects capitalised costs will continue rising because of the delay in CHESS replacement. Based on valuation, Ord Minnett considers ASX less attractive than other stocks under coverage and downgrades to Lighten from Hold. Target is reduced to $78 from $81.
HEALIUS (HLS) was downgraded to Hold from Add by Morgans
Healius has divested its medical centres business to BGH Capital for $500m with the transaction to be completed by end of 2020. Morgans considers the transaction reasonably priced that will strengthen Healius’s balance sheet and simplify operations across the main divisions. The company, as per a trading update, is seeing a recovery across its entire business. The broker cautions the transition to a specialist diagnostic and day hospital operator is far from complete and highlights risks around GP referrals, optimisation of cost base and growth to drive market share gains. The broker downgrades to Hold from Add on account of the divesture with target price reduced to $2.96 from $3.04.
See upgrade above.
ILUKA RESOURCES (ILU) was downgraded to Hold from Accumulate by Ord Minnett
As there has been no update since the company withdrew guidance and reduced zircon production settings, Ord Minnett assesses there is plenty of risk around the outlook. The main catalyst is a confirmation of the structure and timing of the spin-off of the royalty for the Mining Area C. The broker also awaits further detail on the project pipeline to assess how this will benefit from the higher prices that are anticipated. While remaining positive on the stock for the medium to longer term, Ord Minnett downgrades to Hold from Accumulate. Target is $8.90.
INVOCARE (IVC) was downgraded to Underperform from Outperform by Macquarie
Macquarie’s analysis suggests the company continues to lose market share. Earnings risk is skewed to the downside. FY20 has been affected by lower case averages because of funeral restrictions. There is also likely to be lower influenza-related deaths this winter because of physical distancing. Rating is downgraded to Underperform from Outperform and the target is lowered to $10.20 from $12.80.
MEGAPORT (MP1) was downgraded to Neutral from Buy by UBS
UBS continues to like the business strategy but finds it hard to ignore the recent performance of the share price, which is up 13% since February and has outperformed the ASX small ordinaries by 29%. The broker assesses there is upside in leveraging the platform to distribute complementary services but, without a business case, this is not factored in. The short-term opportunity is reflected in the share price and UBS downgrades to Neutral from Buy. Target is raised to $14.05 from $11.90.
NOVONIX (NVX) was downgraded to Hold from Add by Morgans
Novonix has raised $5.7m from institutions and will add another $52-57m from the St Baker Energy Innovation Fund and other existing shareholders, Morgans reports. The funds will be used to repay debt and expand synthetic graphite production capacity. The company’s first graphite customer, Samsung SDI, has shown impressive sales growth. Novonix has also filed another patent related to its Dry Particle Microgranulation technique which targets cathode production. All of which has led to a share price rally. While the broker sees much potential, it’s still early in the game and risks remain. Hence a pullback to Hold from Speculative Buy and a target cut to $1.09 from $1.39 on dilution.
OPTICOMM (OPC) was downgraded to Hold from Buy by Ord Minnett
Uniti Group (UWL), an emerging telecommunications company, is set to acquire fibre network operator OptiComm. The group has proposed a 5-option scheme of arrangement transaction to OptiComm shareholders involving scrip, cash and a combination of both. The board of OptiComm will vote their combined circa 32% of shares in favour of the scheme and has recommended the shareholders do the same. The broker sees the chances of a third-party counter bid slim at this stage. Ord Minnett reduces its rating to Hold from Buy with a target price of $5.42.
STAR ENTERTAINMENT GROUP (SGR) was downgraded to Underweight from Overweight by Morgan Stanley
Morgan Stanley believes Crown Sydney (CWN), which opens in December 2020, will be a winner in terms of the reliance on the domestic market and the ensuing fight for market share. The broker does not believe this outlook and emphasis on domestic, has been factored into the share price for The Star. The broker downgrades to Underweight from Overweight and acknowledges it is the sole underweight broker on the stock. With capacity restrictions, a weaker domestic consumer and restrictions on international travel, the broker does not forecast a recovery in gambling stocks until FY22. Target is raised to $3.30 from $2.50. Industry view: Cautious.
STOCKLAND (SGP) was downgraded to Hold from Accumulate by Ord Minnett
Stockland has provided a positive update and Ord Minnett increases earnings estimates by 4% based on residential demand that is better than previously expected. The stock sold off aggressively in February and March as the market priced in the potential impact of the pandemic but has since been the best performer among A-REITs. As the stock is now trading broadly in line with the broker’s target, the rating is downgraded to Hold from Accumulate. Target is raised to $3.50 from $3.10.
WEST AFRICAN RESOURCES (WAF) was downgraded to Neutral from Outperform by Macquarie
Macquarie upgrades processing assumptions for Sanbrado as the performance to date has been strong. The broker now assumes throughput of 3.2mtpa from mid 2022 to mid 2021 and then reducing to nameplate capacity by mid 2022. Rating is downgraded to Neutral from Outperform, given recent share price strength. Target is $0.90.
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.
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