Today’s dichotomy in the Australian share market is reflected in research updates released by stockbroking analysts.
On the one hand, underlying trends in earnings estimates and share price valuations and targets have turned positive.
On the other hand, the balance between recommendation upgrades and downgrades has turned in favour of more downgrades – often the same companies enjoying positive momentum in forecasts and price targets are the same ones receiving recommendation downgrades.
Today’s dilemma for investors couldn’t be made any clearer.
For the week ending Friday 19 June 2020, FNArena registered thirteen upgrades versus twenty downgrades for individual ASX-listed stocks.
Only two of the upgrades didn’t move past Neutral/Hold, whereas four of the downgrades sank to a fresh Sell.
Carsales and Megaport both received two downgrades, all four to Neutral, after stellar rallies in both share prices recently.
Fresh sell ratings were reserved for the ASX, InvoCare, Regis Resources, and Star Entertainment.
Heavy downward adjustments to earnings forecasts were made for Ardent Leisure, Sims Metal Management, and Crown Resorts but these are dwarfed by what is occurring on the positive side of the ledger.
Nine of the top ten largest increases to consensus forecasts all come in double digit percentage, with the week’s top scorer -Oil Search- almost doubling the prior estimate.
Other big gainers include Viva Energy Group, Qantas, Nufarm, and Air New Zealand.
After a brief peek above the 50%, total percentage of Buy/Outperform ratings for the seven brokers covered has now fallen back to 49.71% – still very high by historical standards.
Total Neutral/Hold recommendations take up 40.89% of the total, while Sell ratings account for the remaining 9.40%.
In the good books
FIRSTWAVE CLOUD TECHNOLOGY LIMITED (FCT) was upgraded to Add from Hold by Morgans B/H/S: 1/0/0
Firstwave Cloud Technology has completed a $15m capital raising, and on rising sales and tight cost control should reach cash flow breakeven by end-2022, Morgans estimates. With funding now settled, management can return focus to the business. For Firstwave, the key to growing sales revenue is to continue adding distributors who pay to use the company’s comprehensive cyber security offering, the broker suggests. Upgrade to Speculative Buy from Hold, target rises to 16.5c from 10.6c.
PREMIER INVESTMENTS LIMITED (PMV) was upgraded to Outperform from Neutral by Macquarie B/H/S: 3/2/0
In light of recent online sales growth, Macquarie is of the view that the company’s businesses are well-placed in terms of both brand and sales channels. Peter Alexander, Just Jeans and Portmans performed well over May. The broker continues to assume some short-term rental relief and wage subsidies. Still, Macquarie is cautious about foot traffic, particularly in the UK. Rating is upgraded to Outperform from Neutral and the target raised to $20.11 from $12.62.
SEEK LIMITED (SEK) was upgraded to Buy from Neutral by UBS B/H/S: 4/1/1
UBS upgrades earnings expectations, anticipating most of the weakness in employment is behind us and job volumes are likely to be flat to slightly ahead from now on. The broker also envisages potential for some of the new base costs to hold into FY21. Relative to Australian online classified peers, the broker assesses price upside for Seek and upgrades to Buy from Neutral. Target is raised to $23.00 from $15.25.
WESTPAC BANKING CORPORATION (WBC) was upgraded to Equal-weight from Underweight by Morgan Stanley B/H/S: 4/3/0
While Westpac has weak retail banking momentum and no plan for medium-term cost reductions, Morgan Stanley upgrades to Equal-weight from Underweight. The upgrade stems from an improved margin outlook because of lower funding costs, amid less concern about loan losses and a reduced risk of a capital raising. Target is raised to $18.10 from $15.00. Industry view: In Line.
In the not-so-good books
ANSELL LIMITED (ANN) was downgraded to Neutral from Buy by Citi B/H/S: 2/4/1
Ansell’s CEO Magnus Nicolin has delayed retirement and will be staying until December 2021. This is due to the pandemic making it difficult to assess CEO candidates. FY20 guidance remains unchanged with the company noting increased demand for products used by essential workers. Citi highlights the company is expanding its manufacturing and distribution capacity even as it tries to shift its focus away from pandemic-hit industries. Ansell is also not increasing its prices except to compensate for increased costs, a strategy appreciated by the broker. Citi downgrades to Neutral from Buy noting the stock reflects fair value currently. The target increases to $35 from $34.50.
CARSALES.COM LIMITED (CAR) was downgraded to Neutral from Outperform by Macquarie and to Hold from Buy by Ord Minnett B/H/S: 2/4/0
The company stated that lead volumes have grown strongly since late April, a surprise to Macquarie. The broker suspects part of this increase is cyclical, and one-off factors such as pent-up demand following the easing of social distancing restrictions as well as government stimulus have contributed. On the basis the strength is cyclical this impact should normalise over time and have little bearing on long-term trends, in the broker’s view. Car ownership may be rising to some extent as a result of the pandemic, for which the implications are positive. Following a 41% increase in the share price since late April Macquarie assesses value is better reflected at current levels and downgrades to Neutral from Outperform. Target rises to $18.00 from $15.30.
FY20 guidance for Carsales.com points towards operating income between $228-$232m which indicates a growth of 5-6% over FY19. Ord Minnett finds this impressive in the face of volume disruptions and a challenging new car market. There is also a rebound in dealer activity with lead volumes growing strongly between April 22 and June 16. Public transport restrictions are also acting as a catalyst, notes the broker. Ord Minnett considers the company to be fully valued and downgrades to Hold from Buy with the target price increasing to $17.06 from $15.72.
FORTESCUE METALS GROUP LTD (FMG) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 2/4/1
Ord Minnett downgrades to Hold from Accumulate following a material outperformance of the share price. The broker still envisages Fortescue Metals will offer strong yields but, given Brazilian iron ore exports are expected to recover in the second half of 2020, lower iron ore prices could weigh. Target is reduced to $14.60 from $15.10.
GALAXY RESOURCES LIMITED (GXY) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 1/4/1
Ord Minnett downgrades to Hold from Accumulate because of recent appreciation in the share price. Target is steady at 90c.
MINERAL RESOURCES LIMITED (MIN) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 2/1/0
Ord Minnett downgrades to Hold from Accumulate because of recent appreciation in the share price. Target is raised to $17.80 from $17.20.
MEGAPORT LIMITED (MP1) was downgraded to Hold from Add by Morgans B/H/S: 0/3/0
Demand for remote working and other cloud/collaboration solutions provided by cloud service providers has, unsurprisingly Morgans notes, been incredibly strong over the last six months. Megaport has now been included in the ASX200. The broker makes no changes to near term forecasts but lifts its target to $14.14 from $12.87 after rolling forward forecasts by 12 months. The stock has rallied 122% year on year and shot up after the initial March sell-off. As the share price is now within 10% of target Morgans pulls back to Hold from Add.
NATIONAL AUSTRALIA BANK LIMITED (NAB) was downgraded to Equal-weight from Overweight by Morgan Stanley B/H/S: 6/1/0
While National Australia Bank’s margin improvement is strong as is its credit quality, Morgan Stanley expects loss rates to be higher than peers due to exposure to businesses. The broker points out the AUSTRAC issue has created uncertainty. All in all, the broker thinks the bank is more expensive than ANZ Bank and Westpac. Morgan Stanley downgrades to Equal Weight from Overweight and increases its target to $18.50 from $16.70.
REGIS RESOURCES LIMITED (RRL) was downgraded to Sell from Hold by Ord Minnett B/H/S: 3/3/1
Ord Minnett downgrades to Sell from Hold because of recent appreciation in the share price. Target is reduced to $4.10 from $4.20.
WESTERN AREAS NL (WSA) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 4/3/0
Ord Minnett downgrades to Hold from Accumulate because of recent appreciation in the share price. Target is steady at $2.20.
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.