In the good books
3P LEARNING (3PL) was upgraded to Overweight from Equal-weight by Morgan Stanley
3P Learning has secured a contract worth US$10m with a Middle Eastern National Ministry of Education to provide Mathletics licenses and services for twelve months. Morgan Stanley points out this will be a material addition to the company’s revenue and highlights the possibility of extending the tenure of the contract. The broker reduces its estimates for FY20 on account of higher costs and lower sales growth. While earnings for FY21 are lifted as a result of this contract, FY22 estimates are mostly left intact. Morgan Stanley upgrades its rating to Overweight from Equal-weight with the target price increased to $1.10 from $0.86. Industry view: In-line.
EBOS GROUP (EBO) was upgraded to Buy from Neutral by Citi
Following the new Community Pharmacy Agreement (see Australian Pharmaceutical Industries downgrade below), Citi considers EBOS, with the largest exposure to the hospital market, is likely to be most negatively affected relative to peers by the new floor-ceiling price. Rating is upgraded to Buy from Neutral as the valuation is rolled forward. Target is raised to $24.50 from $23.50.
JUMBO INTERACTIVE (JIN) was upgraded to Add from Hold by Morgans
The extension of Jumbo Interactive’s reseller deal with Tabcorp (TAH) through to 2030 is a case of short term pain for long term gain, Morgans suggests. It will cost Jumbo -$15m up front and a service fee that ramps up to 4.6% in 2024. It’s costly, the broker admits, but should provide the market with comfort over the relationship. Strong ticket sales have otherwise led Jumbo to reiterate FY20 guidance. Morgans upgrades to Add from Hold. Target rises to $11.58 from $9.62.
SIGMA HEALTHCARE (SIG) was upgraded to Buy from Neutral by Citi
Citi upgrades to Buy from Neutral following the new Community Pharmacy Agreement (see Australian Pharmaceutical Industries downgrade below). Target is raised to $0.75 from $0.70. Sigma has some exposure to the hospital market but the impact of the distribution fee ceiling on the group should be negligible.
TABCORP HOLDINGS (TAH) was upgraded to Neutral from Sell by Citi
Tabcorp has renegotiated its reseller agreement with Jumbo Interactive ((JIN)), effectively halving the long-term net commission rate. Citi assesses this is less risky than exiting the agreement altogether and reflects Tabcorp’s market power. Rating is upgraded to Neutral from Sell and the target raised to $3.40 from $2.80.
WHITEHAVEN COAL (WHC) was upgraded to Buy from Neutral by Citi
Citi is of the view that thermal coal prices are now so low for so long that a producer response will follow. Productions cuts are on the cards, predict the analysts. Citi analysts are anticipating a repeat of 2015 when aggressive reductions followed, with the price for thermal coal subsequently rising. Target price for Whitehaven Coal has been pared back to $1.75 from $1.80 but the anticipated scenario for the sector overall has now triggered an upgrade to Buy from Neutral.
WOODSIDE PETROLEUM (WPL) was upgraded to Outperform from Neutral by Macquarie
Macquarie lowers oil price assumptions for the next 18 months and notes Woodside Petroleum shares are underperforming sector peers. The broker suggests there is increased upside risk for the stock as Woodside may be able to capture value by acquiring the Chevron stake in North West Shelf. The broker upgrades to Outperform from Neutral on valuation. Target is raised to $25.00 from $23.50.
In the not-so-good books – gold stocks
Macquarie assesses a strengthening Australian dollar has taken the gloss off the gold sector, putting a brake on earnings growth. This is exacerbated by expectations for a disrupted June quarter and production growth in FY21 is likely to be limited
ALACER GOLD (AQG) was downgraded to Neutral from Outperform by Macquarie
Target is raised to $9.40 from $9.00.
CAPRICORN METALS (CMM) was downgraded to Underperform from Outperform by Macquarie
Target is steady at $1.50.
DACIAN GOLD (DCN) was downgraded to Underperform from Outperform by Macquarie
Target is reduced to $0.43 from $0.45.
NEWCREST MINING (NCM) was downgraded to Underperform from Neutral by Macquarie
Target is steady at $28.
REGIS RESOURCES (RRL) was downgraded to Underperform from Neutral by Macquarie
Target is reduced to $4.50 from $4.60.
RESOLUTE MINING (RSG) was downgraded to Underperform from Neutral by Macquarie
Target is steady at $1.
SARACEN MINERAL HOLDINGS (SAR) was downgraded to Neutral from Outperform by Macquarie
Target is raised to $5.40 from $5.00.
ST BARBARA (SBM) was downgraded to Underperform from Neutral by Macquarie
Target is steady at $2.60.
WEST AFRICAN RESOURCES (WAF) was downgraded to Underperform from Neutral by Macquarie
Target is steady at $0.90.
In the not-so-good books – other stocks
AUSTRALIAN PHARMACEUTICAL INDUSTRIES (API) was downgraded to Neutral from Buy by Citi
Citi believes Australian Pharmaceutical Industries is most likely to benefit from the new Community Pharmacy Agreement (CPA). The new agreement will be in place for five years and is effective from July 1. The industry will receive additional funding of at least $92m, and most of it should flow through to earnings (EBIT). The impact of the new floor ceiling is likely to be of benefit to the company relative to peers. At this stage the broker includes no benefits in estimates because of the number of variables involved. Rating is downgraded to Neutral from Buy on valuation. Target is raised to $1.25 from $1.15.
GALAXY RESOURCES (GXY) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse updates operating estimates for Mount Cattlin and factors in a weak environment for lithium demand. The broker forecasts a 2020 spodumene price of US$415/t. Liquidity should remain robust and a restructured Mount Cattlin should reduce any strain on cash. The broker downgrades to Neutral from Outperform and reduces the target to $0.84 from $1.50.
PANORAMIC RESOURCES (PAN) was downgraded to Underperform from Neutral by Macquarie
Macquarie reduces medium-term nickel price forecasts. The broker prefers Western Areas (WSA) and Nickel Mines (NIC) among nickel producers. Panoramic Resources is downgraded to Underperform from Neutral. Target is reduced to 8c from 9c.
PILBARA MINERALS (PLS) was downgraded to Sell from Neutral by Citi
Citi expects the spodumene market will remain the weakest link in the lithium supply chain because of significant capacity additions in hard rock supply. Moreover, there is a dependence on volume offtake by third-party converters and a relatively high cost structure. Rating is downgraded to Sell/High Risk from Neutral/High Risk as the valuation appears stretched. Target is reduced to $0.22 from $0.24.
SANTOS (STO) was downgraded to Neutral from Outperform by Macquarie
The Santos share price is up 10% since May. This leads Macquarie to downgrade to Neutral from Outperform. The broker also expects a slower recovery in the oil price over 2021. Target is reduced to $5.50 from $6.05.
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.