Stockbroking analysts’ company ratings on individual ASX-listed stocks are revealing a clear bias toward upgrades. This is also reflected in a positive target price trend.
For the week ending Friday 17 July 2020, FNArena registered 10 upgrades and 6 downgrades for individual stocks. 9 of the 10 upgrades moved to a Buy rating and only 1 of the 6 downgrades moved to a Sell.
While only one broker was responsible for 3 ratings changes in the REIT sector (2 positive, 1 negative), it may be indicative of a wider uncertainty regarding unknown pandemic effects for the sector.
Alumina Ltd was the standout, receiving two upgrades to a Buy, after JV partner Alcoa reported above-forecast production results in the June quarter.
Only Zip Co was downgraded to a Sell, based partly on conservatism about the recent share price rally and partly on a rise in bad debts.
The weak metallurgical coal outlook impacted negatively on earnings forecasts for Coronado Global Resources.
All three brokers commenting on Senex Energy were very positive on future prospects and upgraded earnings forecasts markedly. Coming in second for earnings upgrades was QBE Insurance Group, with raised expectations for premium rates.
Total Buy ratings for the seven brokers monitored daily remains high at 49.25% of total ratings, versus 40.39% on Neutral/Hold, and 10.36% in Sell ratings.
In the good books
ALUMINA LIMITED (AWC) was upgraded to Outperform from Neutral by Credit Suisse and to Accumulate from Hold by Ord Minnett B/H/S: 4/1/1
Credit Suisse upgrades to Outperform from Neutral believing the positive indicators are exceeding the negatives. Assets are performing and unit costs are down in the June quarter. Commentary signalling the aluminium sector is turning the corner in Europe and North America suggests the rise in inventory outside of China may start to slow. That said, the broker acknowledges the global outlook is uncertain and volatility is still expected. Target is raised to $2.00 from $1.65.
AWAC JV partner Alcoa has reported better-than-expected production results from the June quarter. Ord Minnett lifts the valuation for Alumina Ltd as a result. Better operating results in the next 1-2 years should support a higher dividend as well, in the broker’s view. The stock presents value now and the rating is upgraded to Accumulate from Hold. Target is raised to $2.10 from $1.80.
NATIONAL STORAGE REIT (NSR) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 1/2/1
Ord Minnett assesses the short-term impact on operations from the pandemic has been relatively contained with only a -3-4% decline in occupancy. The broker believes National Storage could unlock value in the medium term by stabilising its occupancy at 85%. Furthermore, self-storage should remain a preferred property sector and, given the fragmented nature of the asset class, it remains possible bids could re-emerge from those looking to establish scale in Australia. Rating is upgraded to Accumulate from Hold and the target lifted to $2.05 from $1.60.
OCEANAGOLD CORPORATION (OGC) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 2/2/0
Ord Minnett has remodelled the economic and production assessment of Waihi. A higher peak production rate, longer mine life and increased resources from Martha and Gladstone open pits are envisaged. This leads to an upgrade to Accumulate from Hold and the target raised to $4.20 from $3.60.
PERPETUAL LIMITED (PPT) was upgraded to Neutral from Sell by Citi B/H/S: 1/6/0
Perpetual has released a business update for Q420, which has led Citi to upgrade to Neutral from Sell. The broker believes there are increasing signs of a turnaround, with 4Q net outflows moderating and investment performance for most key strategies improving. Strong growth in FuA in Corporate Trust is encouraging, but much of this is likely to be a one-off event. Cost growth for FY20 and potentially 1H21 will likely be suppressed. This may be temporary as reduced discretionary spend and salary cuts for executives may reverse over time, according to the broker. Rating is increased to Neutral from Sell. The price target increased to $32.00 from $26.10.
QUBE HOLDINGS LIMITED (QUB) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 2/3/1
The company has exchanged contracts for the sale of the Minto properties to entities associated with Charter Hall (CHC) for $207m. Ord Minnett assesses the sale is neutral to valuation. However, the addition to the balance sheet is advantageous, given the uncertainty over logistics volumes for FY21. Recycling capital from a mature property is a positive signal from a company that has deployed substantial expenditure on new projects. Ord Minnett upgrades to Accumulate from Hold and raises the target to $3.09 from $2.95.
WAYPOINT REIT (WPR) was upgraded to Buy from Hold by Ord Minnett B/H/S: 2/0/1
Ord Minnett believes long WALE A-REITs are a way to play the current environment, given stable earnings and distribution spreads. Waypoint is the preferred stock as it offers an attractive distribution yield with limited earnings risk. With the dividend earnings uncertainty surrounding traditional shopping centre landlords, service stations have become a preferred retail asset class. Rating is upgraded to Buy from Hold and the target is raised to $2.95 from $2.80.
In the not-so-good books
CHARTER HALL LONG WALE REIT (CLW) was downgraded to Accumulate from Buy by Ord Minnett B/H/S: 3/1/0
Ord Minnett believes long WALE A-REITs are a way to play the current environment, given stable earnings and distribution spreads. Yet, Charter Hall Long WALE displays some earnings risk and has less valuation upside compared to others in the segment, according to the broker. Hence, rating is downgraded to Accumulate from Buy. Target is reduced to $4.48 from $5.80.
ORIGIN ENERGY LIMITED (ORG) was downgraded to Hold from Add by Morgans B/H/S: 4/3/0
Morgans believes Origin Energy has medium-term potential but a recovery will be some time away. The downside risks in the meantime outweigh the longer-term potential. Rating is therefore downgraded to Hold from Add. The company has announced a -$1.2bn post-tax write-down of its LNG business. Guidance for energy markets operating earnings has been reiterated at $1.4-1.5bn. Target is reduced to $5.95 from $6.43.
SOUTHERN CROSS MEDIA GROUP (SXL) was downgraded to Neutral from Outperform by Macquarie B/H/S: 1/1/0
Macquarie downgrades to Neutral from Outperform. The revenue environment is uncertain and the stock is trading near the target price. While the business has controlled costs and will benefit from JobKeeper payments, further weakness in advertising markets is expected to prevail for the near term. Target is unchanged at $0.18.
WOODSIDE PETROLEUM LIMITED (WPL) was downgraded to Neutral from Buy by Citi B/H/S: 4/3/0
Citi has downgraded Woodside Petroleum to Neutral from Buy. Impairment disclosures have led the broker to downgrade and the analysts fail to see a near-term catalyst, other than a possible reduction in bottlenecks at Scarborough. Citi believes the market does not fully appreciate that Pluto LNG no longer enjoys its S-Shape inflection point at $60 oil. As a result, third quarter results may disappoint. The rating is decreased to Neutral from Buy. Target is reduced to $22.33 from $26.08.
ZIP CO LIMITED (Z1P) was downgraded to Sell from Neutral by UBS B/H/S: 2/0/1
The trading update looked strong, with total transaction volumes increasing by 62%. Second half revenue grew 88%. However, highlight the analysts, net bad debts increased to 2.24% at the end of the June quarter. UBS now believes the risk/reward is unfavourable following the recent rally in the share price and downgrades to Sell from Neutral. Target is raised to $5.70 from $5.60. The broker notes several short-term risks including uncertainty over the duration of the pandemic, growth in credit risk and the integration risk for Quadpay.
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.
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