In the good books
ANZ BANKING GROUP (ANZ) was upgraded to Neutral from Underperform by Macquarie
Macquarie reviews impairment forecasts. With 10-15% of consumer and small-medium enterprise loans being deferred, along with a weak economic outlook, there is downside risk to bank earnings. While recognising the risk of a relief rally as the sector is at a deep discount to its long-term history, in the medium-term Macquarie expects banks will deliver lower underlying returns. ANZ Bank is upgraded to Neutral from Underperform, given the changes. The target is reduced to $18.25 from $18.50.
CORPORATE TRAVEL MANAGEMENT (CTD) was upgraded to Add from Hold by Morgans
Morgans upgrades Corporate Travel Management to an Add from Hold and observes the company is trading at a material discount to the broker’s valuation. One key catalyst may be the company reporting its FY20 results on August 19, according to the broker. The broker believes company guidance may prove conservative as industry feedback suggests that corporate travel has been stronger than expected due to work from government and essential services customer contracts. The company expects a swift return to profitability for the high-margin domestic work, even at modest levels of domestic activity. Domestic travel accounts for about 60% of total revenue according to Morgans. The broker expects the company to win market share in a weakened competitive landscape, with a lower cost base moving forward and the competitive advantage of its technology. Finally, Morgans believes the company has enough liquidity in an environment of subdued activity, for at least 23 months.
OCEANAGOLD (OGC) was upgraded to Outperform from Neutral by Credit Suisse
2020 production has been downgraded because of factors outside of the company’s control. First half production was 40% of the revised lower guidance of 340-360,000 ounces. Credit Suisse observes the physical aspect of Haile is encouraging, despite a challenging period because of rainfall. There is no advancement on a resolution for Didipio but October appears to be potentially critical, when a six-month grace period for temporary lay-offs conclude and formal retrenchment of workers is required. The long-term growth opportunity is building and the broker upgrades to Outperform from Neutral. Target is raised to $4.10 from $2.90.
INCITEC PIVOT (IPL) was upgraded to Add from Hold by Morgans
Incitec Pivot provided a trading update for its first nine months of FY20, which highlighted short term challenges, according to Morgans. US explosives volumes were weaker than the broker expected and profitability was impacted by weak fertiliser prices. Despite this, Morgans believes the company is now through the worst. Some positives include fertiliser prices now starting to recover from recent lows, improved seasonal conditions expected and the US Explosives market bottoming in May. As the analyst has seen in past cycles, the company’s share price tends to re-rate in line with higher fertiliser prices, which are forecast by industry bodies over coming years. The broker raises profit (NPAT) estimates for FY20 and FY21 by 13% and 4%, respectively. The rating is upgraded to Add from Hold. The target price increased to $2.35 from $2.25.
ORIGIN ENERGY (ORG) was upgraded to Add from Hold by Morgans
In releasing its quarterly report for the period to 30 June, Origin Energy received $1.275bn cash from its 37.5% ownership in the Australia Pacific LNG joint venture. This was significantly more cash than Morgans had forecast. However, the broker points out this windfall could be tempered by the expected cash outflow caused by movements in electricity futures prices. The company’s electricity sales were down -7% in FY20 and business demand was down -11% in the last quarter, compared to the previous corresponding period (pcp), due to covid-19. Quarterly retail demand was also down -9% on pcp driven by increasing behind the meter generation/efficiency of households along with lower Small to Medium Enterprise demand. Morgans believes that despite a challenging FY21 ahead, most issues are widely understood and have been priced in by the market. The broker sees valuation upside and lifts its expectations for prices in the retail electricity sector in FY22. Additionally, the analyst forecasts there may be a positive surprise for the company’s share of earnings from Octopus. The rating is increased to Add from Hold. The target price is increased to $6.21 from $5.95.
PANORAMIC RESOURCES (PAN) was upgraded to Neutral from Underperform by Macquarie
Panoramic Resources has released an updated re-start for Savannah, including new reserve estimates. Macquarie notes this extends the mine life to 13 years. However, lower average grades reduce the nickel production outlook for the first five years by -20%. As the share price has fallen -18% over the past month and the stock is trading below the target, the broker upgrades to Neutral from Underperform. Target is $0.07.
ST BARBARA (SBM) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett is positive on the outlook for gold and has increased its near-term gold price forecast to US$2,000/oz. Its long-term gold price forecast remains US$1,600/oz. The broker upgrades its rating on St. Barbara to Accumulate from Hold despite the company’s disappointing update and FY21 production guidance. The target price is increased to $3.80 from $3.60.
In the not-so-good books
AMP (AMP) was downgraded to Underperform from Neutral by Macquarie
Macquarie notes the pre-release of first half results, which missed expectations. The broker understands the migration of high fee products is still outstanding and this poses downside risks into FY21. The broker’s analysis signals AMP may need to over-deliver on cost reductions to maintain operating earnings. Rating is downgraded to Underperform from Neutral and the target reduced to $1.40 from $1.85.
BENDIGO AND ADELAIDE BANK (BEN) was downgraded to Underperform from Neutral by Macquarie
Macquarie reviews impairment forecasts. With 10-15% of consumer and small-medium enterprise loans being deferred, along with a weak economic outlook, there is downside risk to bank earnings. While recognising the risk of a relief rally as the sector is at a deep discount to its long-term history, in the medium-term Macquarie expects banks will deliver lower underlying returns. Bendigo and Adelaide Bank is downgraded to Underperform from Neutral and the target reduced to $6.25 from $6.50.
JB HI-FI (JBH) was downgraded to Hold from Accumulate by Ord Minnett
Ord Minnett downgrades the rating for JB Hi-Fi to Hold due to significant share price performance, which reduces valuation support. The broker believes Stage 4 restrictions in Victoria raise the risk that the Australian consumer will be shocked into a more negative response to covid-19, while the company was also likely to have been a beneficiary of JobKeeper support to consumers, which tapers later in 2020. Rating is decreased to Hold from Accumulate. Target price is $44.
MONADELPHOUS GROUP (MND) was downgraded to Neutral from Buy by UBS
Rio Tinto (RIO) has filed a claim against Monadelphous Group related to a fire incident in January 2019 at its Cape Lambert ore processing facility. The miner claims Monadelphous is in breach of the maintenance contract and has claimed -$493m in loss and damages. The group denies this and also has a $150m public liability insurance policy, notes UBS. The broker considers the claim to be very unusual and thinks Rio’s claim is either an ambit claim or Monadelphous is under-insured relative to the liability limits in its contracts. Rio’s -$493m is 8 times the maintenance division’s earnings and 60% of the group’s market capitalisation. If the claim is successful, the group may be facing a -$350m obligation. The proceedings may also affect share price performance until the issue is resolved, believes the broker. UBS downgrades its rating to Neutral from Buy with the target price decreasing to $8.45 from $13.35.
NATIONAL AUSTRALIA BANK (NAB) was downgraded to Underperform from Outperform by Macquarie
Macquarie reviews impairment forecasts. With 10-15% of consumer and small-medium enterprise (SME) loans being deferred, along with a weak economic outlook, there is downside risk to bank earnings. While recognising the risk of a relief rally as the sector is at a deep discount to its long-term history, in the medium-term Macquarie expects banks will deliver lower underlying returns. While continuing to appreciate the long-term investment thesis, as National Australia Bank has an overweight position for SME and higher exposure to riskier segments, Macquarie downgrades to Underperform from Outperform. Target is reduced to $17.50 from $19.00.
REGIS RESOURCES (RRL) was downgraded to Hold from Add by Morgans
Regis Resources reported strong production to finish the financial year and achieve gold production at the midpoint of the company’s annual guidance, according to Morgans. The company is progressing approvals for the world class McPhillamy’s Project, which the broker believes to be a game changer, with the potential to shift the company from a mid-tier to a major producer. Morgans sees potential for significant resource growth announcements from the company over the coming 12 months. The broker’s forecast model shows the company has strong leverage to the gold price through its flexible hedging delivery schedule. The rating is decreased from Add to Hold. The target price is increased to $5.82 from $5.25.
SARACEN MINERAL HOLDINGS (SAR) was downgraded to Lighten from Hold by Ord Minnett
Ord Minnett is positive on the outlook for gold and has increased its near-term gold price forecast to US$2,000/oz. Its long-term gold price forecast remains US$1,600/oz. Ord Minnett downgrades Saracen Mineral Holdings to Lighten from Hold due to higher than expected capital expenditure requirements. The broker notes some assets and orebodies to be sensitive to higher prices, seeing an increase in reserve prices, such as Saracen’s at US$1,600–1,750/oz. The target price decreases to $4.90 from $5.30.
TABCORP HOLDINGS (TAH) was downgraded to Neutral from Outperform by Macquarie
FY20 guidance is ahead of expectations but Macquarie finds it unclear whether this stems from revenue or from improved costs. The broker lifts FY20-22 estimates by 4% because of the better guidance. Rating is downgraded to Neutral from Outperform because of the uncertainty and challenges within the wagering & media segments. Target is $4.
VILLAGE ROADSHOW (VRL) was downgraded to Neutral from Buy by Citi
Citi has downgraded Village Roadshow to Neutral from Buy due to the recent Queensland border restrictions combined with ride closures at Village’s theme parks. The broker notes the theme park recovery may take longer than it originally anticipated. The broker expects share price downside may be limited given the ongoing talks with suitor BGH. However, the analyst sees elevated uncertainty that a transaction will proceed given the major implications on the company’s exhibition business from the recent AMC Comcast deal. This deal reduces the theatrical window to 17 days (three weekends) from 75-90 days for Universal movies. Citi’s new target price is taking into account BGH’s base bid price of $2.20 under Structure A, combined with an additional 12 cents as Movie World and Sea World have reopened. The analyst assumes shareholders will not receive an additional 8 cents given the majority of Village cinemas are currently closed. The rating is downgraded to Neutral from Buy. The target price decreased to $2.32 from $2.61.
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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