Receiving two upgrades to ratings by different brokers were The Star Entertainment Group thanks to impressive cost management, Coca-Cola Amatil for improving sales volumes and Monadelphous Group as a result of better-than-expected margins, cashflow, and dividend. Additionally, Monadelphous was assessed as having strong prospects for FY21, despite a pending lawsuit from Rio Tinto.
The only company receiving two downgrades to ratings was Domain Holdings and both were largely due to valuation concerns, after a doubling of the share price since March 2020 lows. Surrounding commentary by both analysts was quite upbeat and was further reflected by another broker upgrading the company’s rating due to its leverage to an improved listing environment.
The table for negative updates to earnings estimates reveals significant adjustments for both Qantas Airways and Flight Centre, due to delays in near-term domestic and long-term international travel.
On a more positive note, the largest lift in percentage terms for earnings was Lendlease, on the strength in the development workbook and hopes for a resolution to the sale of its engineering division. A similar potential divestment story is in play at South32 for its stake in South Africa Energy Coal. Along with brokers being generally positive on FY21 guidance by management, this saw the company third on the table for earnings upgrades, just below Sims Limited, with a better-than-expected FY20 result.
In the good books
THE A2 MILK COMPANY LIMITED (A2M) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 3/1/2
Credit Suisse notes a2 Milk’s FY20 result was solid and broadly on expected lines. The company expects strong revenue growth to continue in FY21 along with some capex into milk processing and IT. The company clarified it will continue to prioritise growth over return to shareholders. Driven by attractive growth prospects and strong valuation support, Credit Suisse upgrades its rating to Outperform from Neutral with the target price increasing to NZ$22.55 from NZ$17.65.
See downgrade below.
COCA-COLA AMATIL LIMITED (CCL) was upgraded to Outperform from Neutral by Credit Suisse and Upgrade to Add from Hold by Morgans B/H/S: 3/4/0
The impact of the pandemic on first half earnings was less than Credit Suisse anticipated. The broker was surprised that Indonesian EBIT broke even despite a -19% drop in volumes and applauds the company’s efforts. The broker no longer projects losses for Indonesia and factors in $70m for the company’s new cost savings program. NZ volumes and price assumptions are also upgraded. Rating is upgraded to Outperform from Neutral and the target is raised to $11.25 from $9.00.
Coca-Cola Amatil’s result was materially stronger than Morgans expected due to a stronger volume recovery in June, quicker than expected realisation of cost savings and cashflow was strong (and the highlight for the broker). Morgans highlights overall company volumes have improved sequentially since April, while volume trends in developing countries are improving. The balance sheet remains in a solid position, according to the analyst, and enabled the declaration of an unfranked interim dividend of 9cps. Following the result and encouraging volume trends, Morgans upgrades earnings (EBIT) forecasts by 18.2%, 10.5% and 4% for FY20. FY21 and FY22. The rating is upgraded to Add from Hold. The target price is increased to $10.39 from $8.93.
DOMAIN HOLDINGS AUSTRALIA LIMITED (DHG) was upgraded to Hold from Reduce by Morgans B/H/S: 3/3/0
Morgans relates Domain Holdings Australia has reported very similar online revenue trends to competitor REA Group (REA), with the core digital business seeing revenue declines of -6.4% in the year. However, print revenues were decimated in the second half, according to the broker. The company is aiming to move the audience reach conversation from quantity to quality of leads and ability to match buyers and seller, according to the analyst. Additionally, the aim is to move from a classifieds business to an agent and consumer enabler, participating in the lifecycle of the property transaction. The rating is upgraded to a Hold from Reduce and Morgans is cognisant of the company’s leverage to an improved listing environment. The target price is increased to $3.37 from $2.25.
See downgrade below.
DEXUS PROPERTY GROUP (DXS) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 4/2/0
Dexus Property Group’s FY20 underlying funds from operations were slightly below Ord Minnett’s forecast. A dividend of 23c (20% franked) was declared, taking the full-year payout to 50.3c. No dividend guidance has been given for FY21 due to uncertainty on rent collections. Even so, the broker expects dividends to stabilise at 50-52c in FY22. Taking a contrarian view of the group following its FY20 results, Ord Minnett upgrades its rating to Accumulate from Hold with the target price increasing to $9.65 from $9.10.
HT&E LIMITED (HT1) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 1/2/1
First half results were ahead of estimates driven by better cost management at Cody Outdoor and very strong growth at Soprano Design. The broker recognises the Australian Radio Network faces challenges but believes these are well understood. A re-valuation of Soprano drives an upgrade to the broker’s rating, to Outperform from Neutral. Target is raised to $1.60 from $1.25.
MCMILLAN SHAKESPEARE LIMITED (MMS) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 2/2/0
FY20 results were in line, with the exception of a lack of final dividend, although Credit Suisse is not surprised. The broker considers the decision to withhold a dividend prudent rather than related to any specific cash flow concerns. While the recovery may be lumpy, July novated lease volumes are considered encouraging and tracking ahead of the prior corresponding period. Credit Suisse expects growth in FY21 and upgrades to Outperform from Neutral. Target is raised to $10.60 from $10.10.
NORTHERN STAR RESOURCES LTD (NST) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 1/2/2
FY20 results missed forecasts but reserve and mine life growth are positive, Credit Suisse notes. FY21-22 production forecasts are softer than the broker expected along with modestly higher costs which drives a downgrade to estimates. That said, while production growth is likely to come at higher average cost, it will be accretive and reflects a superior growth profile versus peers, in the broker’s view. Credit Suisse upgrades to Outperform from Neutral. Target is lowered to $15.65 from $16.00.
PRO MEDICUS LIMITED (PME) was upgraded to Buy from Neutral by UBS B/H/S: 2/0/0
Pro Medicus’ FY21 result outpaced UBS forecasts and the broker upgrades to Buy, expecting positive catalysts during FY21 and noting the recent pullback. A sharper than expected rise in second-half exam volumes triggers a 5% increase in FY21 EPS forecasts. FY22-23 EPS earnings are downgraded -3% to -5% on expectations that expansion will moderate. The pipeline continued to build through COVID and the company has plenty of tendering opportunities. Cash flow was strong, yielding a net cash position of $43m. Target price is steady at $29.65.
THE STAR ENTERTAINMENT GROUP LIMITED (SGR) was upgraded to Outperform from Neutral by Credit Suisse and to Accumulate from Hold by Ord Minnett B/H/S: 6/1/0
Credit Suisse notes excellent cost control and good customer management in the current trying times and upgrades FY21 estimates. The broker assesses, by FY22, Star Entertainment is likely to have retired substantial debt. Management has identified $300m in assets that can be divested to fund FY21 investments. The broker now models FY23 revenue at 80% of FY19. Rating is upgraded to Outperform from Neutral and the target is raised to $3.60 from $3.40.
Star Entertainment Group’s FY20 result outpaced consensus and Ord Minnett forecasts, thanks to impressive cost management, although earnings disappointed. Star has removed the dividend until leverage normalises. Domestic visits show some signs of improvement, but visibility is poor. Deleveraging plans, the fact that Star is better positioned to deal with domestic capacity and supply than competitors and the loyalty plan are likely to favour margin expansion, says the broker. The broker expects an earnings fall in FY21 but upgrades the company to Accumulate from Hold and raises the target price to $3.25 from $2.70.
TABCORP HOLDINGS LIMITED (TAH) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 2/4/0
Tabcorp Holdings announced a lower payout to 75% of net profit while also stating dividends will resume “when appropriate”. Credit Suisse assumes lottery will increase revenue by 1% in FY21 for Tabcorp versus -3% assumed previously. The broker notes the first half will be cycling a period of exceptionally strong jackpots and the business might grow. Earnings growth forecasts for FY21-22 have been revised upwards. Credit Suisse upgrades its rating to Outperform from Neutral with the target price increasing to $4.30 from $3.65.
In the not-so-good books
THE A2 MILK COMPANY LIMITED (A2M) was downgraded to Sell from Buy by Citi B/H/S: 3/1/2
Citi believes the best days are behind the company and downgrades to Sell from Buy. A substantial path for growth continues but the outlook is considered increasingly risky amid a resurgence of Chinese brands and increasing geopolitical risks. The broker acknowledges use of the cash balance for acquisitions and/or capital management remains the biggest risk to the view. Citi reduces FY21 and FY22 net profit estimates by -3% to reflect the lower sales and earnings outlook for China along with pressure on Australasian earnings from FY22 amid structural decline in the daigou channel. Target is reduced to $17.20 from $21.50.
See upgrade above.
CARSALES.COM LIMITED (CAR) was downgraded to Hold from Add by Morgans B/H/S: 1/5/0
Morgans describes the Carsales.com FY20 result as good in challenging times and FY21 should show continued growth on a normalised basis. A strong end of year and July trading confirms to the analyst used car conditions are buoyant. The broker highlights international businesses now represent 24% of ‘look through’ revenue for the company, with these businesses being the dominant portals in their geographies. The rating is lowered to Hold from Add. The target price is increased to $19.17 from $14.58.
CHARTER HALL GROUP (CHC) was downgraded to Neutral from Buy by UBS B/H/S: 5/1/0
UBS is of the view Charter Hall Group delivered “extraordinary growth” in a year marked by unprecedented volatility. The broker considers the guidance, -4% below UBS forecast, to be conservative and expects upgrades in the year ahead. UBS downgrades its rating to Neutral from Buy on valuation grounds with the target price revised upwards to $12.25 from $9.80.
CSL LIMITED (CSL) was downgraded to Neutral from Buy by Citi B/H/S: 2/5/0
FY20 net profit was in line with Citi’s estimates. The broker considers the FY21 net profit forecasts ($2.1-2.27bn) are achievable only of plasma collections improve over the course of the year. Still, the broker remains positive about the control of the pandemic globally and sets its net profit estimates near the top of the range. Citi downgrades to Neutral from Buy and reduces the target to $320 from $334.
CORPORATE TRAVEL MANAGEMENT LIMITED (CTD) was downgraded to Hold from Add by Morgans B/H/S: 3/3/0
The FY20 result of Corporate Travel Management beat Morgans forecasts on most key metrics, particularly cashflow and balance sheet strength. The fourth quarter was materially stronger, according to the broker, with Europe and the US the strongest contributors to group revenue. The broker expects earnings may not return to FY19 levels until FY23. The rating is downgraded to Hold from Add, as the stock has rallied 64% since being upgraded to an Add in early August. The target price is increased to $14.20 from $12.85.
DOMAIN HOLDINGS AUSTRALIA LIMITED (DHG) was downgraded to Buy from Neutral by UBS and to Hold from Accumulate by Ord Minnett B/H/S: 3/3/0
Domain Holdings Australia’s FY20 was a “solid beat” versus UBS forecast, somewhat driven by JobKeeper subsidies and a better than expected print result. UBS has upgraded its FY21 earnings forecast by circa 25% and assumes a quicker return of subscription /agent services revenues back to pre-pandemic levels. The stock is trading at UBS’ target price and the broker downgrades to Neutral from Buy rating with the target price increasing to $3.60 from $3.55.
Domain Holdings revenue was down -9.1% on FY20. Ord Minnett notes Project Nash appears to support the company quite favourably despite the lockdowns and restrictions. With the company prioritising cost control in FY21, the broker expects better margins and has increased operating earnings forecasts for FY21. Domain is trading at an elevated premium to its peers, notes the broker, downgrading its recommendation to Hold from Accumulate with a target price of $3.50.
See upgrade above.
GROWTHPOINT PROPERTIES AUSTRALIA (GOZ) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 1/2/0
Growthpoint Properties’ FY20 funds from operation (FFO) was 4% ahead of Ord Minnett’s forecast. Portfolio occupancy decreased to 93% as Botanicca, a newly completed project in Melbourne, was vacant on completion. No earnings guidance was provided for FY21, but the dividend was guided to 20c, down -8% versus FY20. Driven by valuation, Ord Minnett downgrades its recommendation to Hold from Accumulate with the target price rising to $3.40 from $3.30.
IDP EDUCATION LIMITED (IEL) was downgraded to Hold from Add by Morgans B/H/S: 4/1/0
IDP Education’s FY20 result was materially ahead of Morgans expectations. This was largely due to a quicker-than-expected recovery of its IELTS division and signs of strong student demand for its placement operations. The company ended the period with $205m of net cash (assisted by the $225m capital raising in April) and declared it will pay its deferred 19.5cps interim dividend in September. Morgans does not expect the recovery to be linear for the company and due to the recent strong share price, the rating is reduced to Hold from Add. The target price is increased to $19.31 from $15.07.
IRESS LIMITED (IRE) was downgraded to Hold from Add by Morgans B/H/S: 1/2/1
Iress reported headline profit (NPAT) of $26.3m, which was broadly in-line with Morgans forecasts. An interim dividend of 16cps was declared. The company did not reinstate previous guidance, given continued potential disruptions (primarily related to project implementations) from COVID-19. Morgans concludes the company has a strong recurring earnings base and pipeline of opportunities, but investment for growth remains high and the broker is looking for a clearer point at which operating leverage will materialise. The rating is downgraded to Hold from Add. The target price is decreased to $12.05 from $13.74.
INVOCARE LIMITED (IVC) was downgraded to Neutral from Buy by Citi B/H/S: 1/4/1
Citi reduces 2020-22 operating earnings forecasts to account for the lower volume in case averages that is expected over the foreseeable future. The broker also assumes gathering restrictions will affect the business and the multiple will re-rate higher as social distancing measures are eased and there is clarity on the new senior management strategy. First half net profit was -17% below forecasts and there is no 2020 guidance. However, the 5.5c interim dividend was unexpected. Rating is downgraded to Neutral from Buy. Target is lowered to $11.00 from $12.75.
ORIGIN ENERGY LIMITED (ORG) was downgraded to Neutral from Outperform by Macquarie B/H/S: 4/3/0
FY20 results were in line with Macquarie’s estimates. Weaker pricing has weighed on guidance, with underlying profit forecast to fall to $300m in FY21. Operating earnings guidance (EBITDA) is $1.15-1.3bn. Macquarie notes the upside relies on a rally in oil and/or gas prices amid the company’s ability to shorten its exposure to falling power prices. Rating is downgraded to Neutral from Outperform and the target reduced to $6.01 from $6.62.
QANTAS AIRWAYS LIMITED (QAN) was downgraded Neutral from Buy by Citi B/H/S: 3/2/1
Qantas’s FY20 result was a shocker as expected, and the broker downgrades FY22 and FY23 revisions -6% and -10% respectively, finding little joy in the outlook. Citi expects a domestic recovery in the second half of FY21, led by Jetstar Domestic, but the earliest recovery for the international operations is FY22. On the upside, Qantas is addressing its cost base and the broker expects FY21 first-half earnings will represent the nadir. Neutral (High Risk) rating retained. Target falls to $4.40 from $4.60.
SONIC HEALTHCARE LIMITED (SHL) was downgraded to Neutral from Buy by Citi B/H/S: 2/4/1
Sonic Healthcare has delivered an FY20 result above June guidance, consensus and Citi forecasts, courtesy an uptick in COVID testing. While pathology rose, radiology took a -10% hit as volumes dried up. Cash generation was strong and the business base largely recovered from its March-May slump by year-end. Revenue growth in July and August was extremely strong, again thanks to COVID. No guidance was forthcoming. FY21 forecasts rise but Citi expects a return to normal in FY22, although FY22 EPS forecasts fall -7% to reflect currency and interest rate movements. Broker downgrades to Neutral from Buy. Target is raised to $35.50 from $34.00.
SMARTGROUP CORPORATION LTD (SIQ) was downgraded to Hold from Add by Morgans B/H/S: 2/3/0
First half profit (NPATA) of $32.1m was in-line with recent guidance with the balance sheet net debt figure of around $12m a key positive, notes Morgans. Novated lease volumes showed further recovery into June/July, but not to the same extent as competitors, according to the broker. Morgans expects a relatively low organic growth profile and capital will likely need to be deployed (acquisitions) for growth. The rating is lowered to Hold from Add. The target price is decreased to $6.75 from $7.20.
WISETECH GLOBAL LIMITED (WTC) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 1/2/1
Wisetech Global’s FY20 result was slightly ahead of Credit Suisse’s forecast and at the lower end of company management’s guidance. The company’s FY21 guidance points towards operating income of $155-$180m supported by an increased focus on costs. The broker believes the foundation is set for attractive long-term growth, amplified at profit given the scalability of the software and operating model. Long-term investors are expected to be in for surprises to the upside. Overall, the broker struggles to bridge the strong share price performance with the news in the FY20 result and downgrades its rating to Neutral from Outperform. The target price increases to $28 from $23.6
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.
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.