For the week ending Friday 28 August, there were 20 upgrades and 15 downgrades to company ratings by stock analysts in the FNArena database. Of the 20 upgrades, 14 went to a direct Buy, and only 2 of the 15 downgrades went to a direct Sell.
Three stocks received two upgrades from separate brokers. Suncorp’s FY20 result beat estimates, Oil Search was deemed undervalued and TPG Telecom reduced capital expenditure and its new merger partner Vodaphone Australia outperformed.
Appen received the dubious honour of two downgrades from brokers, due to a weak first half, which casts doubt on the second. Scepticism deepened when a broker described its business as ‘relatively opaque’, which doesn’t garner confidence in the forecasting stakes.
However, hope springs eternal, with the largest upgrade to earnings estimates for the week being registered by Wagners, producer and seller of construction materials, despite an in-line profit result. South32 was second on the earnings upgrade table as it divests itself of various businesses, and next up was NextDC, which slightly exceeded earnings expectations and painted a strong growth outlook.
To no one’s surprise, two podium positions on the table for negative earnings revisions by brokers were filled by Qantas Airways and Air New Zealand, due to delays in near-term domestic and long-term international travel, while Whitehaven Coal featured for a soft profit result and some balance sheet concerns.
Total Buy recommendations take up 48.07% of the total, versus 40.97% on Neutral/Hold, while Sell ratings account for the remaining 10.96%.
In the good books
ADBRI LIMITED (ABC) was upgraded to Neutral from Sell by UBS B/H/S: 1/4/2
With both margins and volumes holding up better than expected in the first half, UBS upgrades Adbri to Neutral from Sell. The company’s net profit (NPAT) was 12% ahead of the broker’s forecast. No guidance has been provided for 2020 but management stated net profit was on track to achieve its pre-covid-19 guidance of $110m. Noting this, the broker has upgraded its 2020 net profit by 24%. UBS feels Adbri has passed the trough in margins for its core cement division and the outlook seems to be improving. Other tailwinds include positive residential demand and a pipeline of Infrastructure work. The target price is increased to $2.40 from $2.03.
ATLAS ARTERIA (ALX) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 1/4/0
Traffic on Atlas Arteria’s APRR toll road in France had bounced back to pre-virus levels by mid-August, only to be tempered by heat waves. Still, Credit Suisse suggests traffic may only be down -3% year on year on the second half. Atlas Arteria will now pay its previously deferred 11c first half dividend in October. Coming back to the actual first half result, it was weaker than the broker expected. But in light of the subsequent news, Credit Suisse lifts its target to $7.90 from $6.90 and upgrades to Outperform from Neutral.
APA GROUP (APA) was upgraded to Outperform from Neutral by Macquarie B/H/S: 3/4/0
Macquarie upgrades to Outperform from Neutral and raises the target to $11.72 from $11.36. The broker notes the management team has been rebuilt and the project pipeline is being filled. There is also the significant North American opportunity. Nevertheless, the earnings outlook is flat as the economic downturn has taken the edge off volumes and the refinancing of SEAgas lowers energy investment.
CAPITOL HEALTH LIMITED (CAJ) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 2/0/0
Underlying operating earnings in FY20 were materially higher than Ord Minnett anticipated. The result was underpinned by cost control and a bounce in volumes towards the end of the year. GP attendance also held up well. Growth options abound, the broker notes, supported by a strong balance sheet. With the long-term structural dynamics in the industry intact, Ord Minnett upgrades to Accumulate from Hold. Target rises to $0.28 from $0.20.
In the not-so-good books
APPEN LIMITED (APX) was downgraded to Hold from Accumulate by Ord Minnett and to Underperform from Neutral by Credit Suisse B/H/S: 3/1/1
First half results were below Ord Minnett’s estimates. Full year operating earnings guidance of $125-130m has been maintained. The softness in the first half was driven by a deceleration in underlying earnings growth and the cycling of some one-off contracts. The broker finds the company’s business relatively opaque and difficult to forecast but notes the exposure to the artificial intelligence sector should provide significant growth potential. As the stock has re-rated since early May, the rating is downgraded to Hold from Accumulate. Target rises to $35 from $33.
Credit Suisse suggests the market had been standing by for a material 2020 earnings upgrade from Appen with yesterday’s first half result, but now the focus has swung to whether full year guidance can even be achieved. The first half was weaker than the broker expected, but has only led to slight forecast downgrades and a target drop to $29 from $30, retaining the same 45x multiple. Full year guidance is unchanged, but this implies a 60% second half skew, the broker notes, and the A$ is providing a headwind. Downgrade to Underperform from Neutral.
FLIGHT CENTRE LIMITED (FLT) was downgraded to Hold from Add by Morgans B/H/S: 3/3/0
Flight Centre reported a large FY20 underlying loss of -$509.9m, with the larger second half loss of -$612.6m reflecting covid-19 border closures and travel restrictions, notes Morgans. The Leisure division with its high cost base, weighting to international travel and high rate of cancellations was severely loss making. The analyst calculates the company has enough liquidity to weather a low revenue environment for around 16 months, and while expecting a loss in FY21, by FY24 Morgans expects the company to return to its FY19 earnings. The rating is downgraded to Hold from Add. The target price is increased to $13.60 from $13.
HOME CONSORTIUM LIMITED (HMC) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 0/2/0
FY20 results were in line with Credit Suisse estimates. Credit Suisse notes FY21 guidance has been withdrawn in light of the uncertainty, although the company appears to be progressing well with its strategy. Subsequent to the recent equity raising, gearing is well within covenants, the broker notes. As the share price has rallied subsequent to the equity raising Credit Suisse envisages better absolute value elsewhere and downgrades to Neutral from Outperform. Target edges down to $3.21 from $3.22.
IGO LIMITED (IGO) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/3/1
IGO’s FY20 numbers matched guidance provided at the company’s June quarter update, so no surprises. A 5c final to make 11c for the year came in at the top end of management’s dividend payout range. This will be reviewed in FY21, and Credit Suisse suspects a dividend/buyback combination will be forthcoming. FY21 production and cost guidance is unchanged. The miner is hoping to expand across various metals, likely through M&A, with lithium and rare earths now on the radar. Target rises to $4.35 from $4.05 after switching to a net asset and enterprise value blend from discounted cash flow. Upgrade to Neutral from Underperform on valuation.
RURAL FUNDS GROUP (RFF) was downgraded to Neutral from Buy by UBS B/H/S: 0/1/0
Rural Funds Group’s FY20 result was devoid of any impact from covid-19 with earnings (AFFO) up 3%, comments UBS. Dividend guidance for FY21 is 4% growth with earnings (AFFO) at 11.7c (down -13% versus last year) due to increased capital expenditure profile on long-dated projects like Macadamias. UBS downgrades its rating to Neutral from Buy on valuation grounds with the target price increasing to $2.35 from $2.30.
WAGNERS HOLDING COMPANY LIMITED (WGN) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 1/2/0
FY20 revenue was ahead of expectations while net profit was in line. Quarries and transport/haulage performed well as major projects were ramped up. The company’s high debt is a concern although the broker expects this to reduce in FY21 because of the successful recent refinancing. More earnings growth is expected in FY21 although Credit Suisse notes further upside depends on project gains, given flat industry volumes. As a result, the broker chooses to remain conservative and the rating is downgraded to Neutral from Outperform. Target is raised to $1.10 from $1.00.
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.