In the good books
AGL ENERGY (AGL) was upgraded to Neutral from Underperform by Macquarie
AGL Energy has acquired Click for around $155m. Macquarie observes Click offers limited strategic value as customers are spread across the eastern seaboard where AGL Energy already has a good position. Churn in this group is naturally higher and the credit risk is elevated, the broker adds. Nevertheless, this is a low-risk acquisition that provides operating earnings upside of around $30m, funded with cash. Macquarie observes cyclical pressure on the share price has peaked and upgrades to Neutral from Underperform. The target is lifted to $14.98 from $14.65.
AURELIA METALS (AMI) was upgraded to Buy from Accumulate by Ord Minnett
Ord Minnett believes the stock remains misunderstood in terms of the quality of the portfolio. While operational risks continue, the broker advises buying any dips as Aurelia Metals trades at a discount relative to fundamentals and peers. The broker believes the Federation project is a game changer and early exploration results warrant a re-rating. Rating is upgraded to Buy from Accumulate and the target lifted to $0.75 from $0.60.
AUSTRALIAN VINTANGE (AVG) was upgraded to Add from Hold by Morgans
Australian Vintage delivered a solid FY20 result slightly ahead of Morgans forecasts. The broker highlights the UK/Europe business was the standout, while Australia also performed strongly. Conditions remain challenging in North America and Asia. FY21 outlook comments were positive and management is targeting a 48% improvement in return on capital employed (ROCE), with lower wine costs to provide a significant tailwind, explains the analyst. The rating is upgraded to Add from Hold and the target price is increased to $0.62 from $0.50.
AUTOSPORTS GROUP (ASG) was upgraded to Outperform from Neutral by Macquarie
Strong support from original equipment manufacturers and JobKeeper led Autosports Group to a better result than Macquarie first spotted on release. Lead indicators of order writing are exceeding deliveries heading into FY21, making the broker more positive. No guidance provided due to uncertainty, but Macquarie suggests a swift bounce out of Victoria’s lockdowns should provide a catalyst for re-rating. Upgrade to Outperform, target rises to $1.65 from $1.10.
INSURANCE AUSTRALIA GROUP (IAG) was upgraded to Outperform from Neutral by Macquarie
Macquarie believes concerns about the potential for a new CEO to re-base earnings are overdone and business interruption losses are over estimated. The broker calculates probable business interruption losses at -$125m but estimates, at current levels, the market is pricing in a -$1.9bn loss post reinsurance for Insurance Australia Group, which is considered highly unlikely. The broker believes the valuation has finally become attractive and upgrades to Outperform from Neutral. Target is $5.50.
NEXTDC (NXT) was upgraded to Add from Hold by Morgans and to Accumulate from Hold by Ord Minnett
NextDC’s FY20 result was in-line with guidance and the result and outlook demonstrates to Morgans how uncorrelated digital infrastructure is to economic cycles and what a high quality the company’s business model and earnings streams are. The broker projects earnings to exceed $200m in the next four years and potentially $300m in the next five, if options granted to cloud solution provider (CSP) customers are granted. Morgans poses are we currently seeing a short-term spike in cloud demand due to remote working or has the world permanently changed? The broker is betting on demand remaining robust. The rating is upgraded to Add from Hold and the target price is increased to $13.89 from $11.11.
FY20 results highlight the appeal of the stock, in Ord Minnett’s view. Revenue was in line with forecasts. The net loss of -$45m included a large one-off adjustment for tax losses and timing differences. The broker envisages NextDC is well-placed to benefit from the increased demand for public cloud and data centre services post the pandemic. Rating is upgraded to Accumulate from Hold and the target lifted to $13 from $10.
WEST AFRICAN RESOURCES (WAF) was upgraded to Outperform from Neutral by Macquarie
West African Resources reported a profit of $3.7m in the first half with a net debt position of -$204.1m. This is in-line with Macquarie’s estimate. The company also noted its first earnings from Sanbrado and the broker expects production to progressively grow over the next year. Even so, Macquarie decides to take a more conservative view and predicts production of 275koz between the third quarter 2020 to second quarter 2021 versus West African Resources’ 300koz plus outlook. Macquarie upgrades its rating to Outperform from Neutral with a target price of $1.10.
In the not-so-good books
LINK ADMINISTRATION (LNK) was downgraded to Hold from Add by Morgans
Link Administration Holdings reported a FY20 result broadly in-line with consensus for revenue and operating profit (NPATA), according to Morgans. The broker expects FY21 to be a tough year before growth recovers on cost-out, the Pepper European Servicing (PES) acquisition and property Exchange Australia, PEXA. The analyst downgrades EPS estimates for FY21 and FY22 by -11% to -18% on reduced revenue and margin forecasts in both years. The rating is downgraded to Hold from Add pending signs of improving earnings momentum, which Morgans believes will be more a FY22 story, and the target price is decreased to $4.21 from $4.80.
NATIONAL TYRE & WHEEL (NTD) was downgraded to Hold from Add by Morgans
The rating for National Tyre and Wheel is downgraded to Hold from Add, following a strong share price rally and increased debt position. Morgans notes the earnings from the Tyres4U (T4U) acquisition are key to the future performance. The broker awaits the findings of the T4U strategic review in September. The FY20 earnings result was 8% above Morgans forecast, with a strong surge in demand/trading in the fourth quarter. The post balance date acquisition of T4U has seen the group gear up its balance sheet to a net debt position of circa $24m. The target price is increased to $0.633 from $0.501.
OCEANAGOLD CORPORATION (OGC) was downgraded to Neutral from Buy by UBS
2020 production guidance has been downgraded to 295-345,000 ounces. This stems from disruptions at Haile. Meanwhile, progress at Didipio remains stalled and the operation has now been shut for over a year. UBS removes assumptions for a re-start and does not factor in earnings or valuation from this asset. This has resulted in a material downgrade to estimates. The broker downgrades to Neutral from Buy, contemplating no near-term catalysts to close the gap to peers. Target is reduced to $3.40 from $4.40.
POINTSBET HOLDINGS (PBH) was downgraded to Underperform from Neutral by Credit Suisse and to Hold from Buy by Ord Minnett
The company has announced an agreement with NBCUniversal, to be funded by scrip and options which Credit Suisse asserts actually turns PointsBet into an option. The market commitment, at US$393m over five years, is so large that the company is unlikely to deliver operating earnings in the US until at least FY25, predicts the broker. Given the power of NBCUniversal, if PointsBet can demonstrate revenue that covers the new costs investors are likely to focus on revenue for valuation purposes, in the broker’s view. Credit Suisse downgrades to Underperform from Neutral. Target is $6.50.
FY20 results were better than Ord Minnett forecast. Results were overshadowed by the partnership deal with NBC, which should allow the PointsBet brand awareness to “skyrocket” in key markets. Despite the merits of the deal and the strong chance of success in building US market share, the jump in the share price means the stock is now trading around fair value. Hence Ord Minnett downgrades to Hold from Buy. Target is raised to $13.60 from $6.15.
ZIP CO (Z1P) was downgraded to Sell from Neutral by Citi
Citi envisages potential for the share price to outperform in the near term. Still, the stock is up 35% over the last month and the entry of PayPal into the BNPL segment increases concerns regarding growth expectations for the medium term. Citi downgrades to Sell/High Risk from Neutral/High Risk and retains a $6.70 target. Zip intends to step up in investment and has recently signed up new enterprise merchants and Quadpay’s trends continue to improve. While the core Australian business is differentiated, Citi remains concerned that Zip is a late entry in the US, given Afterpay (APT), Klarna and Affirm’s sizeable lead.
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.
