Rounding out the August reporting season for ASX-listed stocks, the week ending Friday September 4 yielded thirteen upgrades and eight downgrades to company ratings by stockbroking analysts. Of the thirteen upgrades, nine went to a direct Buy, while half of the eighth downgrades were moved to a direct Sell.
NextDC received two upgrades to Buy from separate brokers who forecast the increased demand for public cloud and data services will continue post-pandemic. Meanwhile, Pointsbet Holdings received two downgrades after announcing an agreement with NBCUniversal. After a spectacular rise in share price, one broker downgraded on valuation concerns, while the other projects it will be at least FY25 until the company realises any operating earnings in the US.
Both OceanaGold and Nufarm received significant earnings downgrades. Also featuring in the top three negative percentage earnings downgrades was Air New Zealand due to the grim outlook for international travel, despite the company beating FY20 result expectations.
On a more positive note, the largest lift in percentage terms for earnings was Cooper Energy, after some easing of concerns over the Sole gas project near Orbost in Victoria. Afterpay was second on the table with momentum expected to continue and execution expected to be key. The cashed-up Reece came in third as brokers expected the company to deploy some of its capital into further acquisitions.
In the good books
EVOLUTION MINING LIMITED (EVN) was upgraded to Neutral from Underperform by Macquarie B/H/S: 0/3/4
The investor briefing highlighted the potential the company envisages for Red Lake. Macquarie finds the prospect of an open pit at the site compelling but awaits more clarity on the costs and the path to approval before including it in forecasts. The broker assumes a higher conversion of resources to reserves, which extends assumed mine life of the assets. This leads to an upgrade to Neutral from Underperform. Target is raised to $5.60 from $5.20.
IOOF HOLDINGS LIMITED (IFL) was upgraded to Buy from Hold by Ord Minnett B/H/S: 2/2/0
Ord Minnett notes risks around IOOF Holdings’ proposed acquisition of National Australia Bank’s (NAB) MLC business. The broker highlights the company has bought businesses like MLC that have negative net flows and it is unclear if the negative flow can be stopped. On the bright side, the company will be the largest superannuation player in the market which, the broker feels, should ensure longevity. Ord Minnett upgrades its recommendation to Buy from Hold with the target price lowered to $4.15 from $5.00.
NUFARM LIMITED (NUF) was upgraded to Neutral from Underperform by Macquarie B/H/S: 4/2/1
Nufarm, which reports its FY20 result on September 23, anticipates underlying FY20 operating earnings of $230-240m. A non-cash impairment of -$215m will be taken in relation to the European assets. Europe is the main culprit in the weaker-than-expected outcome although there was some potential relief on the way with lower raw material costs over the last quarter. Given the extent of the recent share price decline, Macquarie upgrades to Neutral from Underperform. Target is reduced to $4.26 from $4.85.
SONIC HEALTHCARE LIMITED (SHL) was upgraded to Neutral from Sell by UBS B/H/S: 2/5/0
On calculating the contribution of coronavirus testing to the company’s financial performance, UBS makes material upgrades over the short term. Well aware that rates may fall and reimbursement rates may decline, the broker believes Sonic Healthcare will still be a beneficiary of above-normal free cash flow for 1-2 years. This could be used to fund growth opportunities not previously accessible. UBS upgrades to Neutral from Sell and raises the target to $32.10 from $29.80.
TRANSURBAN GROUP (TCL) was upgraded to Buy from Neutral by UBS B/H/S: 3/2/2
As the stock has underperformed the market by -10-15% since late May and there is an end in sight to the lockdowns in Melbourne, UBS upgrades Transurban to Buy from Neutral. Target is raised to $15.50 from $14.70. UBS assesses Transurban is highly leveraged to a recovery in the Melbourne network as it accounts for one third of group operating earnings. Moreover, the market is seeking growth in a structurally weaker environment. The broker expects a dividend in FY21 of $0.46, to reflect underlying growth of 10%. Growth estimates in FY22-25 of 13% rely on the completion of WestConnex stage 3 in Sydney, WestGate Tunnel in Melbourne and a number of projects in Washington.
In the not-so-good books
OZ MINERALS LIMITED (OZL) was downgraded to Lighten from Accumulate by Ord Minnett B/H/S: 3/2/1
Ord Minnett suggests investors take profits after a surge of 50% in the share price over the past three months. The broker now considers the stock expensive and downgrades to Lighten from Accumulate. Target is reduced to $14.50 from $10.50. The next catalyst is expected from the Prominent Hill expansion scoping study in the fourth quarter.
STOCKLAND (SGP) was downgraded to Lighten from Hold by Ord Minnett B/H/S: 1/4/0
Ord Minnett observes Stockland was the best performing A-REIT in August as the share price rose 24.1% compared with the index rising 7.9%. The broker assesses the good results and spike in residential sales in June are now priced into the stock. Ord Minnett also believes there are further devaluations to come from the retail and retirement portfolios. The improving residential outlook is encouraging but diluted by the cycling of project profits worth $100m from FY20. Thus, rating is downgraded to Lighten from Hold and the target lowered to $3.60 from $3.70.
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.