The week ending Friday 13 November did indeed turn out to be unlucky for ASX-listed stocks on the FNArena database. For the first time in nearly three months, downgrades (seventeen) held sway over upgrades (twelve). There appeared to be a vaccine-induced swing away from stocks that had previously benefited from virus concerns.
CSL received both a ratings upgrade and downgrade. Ord Minnett perceived a two-fold boost from a vaccine. Not only should plasma collections start to normalise by the end of FY21, but also the vaccines under manufacture have a higher probability of success. They are based upon similar antibody profiles as the leading overseas candidate.
Citi agreed with Ord Minnett on plasma collections and simultaneously downgraded the stock to Neutral from Buy, due to recent share price outperformance.
Enthusiasm for Graincorp and Seven West Media was apparent in the No1 and No2 spots for largest percentage earnings upgrades for the week, by brokers in the FNArena database.
Xero was next after the first half slowdown in growth was less than feared. Sales and marketing expenses also fell sharply, resulting in a strong boost to profits and cash.
Earnings upgrades accrued to Sims due to all metal operations achieving positive earnings, netting to a “solid” group effort. Finally, a combination of better sales and margin improvement drove forecast earnings revisions for News Corp.
Nearmap had the unfortunate distinction of largest percentage downgrade to earnings for the week. Morgan Stanley was expecting slightly higher revenue guidance from management and was averse to the company’s use of constant currency (which implies a -6% foreign exchange headwind).
Earnings forecasts for Senex Energy also declined after Morgan Stanley concluded there is better upside to an oil price recovery elsewhere, while conceding the growth story remains sound.
In the good books
GRAINCORP LIMITED (GNC) was upgraded to Add from Hold by Morgans B/H/S: 4/0/0
While the FY20 result for GrainCorp was a material improvement in earnings (EBITDA) on the previous corresponding period, it was below Morgans’ forecasts and consensus. Highlights for the broker include the benefit of the crop production contract ($47m net gain) and the non-repeat of international trading losses (up $65m). Additionally, there was a stronger Grains division performance and higher oilseed crush volumes and margins. The final dividend of 7 cents was a positive surprise to the analyst and highlighted the company’s positive outlook. The FY21 outlook statements were materially stronger than Morgans expected with earnings growth in FY21. This was driven by a significantly larger 2020/21 East Coast winter crop and ongoing benefits from the company’s recent operating initiatives. Morgans upgrades FY21, FY22 and FY23 earnings estimates by 12.9%, 20.7% and 9.5%, respectively. The rating is upgraded to Add from Hold and the target price is increased to $4.79 from $4.18.
IDP EDUCATION LIMITED (IEL) was upgraded to Add from Hold by Morgans B/H/S: 5/0/0
Morgans reiterates the upside from a vaccine for IDP Education is the potential for international borders to reopen quicker than expected. This would bolster student placement and IELTS testing volumes and earnings. The broker believes the company will be materially better placed when normalised conditions prevail. The analyst increases FY22 and FY23 EPS forecasts by around 3% and 12%, respectively. This is primarily driven by increased IELTS/Student Placement volume assumptions and slightly lower opex assumptions. The rating is increased to Add from Hold and the target price is increased to $25.09 from $23.23.
NATIONAL TYRE & WHEEL LIMITED (NTD) was upgraded to Add from Hold by Morgans B/H/S: 1/0/0
According to Morgans, persistently strong trading conditions and the acquisition of T4U has seen National Tyre & Wheel upgrade first half earnings (EBITDA) guidance. The broker highlights this guidance does not include any material contribution to earnings from synergies arising from the August acquisition of Tyres4U. The balance sheet has deleveraged far quicker than previously expected by the analyst, putting dividends firmly back on the agenda in the short term. Given the deleveraging and potential synergy upside from T4U, the rating is upgraded to Add from Hold. Morgans upgrades EPS forecasts by circa 50-85% in forecast years which sees the target price increased to $1.00 from $0.63.
SONIC HEALTHCARE LIMITED (SHL) was upgraded to Buy from Neutral by Citi B/H/S: 3/4/0
At the AGM, Sonic Healthcare announced a level of growth that is unprecedented, according to Citi. It’s considered likely the growth is directly related to the pandemic. October revenue was up 33% on the previous corresponding period. The company is experiencing record covid testing volumes in the US and Europe, as a result of the pandemic second wave. The base business is negatively impacted but “less than first waves”, explains the broker. The analyst considers the company should be in a solid position to pursue acquisitions beyond covid. This is considered a key upside risk to forecasts. Citi lifts EPS estimates for FY21, FY22 and FY23 by 58%, 28% and 5%, respectively. The rating is increased to Buy from Neutral and the target raised to $38.50 from $35.50.
SEVEN WEST MEDIA LIMITED (SWM) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 3/1/0
The latest update points to a better ad market trajectory, hinting at a broadly flat operating income in the first half, well ahead of Credit Suisse’s expected decline of -41%. Broadcaster video on demand (BVOD) revenue growth during the first four months of the first half is considered impressive by the broker. Credit Suisse upgrades its rating to Outperform from Neutral. Target rises to $0.40 from $0.12.
TRANSURBAN GROUP (TCL) was upgraded to Outperform from Neutral by Macquarie B/H/S: 3/2/2
Transurban has been out-bid on the Elizabeth River Crossing project in Virginia. Perhaps disappointing but it does shrink a required capital raising for the buy out of the rest of WestConnex in Sydney, Macquarie notes. There are still opportunities pending in the US. The implied PE multiple paid for the ERC materially exceeded the broker’s valuation, and the broker assumes such a premium can also be captured through the partial sale of Transurban’s other US assets. To that end, target rises to $15.93 from $14.33. Upgrade to Outperform from Neutral.
TELSTRA CORPORATION LIMITED (TLS) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 4/1/1
Ord Minnett summarises that Telstra had a primary focus at the investor day on the ongoing rollout of the 5G network and the potential spin-off of its TowerCo assets. A key takeaway for the broker is management expects to arrest five years of operating earnings (EBITDA) declines through increased revenue and margins in the mobile segment. This is due primarily to 5G and ongoing cost savings in fixed wireless broadband. Other highlights included earnings (EBITDA) are expected to grow 4–14% per annum over the next two years, and the sale of TowerCo could be up to 6–7% value-accretive. Management expects to commence a process to sell InfraCo Towers in 2021. Ord Minnett estimates the TowerCo assets could be worth 3.7–3.9bn, assuming a 5% weighted average cost of capital (WACC). A sale at that price is considered to be 6% value accretive. The rating is increased to Accumulate from Hold and the target price is increased to $3.65 from $3.40.
In the not-so-good books
AUSNET SERVICES (AST) was downgraded to Lighten from Hold by Ord Minnett B/H/S: 0/4/2
The first half underlying net profit for AusNet Services came in significantly ahead of Ord Minnett’s forecast due mainly to a better-than-expected contribution from the electricity distribution business. This was driven by increased residential consumption. With revenue from the asset above the cap, this is expected by the broker to unwind in future periods. Aside from that, the result was in line with estimates. Management continues to highlight growth, although the increase in the regulatory contracted asset base (RCAB) has been tempered slightly with a more conservative outlook, notes the analyst. The rating is downgraded to Lighten from Hold and the target price of $1.75 is unchanged.
COMMONWEALTH BANK OF AUSTRALIA (CBA) was downgraded to Reduce from Hold by Morgans B/H/S: 0/4/3
Following a trading update, Morgans downgrades earnings forecasts for Commonwealth Bank and lowers the rating to Reduce from Hold. On a run-rate basis, the unaudited first quarter cash profit is -7.5% softer than the broker forecast for FY21. It’s considered the quarter had been impacted by a collective provision top-up that is not expected to be repeated in coming quarters. Morgans lowers cash EPS forecasts by -3.8% and -4.8% for FY22 and FY23, respectively. This is largely due to lower net interest margin (NIM) forecasts and higher operating expense forecasts. The first quarter NIM is lower than the second half FY20. The contraction was largely attributable to a lower interest rate environment as well as unfavourable lending margins and higher liquid assets. The bank said an increase in operating expenses was the result of increased investment spend and higher staff costs due to continued impacts from covid-19. The target price is decreased to $63 from $66.
GPT GROUP (GPT) was downgraded to Neutral from Outperform by Macquarie B/H/S: 4/1/1
GPT has surged 13% in two days as part of the vaccine-inspired value switch and outperformed the ASX REIT index by 4.6%, Macquarie notes. The broker had previously identified GPT as a value pick. Not anymore. On the strength of the rally, and ongoing risk of lower office/retail asset valuations, the broker downgrades to Neutral from Outperform. Macquarie has nonetheless backed off its valuation risk assumptions slightly, so target rises to $4.79 from $4.48.
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.