In the good books
ACCENT GROUP (AX1) was upgraded to Buy from Neutral by Citi
The update from the AGM has signalled roll-out prospects are better than Citi had anticipated. The business is expected to be a beneficiary of more people going out and about. Moreover, the broker highlights there is limited exposure to markets with significant disruption from the pandemic and a material growth opportunity in high-margin vertical accessories. Rating is upgraded to Buy from Neutral and the target raised to $2.09 from $1.60.
AMPOL (ALD) was upgraded to Buy from Neutral by UBS
UBS upgrades to Buy from Neutral to reflect upgrades to earnings estimates and a $300m off-market buyback. The broker observes catalysts for the short term from earnings momentum and the possibility of further capital management over the next 12 months. Ampol has reaffirmed a focus on lifting returns from the existing asset base and lowering expenditure for retail store fit-outs. There was no update on the Lytton review but the company has indicated the Kurnell storage facility can support the federal government’s focus on improved domestic fuel security. Target is raised to $33.70 from $26.00.
See downgrades below.
AUSNET SERVICES (AST) was upgraded to Hold from Reduce by Morgans
A share price decline for AusNet Services in the wake of the company’s first half results prompts Morgans to increase the rating to Hold from Reduce. At current prices the broker estimates a 12-month potential total shareholder return of around 4%, including a 5.1% cash yield. The analyst warns of uncertainty on dividend franking. The target price is increased to $1.86 from $1.80.
CITY CHIC (CCX) was upgraded to Buy from Neutral by Citi
In its update, City Chic has noted 18.7% comparable growth in sales, excluding the Victorian stores which were closed. Citi expects Australian online sales were likely up more than 50%. Citi forecasts a -150 basis points decline in gross margin for the City Chic brand and envisages the company will also invest in marketing Avenue. The company plans a new website in Australia, targeting a lower price point and more conservative fashion style. This will leverage the Avenue range. Rating is upgraded to Buy from Neutral, as the broker detects improving momentum, and the target is steady at $3.20.
ORICA (ORI) was upgraded to Add from Hold by Morgans
The FY20 result was in-line with guidance, with earnings particularly weak in the second half, notes Morgans. Headwinds in emerging economies are flagged to persist into the first half FY21. Guidance for a strong second half onwards has the broker upgrading FY22 and FY23 forecasts. With 16% upside to a target price of $18.95 (from $15.55), the broker upgrades to Add from Hold.
ZIP CO (Z1P) was upgraded to Neutral from Sell by Citi
Citi notes increasing competition does not appear to have affected customer usage or margins in the company’s October trading update. Yet the broker continues to envisage downside risk to medium-term growth forecasts and margins from competition. As the stock is down -22% since the beginning of September, the rating is upgraded to Neutral/High Risk from Sell/High Risk. Target is raised to $6.70 from $6.55.
In the not-so-good books
AMPOL (ALD) was downgraded to Equal-weight from Overweight by Morgan Stanley and to Hold from Accumulate by Ord Minnett
Ampol has announced a $300m off-market buy-back and a further -$40m cost-out. Despite factoring in some solid growth next year in the higher-value parts of the business, Morgan Stanley reduces the rating to Equal-Weight from Overweight (given the stock has rallied nearly 25% in the quarter). The broker forecasts an uplift from shop margin over the coming halves and expects FY21 shop margin to grow around 20% versus FY20. The target price is unchanged at $31. Industry view is Cautious.
Ord Minnett notes the share price performance has been robust because of the leverage Ampol enjoys from a broader recovery in mobility. There is less valuation support now and the outlook for Lytton is uncertain so the broker downgrades to Hold from Accumulate. Target is raised to $30 from $28.
See upgrade above.
ATLAS ARTERIA (ALX) was downgraded to Neutral from Outperform by Macquarie
Atlas Arteria has surprised with a traffic update outside the quarter. Traffic has collapsed as expected due to the re-lockdown in France, but not as fast as Macquarie expected. Truck traffic remained largely unaffected. The numbers are positive for dividend expectations but do not change the broker’s earnings forecast of a strong rebound out of the virus impact. As this is captured in the share price, Macquarie downgrades to Neutral from Outperform. Target falls to $6.68 from $6.73 on currency adjustments.
INSURANCE AUSTRALIA GROUP (IAG) was downgraded to Neutral from Buy by Citi and to Equal-weight from Overweight by Morgan Stanley
Citi assesses the company is now conservatively provisioned after its capital raising. The perception that Insurance Australia is a quality play in the sector is somewhat dented, in the broker’s view. Estimates for earnings per share are reduced for FY21 by -102% to allow for new business interruption provisioning and the equity raising. Citi downgrades to Neutral from Buy and lowers the target to $5.70 from $6.25.
As a result of higher-than-expected business interruption (BI) claims, Morgan Stanley reduces the rating for Insurance Australia Group to Equal-Weight from Overweight and the target price to $4.80 from $6.50. The broker considers earnings uncertainty has increased due to the higher provisions and a higher probability of a challenging quota share renewal with reinsurers. While the company still has the potential to cut costs, the analyst believes a cost-out programme is likely delayed to focus on settling BI claims. Industry view: In-line.
NANOSONICS (NAN) was downgraded to Hold from Add by Morgans
After a comprehensive trading update earlier in the month, Morgans feels little was added by way of additional news at the AGM. After a rally in the share price the broker pulls back the rating to Hold from Add. The analyst anticipates the key upside/downside risk stems from the timing of the regulatory approval for the next product. The target price of $6.86 is unchanged.
NINE ENTERTAINMENT CO. HOLDINGS (NEC) was downgraded to Neutral from Buy by UBS
UBS observes Nine Entertainment has had a stellar run up in the share price, amid a sustained improvement in advertising markets. Nevertheless, the broker suspects the recent improvement is merely the pulling forward of a cyclical recovery, which in large part is being driven from lower multiple areas of the business. The broker assumes FY21 free-to-air TV revenue is up 5% but still lower than FY19 levels. UBS downgrades to Neutral from Buy and raises the target to $2.50 from $2.05.
OIL SEARCH (OSH) was downgraded to Hold from Add by Morgans
With the Oil Search share price having risen 47% this month, Morgans downgrades the rating to Hold from Add. The broker warns of potential future funding constraints, which highlights the importance of being able to sell down the Alaskan interests to 36% from 51%. At the same time the recent investor day illustrated to the analyst how much value the company has added to its Alaskan assets, while also raising concerns about PNG growth. The target price of $3.65 is unchanged.
PRO MEDICUS (PME) was downgraded to Neutral from Buy by UBS
UBS finds Pro Medicus a high-quality growth prospect, noting its addressable market and market power. Nevertheless, post the FY20 results the stock has performed strongly and the risk/reward is now more balanced. Rating is downgraded to Neutral from Buy and the target raised to $32.00 from $29.65. The high valuation is supported by favourable economics and structural tailwinds, which the broker assesses is underpinned by a transition to enterprise imaging and the adoption of artificial intelligence in medical imaging.
SYDNEY AIRPORT HOLDINGS (SYD) was downgraded to Neutral from Outperform by Macquarie
Macquarie notes the outlook has improved for Sydney Airport, with state borders opening up, hope for international down the track on vaccine success, REX taking on the Melbourne route to offset a smaller Virgin Airways, and a slot review pending. The share price has risen accordingly. The broker increases its target to $7.09 from $6.66 and pulls back to Neutral from Outperform, warning of downside risk from rising bond yields.
VIRTUS HEALTH (VRT) was downgraded to Hold from Add by Morgans
Virtus Health has noted a swift recovery across all geographies in the first quarter, which has resulted in revenue rising 19% on the previous corresponding period. Morgans expects this level of growth to continue until December and then believes lockdowns overseas may result in some moderation. The broker makes no changes to forecasts, while also considering future earnings upgrades are likely given positive comments by management. The Add rating is downgraded to Hold from Add, due to a strong recent share price, and the target is increased to $5.31 from $4.34.
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.