In the good books
ALTIUM (ALU) was upgraded to Buy from Neutral by UBS and to Buy from Neutral by Citi
The results in the first half were slightly below expectations. Revenue guidance is been revised to US$190-195m with operating earnings of US$70-76m. UBS retains forecasts at the lower end of these ranges but believes the market reaction to the results suggests many envisage considerable risk in achieving the skew to the second half. On the positive side, UBS believes pent-up demand is likely to return as business confidence improves and this should mean a return to normalise pricing levels after significant discounting was experienced. The broker also believes a strong balance sheet could allow the company to capitalise on M&A opportunities. UBS takes a medium-term view and upgrades to Buy from Neutral. Target is reduced to $34 from $36.
While envisaging downside risk to second half earnings, Citi now suspects Altium is nearing the end of the pandemic-induced downgrade cycle. The demand environment and earnings growth are likely to accelerate over 2021 as the vaccine is rolled out. Valuation is now relatively more attractive. Hence, the broker upgrades to Buy from Neutral and raises the target to $33.50 from $32.80.
ANSELL (ANN) was upgraded to Add from Hold by Morgans
After first half results, Morgans lifts the rating for Ansell to Add from Hold and the target to $44.45 from $36.06 as all key divisions saw performance improve. Despite higher covid-19 related costs, gross margins increased 180 basis points to 35.9% on higher production volumes, manufacturing efficiencies and sales growth. The broker believes demand for personal protection solutions will remain robust and the pandemic has strengthened the company’s position and earnings trajectory. The analyst increases FY21-22 underlying earnings forecasts by up to 26%.
ARB CORPORATION (ARB) was upgraded to Hold from Lighten by Ord Minnett
ARB Corp’s result came in 3.7% above Ord Minnett, albeit inclusive of JobKeeper. While the dividend increased, the payout ratio was lower than expected as the company looks to increase investment in the business. Recent improvement in new vehicle sales after a long period of decline may represent a turning point for the industry, the broker suggests. ARB’s key vehicles, large SUVs and 4WDs, have achieved particularly strong growth in recent months. This combined with strong demand in export markets should lead to a period of above average sales and profit growth. The broker thus upgrades its rating to Hold from Lighten, but no more given valuation is fair. Target rises to $35 from $26.
ASX (ASX) was upgraded to Neutral from Sell by UBS
First half net profit was ahead of estimates. UBS believes this demonstrates the diversity in the ASX model. The difficult operating environment was offset by growth elsewhere such as in listings and the cash market. Net profit fell -3.4%, the first decline in eight years. UBS attributes the fall to the drop of -40% in net interest and dividend income. The broker expects earnings will rebase at this level over FY21 and then gradually recover. Given the underperformance in the share price, the broker upgrades to Neutral from Sell. Target is raised to $68 from $66.
BABY BUNTING (BBN) was upgraded to Add from Hold by Morgans
Morgans upgrades the rating for Baby Bunting to Add from Hold and raises the target price to $6.39 from $4.83. There was 40% profit (NPAT) growth in the first half, which was -6% short of Morgans forecasts due to less gross margin expansion in the second quarter and continued investment in people/infrastructure. Online sales, including click and collect grew by 100% and comprised 19.7% of total sales, while private label/exclusive sales made up 39% of the total. The broker highlights the move into New Zealand provides further longevity to an already strong growth profile. While valuation is at a premium to retail peers the analyst considers the growth profile is far superior. Morgans FY21 and FY22 earnings (EBIT) forecasts are unchanged while the FY23 forecast lifts by 8% and more meaningfully beyond due to the NZ rollout inclusion.
GPT GROUP (GPT) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse considers GPT Group’s result to be better-than-expected with funds from operations well above the broker’s forecast of 25.6c although less than last year. No FY21 guidance was provided but the broker expects it to be a better earnings year. The broker is of the view the group suffers from negative sentiment towards both the office and retail sectors with not enough attention given to its industrial exposure or management platform. The broker upgrades to Outperform from Neutral with the target falling to $4.78 from $4.83.
INGHAMS GROUP (ING) was upgraded to Outperform from Neutral by Macquarie
Inghams Group’s first-half result preview suggests strong volumes with first-quarter core poultry volume lifting 6.2% versus last year. Also, the result should not be impacted much by lower pricing, if Macquarie’s updated forecasts prove correct. Macquarie expects strong poultry volumes to continue into 2Q with better than expected pricing. Further margin recovery will require covid normalisation, inventory work-through and lower input costs, adds the broker. Macquarie upgrades to Outperform from Neutral with a target of $3.78.
NEWS CORPORATION (NWS) was upgraded to Overweight from Underweight by Morgan Stanley
Morgan Stanley lifts the rating for News Corp to Overweight from Underweight and raises the target price to US$30 from US$15. Morgan Stanley raises the enterprise value estimate for News Corp’s 80%-owned US real estate portal Move Inc to US$5-7bn versus consensus by other brokers of around US$2bn. This makes the company’s share of Move Inc worth between US$7-10 per share. The analyst explains, at the time of acquisition in 2014 Move was the number three player in the US and not profitable. The turning point was in 2018 when Move Inc acquired Opcity, a software platform business model which matches home buyers and sellers with brokers.
OROCOBRE (ORE) was upgraded to Buy from Neutral by Citi
Electric vehicle sales have proved extremely resilient in 2020, Citi observes, growing by around 35%, while overall passenger vehicles fell -20%. This signals sizeable demand growth in stocking activity from the EV battery supply chain. While lithium carbonate and hydroxide prices are up over the year to date the major feedstock, spodumene, is still rather flat. Citi expects spodumene will recover to US$600/t over the next 18 months, amid demand strength and better supply discipline from miners. Orocobre is upgraded to Buy/High Risk from Neutral/High Risk and the target is unchanged at $6.75.
PILBARA MINERALS (PLS) was upgraded to Neutral from Sell by Citi
The acquisition of Pilgangoora remains the key catalyst and Citi upgrades Pilbara Minerals to Neutral/High Risk from Sell/High Risk and raises the target to $1.10 from $1.00.
In the not-so-good books
APPEN (APX) was downgraded to Underperform from Outperform by Macquarie
After discussion with industry contacts and a review of Appen’s FY21 outlook, the broker has decided to double-downgrade to Underperform from Outperform. The market has a consensus Buy rating but the broker is expecting a wake-up call. The company’s second half 2020 underperformance, previously revealed, was driven by increased competition leading to a structural loss of market share, and the broker expects headwinds to persist in 2021. The result release should be a “non-event”, the broker suggests, but once the outlook is reviewed the broker expects consensus downgrades. Target falls to $19 from $27.
ASALEO CARE (AHY) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse lowers its rating to Neutral from Outperform with a target price of $1.50. Essity has been given access to Asaleo Care’s financial accounts to try and work out a takeover transaction. The broker believes a takeover is likely and there is an opportunity for Essity to amalgamate its Australian medical business with Asaleo. Even so, Credit Suisse concedes the risk of no-deal is a possibility in which case the share price may retrace its recent gains.
AURIZON HOLDINGS (AZJ) was downgraded to Neutral from Buy by Citi
An initial assessment of Aurizon Holdings’ first half result prompts Citi to downgrade to Neutral from Buy with the target falling to $4.28 from $5.15. Aurizon Holdings reported a first half operating income of $454m, a 9% beat to consensus. For the full year, the company has upgraded its operating income guidance to $870-$910m driven by a circa $40m retrospective recognition of Wiggins Island Rail Project (WIRP) fees. Where bulk performed better than expected, coal faltered with coal revenue decreasing by -8%. While believing coal markets will re-adjust in the short term and earnings will be relatively resilient, Citi expects fossil fuel exposed stocks to trade at a discount to historic multiples.
DOMAIN HOLDINGS GROUP (DHG) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse downgrades to Neutral from Outperform with the target dropping to $5 from $5.10. Domain Holdings Australia’s first-half earnings were slightly ahead of Credit Suisse’s estimates with revenue of $137m and operating income of $54.5m. On the flip side, company guidance for FY21 total costs was significantly higher than expected. Costs are expected to step up in FY22 on account of the reversal of the JobKeeper/Zipline benefit. Given Credit Suisse analysts had previously forecast for costs to progressively ramp up over time, changes made to outer year estimates are more limited.
DOMINO’S PIZZA ENTERPRISES (DMP) was downgraded to Accumulate from Buy by Ord Minnett
Domino’s Pizza Enterprises’ will report its first-half result on 17 February. Ord Minnett expects operating earnings to lift by 18.8% versus last year along with an underlying net profit of $95.5m, up 31.9%. An interim dividend of 88c is forecast. Led by the recent share price performance driven by same-store sales, operating income margin expansion and cash realisation, Ord Minnett downgrades its recommendation to Accumulate from Buy with the target price rising to $100 from $85.
SMARTGROUP CORPORATION (SIQ) was downgraded to Neutral from Outperform by Macquarie
Macquarie downgrades to Neutral from Outperform with a target of $7.29. Among the fleet and novated companies, Macquarie finds Smartgroup Corp has the least used car price exposure and this helps driving its fleet income. The broker expects new car supply to remain a constraint throughout 2021, especially since the retail channel is preferred over novated and fleet. Also, going forward regulatory uncertainty may impact the timing of both capital management and corporate activity.
SEVEN WEST MEDIA (SWM) was downgraded to Accumulate from Buy by Ord Minnett
Ord Minnett reduces the rating for Seven West Media to Accumulate from Buy after the recent share price rise. The broker increases the target to $0.55 from $0.28 after factoring-in FY21 estimates for revenue growth of 6.1% and cost reduction of -8.1%. Post the first half results, the analyst highlights underlying net profit after tax (excluding significant items) was $86.6m, up 25% on the same period last year. The company announced it was in discussions with Google for its news content. This is after agreeing to a long-term partnership with Google for the search engine giant’s News Showcase Product, from which the broker estimates revenue of $39.5m to $69.2m yearly.
WESFARMERS (WES) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse does not see many downside risks for Wesfarmers in the first half result and expects a strong result from its retail businesses. Accelerating housing activity and the work from home thematic also set the scene for a solid second half, suggests the broker. The broker does not expect a large-scale acquisition looking at the inflated asset prices and thus a capital return is likely in 2021. Wesfarmers will report its result on February 18. Led by the recent share price strength, the rating is downgraded to Neutral from Outperform. Target is raised to $56.79 from $55.83.
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.