In the good books
ALUMINA (AWC) was upgraded to Neutral from Underperform by Macquarie
Macquarie upgrades to Neutral from Underperform as rallying prices and demand for aluminium have transformed the earnings outlook. The broker notes Alumina Ltd is trading at a free cash flow yield of around 10% at spot prices. Target is raised to $1.70 from $1.50.
AUSTRALIAN FINANCE GROUP (AFG) was upgraded to Add from Hold by Morgans
Morgans increases EPS forecasts for FY22 and FY23 by 6.8% and 8.4% due to increased net interest margin (NIM) forecasts and increased loan growth forecasts. The rating is upgraded to Add from Hold and the target to $2.90 from $2.60. The broker expects the current contraction in residential mortgage-backed securities (RMBS) will allow the AFG securities (AFGS) business to offer sharper pricing on its variable rate home loan products.
CAPRICORN METALS (CMM) was upgraded to Neutral from Underperform by Macquarie
Macquarie upgrades to Neutral from Underperform following recent weakness in the share price. A modest strengthening in the Australian dollar drives reductions in gold earnings estimates. Target is $1.60.
GALAXY RESOURCES (GXY) was upgraded to Buy from Hold by Ord Minnett
Ord Minnett updates production profiles amidst a recovery in demand and pricing for lithium chemicals. As the market tightens, sourcing lithium units is being prioritised over grades. As the share price has pulled back somewhat, the broker envisages opportunities in the sector and upgrades Galaxy Resources to Buy from Hold. Target is raised to $3.70 from $2.70.
INSURANCE AUSTRALIA GROUP (IAG) was upgraded to Add from Hold by Morgans
Morgans downgrades FY21 EPS forecasts by -8% and lowers the target price to $5.35 from $5.68 on revised management claims guidance as a result of the NSW/QLD floods. However, the rating is raised to Add from Hold with the share price at seven-year lows. The company’s reinsurance will cap the maximum event loss at -$165m though the company is estimating around -$135m. The broker views the flood impact as relatively contained.
ILUKA RESOURCES (ILU) was upgraded to Buy from Hold by Ord Minnett
Ord Minnett adds stage 2 of the Eneabba project and stronger mineral sands prices to its financial modelling for Iluka Resources. As a result, estimated value increases by 25%. Little new supply is expected in the short term and strength in demand continues for mineral sands and rare earths. Incorporating higher prices and adding stage 2 significantly improves cash flow and Ord Minnett upgrades to Buy from Hold. Target is raised to $8.10 from $6.60.
JUPITER MINES (JMS) was upgraded to Outperform from Neutral by Macquarie
Macquarie points out Jupiter Mines was South Africa’s largest exporter of manganese in FY21, at 3.4mtpa. The broker expects a 2c final dividend, bringing the full year dividend yield to 10%. Stronger manganese prices are driving the upside and the impact of weather has been offset by improvements in logistics. Rating is upgraded to Outperform from Neutral. $0.35 target retained.
MOUNT GIBSON IRON (MGX) was upgraded to Outperform from Neutral by Macquarie
Macquarie incorporates stronger demand and prices, upgrading 2021 iron ore, manganese and thermal coal forecasts by 18%, 22% and 17% respectively. Mount Gibson is upgraded to Outperform from Neutral, having materially underperformed its peers in the year to date. The completion of Koolan Island cutback is a key development for the company. Target is raised to $1.00 from $0.95.
OROCOBRE (ORE) was upgraded to Buy from Hold by Ord Minnett
Ord Minnett updates production profiles amidst a recovery in demand and pricing for lithium chemicals. As the market tightens, sourcing lithium units is being prioritised over grades. Share prices have pulled back a little and the broker envisages more opportunities in the sector and upgrades Orocobre to Buy from Hold. Target is raised to $5.50 from $5.40.
OIL SEARCH (OSH) was upgraded to Neutral from Underperform by Macquarie
Macquarie raises Brent oil price assumptions by 20% for 2021 and by 7% for 2022, expecting prices will peak at US$72/bbl in the third quarter of 2021. The broker notes the sell down in Alaska is now critical for Oil Search as this has the potential to reduce net capital expenditure exposure and provide upfront funding. Rating is upgraded to Neutral from Underperform. Target rises to $4.40 from $4.10.
REA GROUP (REA) was upgraded to Neutral from Underperform by Credit Suisse
REA Group will acquire all of Mortgage Choice (MOC) via a scheme of arrangement. The offer is $1.95 a share. Credit Suisse estimates the acquisition will more than triple the market share of REA Group in the mortgage broking channel to around 7%. This should provide opportunities for synergies from greater scale and the ability to negotiate better rates. It will also be able to stream leads generated from its platform to a business which is fully owned. Nevertheless, Credit Suisse warns mortgage broking is a business that is exposed to cyclical fluctuations and, while the scale of the investment is not enough to change the earnings profile, it is marginally dilutive to the multiple. Rating is upgraded to Neutral from Underperform as the stock is now trading in line with valuation. Target is $136.70.
SOUTH32 (S32) was upgraded to Outperform from Neutral by Macquarie
Macquarie upgrades to Outperform from Neutral as rallying prices and demand for manganese and aluminium have transformed the earnings outlook. The broker notes South32 is trading at a free cash flow yield of around 10% at spot prices. Target is raised to $3.10 from $2.90.
TELSTRA CORPORATION (TLS) was upgraded to Overweight from Underweight by Morgan Stanley
Morgan Stanley upgrades to Overweight from Underweight after recent news of the separation into three operating companies and the injection of external investors into Mobile Towers. The price target is raised to $4 from $3. The broker feels the greater the degree of freedom headquarters allows each entity the better. The Towers spin-off provides a near term catalyst though it’s considered the primary risk continues to be intense competitive rivalries preventing mobile and fixed line price inflation. Additional options are now emerging to create value including but not limited to InfraCo and the NBN and the analyst thinks additional changes in structure across other operating units are also possible. Industry view: In-Line.
In the not-so-good books
AGL ENERGY (AGL) was downgraded to Hold from Accumulate by Ord Minnett
AGL Energy will divide into two energy businesses, basically retail and generation. Ord Minnett notes a lack of detail regarding capital structures, offtake arrangements and final asset allocations which makes it difficult to assess how the split will appeal to investors. The broker suspects the retail business will not take on significant wholesale price risk so that the generation part, PrimeCo, cannot be structured as an infrastructure asset. There are challenges ahead and the broker downgrades to Hold from Accumulate, finding it difficult to envisage how PrimeCo can be made attractive as a stand-alone entity. Target is lowered to $11.00 from $14.05.
COOPER ENERGY (COE) was downgraded to Hold from Add by Morgans
Morgans lowers the rating to Hold from Add and the target to $0.30 from $0.39 given short-term uncertainty around the path to reaching nameplate at Sole. The broker expects near-term underperformance while APA Group (APA) aims to lift production and capital works. While taking a conservative stance, the broker remains confident in the long-term outlook and intrinsic value in the Gippsland and Otway Basin assets.
CORONADO GLOBAL RESOURCES (CRN) was downgraded to Hold from Add by Morgans
Morgans believes the share price is vulnerable to a downside pricing scenario in the absence of a sustained met coal price recovery. The broker has always felt the company is a leveraged play on met coal pricing more than a play on production growth or development. Now with sluggish QLD hard coking coal prices back near US$115/t, it places upward pressure on net debt, explains the broker. This needs to be weighed against a compelling earnings/valuation leverage to healthier prices. Morgans downgrades the rating to Hold from Add. The target is lowered to $1 from $1.27 after the broker applies a -5% discount to a revised valuation to reflect the potential downside coal price scenario.
JB HI-FI (JBH) was downgraded to Underweight from Equal-weight by Morgan Stanley
Morgan Stanley opts for a more cautious stance within the household goods space due to harder comparisons and the vaccine rollout. The broker lowers the rating to Underweight from Equal-weight and the target to $46 from $52. Industry view is Attractive. The consumer electronics sub-category was an early beneficiary of ‘panic-buying’ from March 2020 and will therefore face tougher comps earlier than others in March/April, explains the analyst. Compared to Harvey Norman (HVN), Morgan Stanley sees more limited underlying upside associated with housing and regional strength. Also, the share price is retesting all-time highs and has outperformed the ASX200 by 39% since the February 20, 2020 market peak.
MCPHERSON’S (MCP) was downgraded to Hold from Buy by Ord Minnett
An unconditional on-market takeover offer has been lodged by Gallin at $1.34 a share. Ord Minnett notes the offer price represents a 9.8% premium to the pre-bid market and a -7.6% discount to its DCF-based valuation. The lack of a takeover premium is indicative of the opportunistic nature of the offer and also explained by sub-standard capital allocation decisions during FY21, in the broker’s view. The broker suspects incremental demand may be forthcoming from third-party bidders, given strong levels of brand equity and category leadership in core products. Rating is downgraded to Hold from Buy. Target is $1.45.
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.