In the good books

Ausnet (AST) was upgraded to Add from Hold by Morgans. B/H/S – 2/3/2. FY18 results beat estimates. Morgans upgrades FY19-21 materially, assuming efficiency initiatives are able to hold underlying costs flat until the next regulatory re-sets are applicable. With cash flow in FY18 stronger than expected, and capital expenditure lower, concerns the broker previously had about the key credit metric for the company’s credit rating have dissipated. Target rises to $1.88 from $1.77.

Graincorp (GNC) was upgraded to Outperform from Neutral by Credit Suisse. B/H/S – 1/3/0. A significantly more diversified grain marketing business, asset sale opportunities, improving earnings in refined oils and opportunities in craft malt whisky support valuation, the broker suggests, in the face of short-term weather impacts. To that end Credit Suisse upgrades to Outperform from Neutral while trimming its target to $8.80 from $9.06.

Invocare (IVC) was upgraded to Buy from Sell by Citi. B/H/S – 1/4/2. InvoCare failed to impress the broker in February, but Citi analysts have now made a 180 degrees turnaround declaring the company’s Protect & Growth capex plan, costing $200m, is going to deliver. In addition, the share price valuation is seen as too low. The analysts see a case for additional upside potential from cost savings, market share gains (yes), stronger case average growth, as well as from acquisitions in rural areas. Estimates are, on their own admission, between 2-7% higher than market consensus. Price target improves to $14 from $13.50.

Link Administration Holdings (LNK) was upgraded to Outperform from Neutral by Credit Suisse. B/H/S – 3/4/0. Management has provided clarity on the bear case scenario given the federal government’s budget policy on low-balance super accounts. Credit Suisse estimates the impact of the new legislation is -8% in FY21 but suggests the policy stands a good chance of being watered down. The broker downgrades FY20 EPS estimates by -7% and FY21 by -10%. This includes the proposed changes to superannuation and the loss of CareSuper from FY20.

Speciality Fashion Group (SFH) was upgraded to Buy from Neutral by Citi. B/H/S – 1/0/0. Specialty Fashion has sold its Autograph, Katies, Millers and Rivers brands to Noni B (NBL) for $31 million, leaving City Chic as Specialty’s only remaining brand. City Chic is growing sales at 5-10% on improving margins, Citi notes. Net of the cost of the exit, Specialty will now be cash positive from the sale and on the free cash flow City Chic can generate, and will possibly resume dividend payments, Citi suggests. Upgrade to Buy (High Risk). Target rises to 75c from 48c.

In the not-so-good books

Automotive Holdings Group (AHG) was downgraded to Neutral from Outperform by Macquarie. B/H/S – 2/4/0. Subsequent to the company’s downgrade to FY18 guidance, Macquarie suggests challenging market conditions are likely to weigh in the near term with the risk of broader contagion. The implied reversal in automotive margin performance requires consideration and the broker acknowledges the underlying drivers are difficult to ascertain at this point. Target is reduced to $3.30 from $4.20.

CYBG PLC (CYB) was downgraded to Neutral from Outperform by Credit Suisse. B/H/S – 1/3/1. First half results missed Credit Suisse estimates at the top line. Still, the broker believes the bank continues to execute well on costs although the revenue story appears harder given competitive pressures. The possibility of outperforming FY19 CTI targets now appears unlikely to Credit Suisse and the share price will be dependent on revenue upside. $6.00 target retained.

Xero (XRO) was downgraded to Neutral from Buy by Citi. B/H/S – 0/3/1. Xero’s FY18 performance may have met market consensus, but Citi analysts had been a little more ambitious, and thus the company slightly “missed”. But only on operational costs affecting EBITDA, other numbers were either better or in-line. Estimates have been slightly reduced to incorporate lower margin assumptions. Valuation increases to $40.60 from $39.09, but that’s not enough to keep the Buy rating in place given the strong rally in the share price, hence the downgrade to Neutral.

The above was compiled from reports on FN Arena. The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, 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.