Buy, Hold, Sell – What the Brokers Say

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In the good books

APPEN (APX) was upgraded to Neutral from Underperform by Macquarie

The share price has declined -33% in the last three months, Macquarie notes. While the broker has previously highlighted the risk of increased price competition, recent investor feedback suggests the market is aware of the risk. Hence, Macquarie suspects this is now being reflected in the share price. While the broker will monitor market activity closely, given the sensitivity to prices from price competition that could lead to larger-than-expected earnings downgrades, the rating is upgraded to Neutral from Underperform. Target is $16.

CHORUS (CNU) was upgraded to Neutral from Sell by UBS

UBS notes Chorus underperformed the NZX50 by circa -15% in the last three months, leading the broker to update its model to take account of increasing wireless competition and movement in risk-free rates. The broker expects a reduction in long term dividends but even then upgrades to Neutral from Sell. The target falls to $6.30 from $7.

OIL SEARCH (OSH) was upgraded to Buy from Neutral by UBS

First quarter production was in line with UBS estimates. Revenue was marginally lower than expected because of reduced volumes from PNG LNG. Realised LNG prices outperformed peers in the quarter, the broker notes. 2021 guidance has been revised, with capital expenditure reduced by -28% as expenditure on the biomass project and seismic analysis in PNG are deferred. Yet operating cost guidance has been revised up 35% because of higher hedging costs. UBS upgrades to Buy from Neutral, assessing the outlook for oil demand is improving and Oil Search has the highest leverage to a forecast oil price recovery. Target is reduced to $4.50 from $4.60.

ORIGIN ENERGY (ORG) was upgraded to Outperform from Neutral by Macquarie

Macquarie suggests Origin Energy must address leverage in order to maintain an investment grade credit rating, noting the company’s second earnings downgrade has meant S&P has placed a negative watch over its BBB rating. Earnings have structurally declined and leverage is stretched. The broker believes the negatives are entrenched in the share price and therefore upgrades to Outperform from Neutral. Target is raised to $4.70 from $4.68. At a minimum Macquarie believes the dividend policy needs to be reviewed in order to retain cash and some debt reduction will be necessary.

RELIANCE WORLDWIDE CORPORATION (RWC) was upgraded to Add from Hold by Morgans

Morgans lifts the rating to Add from Hold after a third quarter sales trading update that was ahead of expectations. Constant currency sales growth was strong across all regions (EMEA 13%, APAC 11%), with Americas (39%) boosted by the Texas freeze event. The broker increases underlying earnings (EBITDA) estimates for FY21-23 by 6%,1% and 2%, respectively, and raises the target price to $5.50 from $4.65. Management advised that April sales to date are substantially ahead of the covid-impacted pcp. The company is continuing to implement price rises for products that have been impacted by higher input costs, particularly brass products which have experienced higher copper and zinc costs.

In the not-so-good books

ACCENT GROUP (AX1) was downgraded to Neutral from Buy by Citi

Citi highlights the Glue acquisition as yet another example of Accent Group’s ongoing pursuit of growth. The acquisition price at $13m is small in Citi’s view, meaning the downside is limited. While Glue provides Accent Group with a growth avenue, Citi notes the group is already in the middle of many other growth opportunities that could lead to competition for management time and company resources. Citi downgrades its rating to Neutral from Buy noting the share price is up almost 25% over the last month with the target price rising to $3.10 from $2.85.

ANZ BANKING GROUP (ANZ) was downgraded to Neutral from Buy by Citi

In a first half results preview, Citi strategists believe the sharp improvement in the Australian economy, particularly the employment market, is set to make the major banks’ covid-crisis loan loss provisions redundant. FY21 consensus earnings could be an average circa 12% higher if just 60% of these provisions are released back during FY21, calculates the broker. For ANZ Bank’s interim, the analyst forecasts cash NPAT of $3,215m, basic cash EPS of 113.1c and a dividend of 65c. While the analyst upgrades forecasts by around 8-11% across 2H21-FY22 to reflect further loan provision write-backs, the rating is downgraded to Neutral from Buy after a strong run in the share price. The target rises to $30.25 from $26.50.

BLUESCOPE STEEL (BSL) was downgraded to Neutral from Outperform by Credit Suisse and Macquarie

Second half earnings guidance (EBIT) has increased to $1-1.08bn from $750-830m. This is a substantial upgrade, Credit Suisse observes, and driven by North Star in the US and Australian Steel Products. The broker increases EBIT estimates for FY21 by 10%. Nevertheless, earnings are nearing a peak for what can be achieved from the current asset base and the broker envisages diminishing share price returns from earnings upgrades. Rating is downgraded to Neutral from Outperform. Target is steady at $22.50.

Macquarie notes earnings momentum is strong and more upgrades to estimates are likely to ensue. Still, the broker finds it difficult to imagine the environment will become better from here and downgrades to Neutral from Outperform. Target is raised to $23.90 from $23.05.

SEALINK TRAVEL (SLK) was downgraded to Neutral from Outperform by Macquarie

Macquarie downgrades to Neutral from Outperform, reducing the target to $9.30 from $10.30. The broker assesses current levels in the stock are ascribing value to growth options in which it has little confidence. M&A in New Zealand remains the most attractive option while the performance of the bus operations in Sydney remains robust.

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.

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