In the good books
AMPOL (ALD) was upgraded to Overweight from Equal-weight by Morgan Stanley
Morgan Stanley moves to Overweight from Equal-weight, due to government financial assistance enabling Australia’s two last refineries to stay open until at least 2027. The target price is increased to $31.70 from $30. Industry view is Attractive. The broker increases earnings estimates as the refining package will give the investment community more confidence that consensus forecasts can be attained. For the next leg of upside, its considered global refinery margins need to improve. While it is still possible to lose money, the significant bear case of refineries losing a lot of money has been reduced, explains the analyst.
CARSALES.COM (CAR) was upgraded to Add from Hold by Morgans
Morgans upgrades to Add from Hold and lifts the target price to $20.82 from $19.45. The broker is supportive of the recent acquisition of Trader Interactive, which will likely reinvigorate topline growth. The analyst sees Carsales.Com as providing the best growth/valuation trade-off amongst the domestic classifieds players at present. With strong domestic new car sales and Korea travelling well despite covid, conditions are considered to remain supportive into FY22.
COMPUTERSHARE (CPU) was upgraded to Hold from Lighten by Ord Minnett
Ord Minnett thinks Computershare offers very strong leverage to earnings from higher American interest rates following its acquisition of Wells Fargo’s Corporate Trust Services business in the US. The broker believes this is a sentiment dynamic that could even override its concerns about actual near-term earnings from the company. To reflect some potential upside from rates, Ord Minnett has raised its terminal growth assumptions. As a result, Ord Minnett upgrades its rating to Hold from Lighten. The target price rises to $14.60 from $12.
CREDIT CORP GROUP (CCP) was upgraded to Buy from Hold by Ord Minnett
Ord Minnett upgrades the rating for Credit Corp Group to Buy from Hold, after the share price has underperformed the Small Ordinaries index by -20% since mid-March. This is considered due to a slower-than-expected recovery in Purchased Debt Ledger (PDL) supply in both Australia and the US. The broker sees evidence that some larger financial participants could re-enter the purchased debt ledger sale market over the next 12–18 months. Also, a number of forbearance measures are set to expire in the US, including rent and mortgages in June. The analyst suspects collections in the US and arrears rates in the consumer lending business have performed better than previous assumptions. The target price is unchanged at $31.50.
OROCOBRE (ORE) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett feels the proposed merger between Orocobre and Galaxy Resources (GXY) will result in a unique, pure lithium producer. The merged company is considered to have a diversified, low-carbon, strategic and growing production base. The rating is upgraded to Accumulate from Hold. Assuming timely deal completion, and including Olaroz Stage 3 in the valuation, the broker increases the target price to $7.15 from $5.50. The combined entity will grow to the fifth largest lithium company globally, based on forecast 2030 production.
SUNCORP (SUN) was upgraded to Buy from Neutral by Citi and to Add from Hold by Morgans
Citi sees attractive medium-term upside potential in Suncorp Group if the group can deliver on at least some of its FY23 targets about which the market remains sceptical. Even so, noting any meaningful improvement in either bank or general insurer looks unlikely until at least 2H22, Citi continues to believe much of the potential for share price upside may be more medium-term than short-term. Led by the recent share price fall, Citi upgrades to Buy from Neutral with an $11.80 target price.
After a recent retracement in share price, Morgans moves to an Add rating from Hold for Suncorp Group, and lifts the target price to $11.53 from $11.39. As part of a recent general insurance forum, Suncorp Group confirmed that momentum in the banking franchise broadly continued as expected in the third quarter. Management also disclosed that achieving its bank cost-to-income ratio target of around 50% will come 1/3rd from revenue growth and 2/3rds from cost improvements. The broker expresses some caution on this, given past difficulties in improving banking efficiency.
TPG TELECOM (TPG) was upgraded to Buy from Hold by Ord Minnett
Ord Minnett believes market concerns about TPG Telecom’s management change and the impact of covid on subscribers have been the key drivers of TPG Telecom’s underperformance. While concerned over the mobile business with covid headwinds not expected to ease until mid-2022, the broker does expect strong earnings growth driven partly by cost synergies from the merger. Ord Minnett upgrades to Buy from Hold with the target price lowered to $6.45 from $7.40 led by lower post-paid revenue and fixed average revenue per user (ARPU).
TREASURY WINE ESTATES (TWE) was upgraded to Add from Hold by Morgans
Morgans lifts the rating to Add from Hold and raises the target price to $13 from $11.10, after developing greater confidence in Treasury Wine Estate’s growth profile. The FY21-23 profit forecasts were increased by 4.4%, 9.0% and 4.8%, respectively. The FY21 trading update was better than the broker expected, despite covid-impacts on some of the higher-margin channels and no China sales in the second half. To maximise the benefits of a separate focus across brand portfolios, rather than regions, management has created new divisions (Penfolds, Treasury Americas and Treasury Premium Brands). The analyst believes this will allow the market to properly value the Penfolds brand, and prove that the sum-of-the-parts is worth more than the whole.
VICINITY CENTRES (VCX) was upgraded to Outperform from Neutral by Macquarie
Macquarie reviews the outlook for Vicinity Centres, noting the current share price implies a decline in asset values of -33% compared with pre-pandemic levels. Yet the broker points to some key assets and believes the pricing is not recognising the performance of convenience-based assets or the strength of the balance sheet. Macquarie assesses current pricing provides an opportunity and upgrades to Outperform from Neutral. The main risk in the short term is a reduction in the pay-out ratio. Target edges down to $1.64 from $1.65.
In the not-so-good books
APA GROUP (APA) was downgraded to Neutral from Outperform by Macquarie
Macquarie feels emissions policies are driving a structural decline in gas usage and, hence, growth for APA Group over a 30-year horizon. The broker lowers the rating to Neutral from Outperform. The target price falls to $10.09 from $10.40. The analyst believes renewables are still an avenue for growth though the space remains competitive. While the government release of the RIS Gas pipeline review has minimal impact on the group, increased information disclosure may cause pricing pressure, cautions the broker.
SOUTH32 (S32) was downgraded to Neutral from Outperform by Macquarie
South32 will be divesting the South Africa Energy Coal business with completion expected on 1 June 2021. The company confirmed the exit is conditional and a loss on sale of -US$125-175m will be booked. The exit was a key catalyst for the stock, in Macquarie’s view and the broker sees limited near-term positive catalysts with only the pre-feasibility study for Taylor due in the next few months. Further, declines in some of the miner’s key commodities have eroded the near-term earnings upgrade momentum and Macquarie downgrades to Neutral from Outperform. The target falls to $3.10 from $3.20.
ST BARBARA (SBM) was downgraded to Underperform from Neutral by Macquarie and to Hold from Buy by Ord Minnett
St Barbara has cut FY21 guidance to 330-360,000 ounces amid grade issues and the contractor change at Gwalia as well as low mining rates at Simberi. Macquarie had expected a downgrade to guidance but this update was materially weaker than anticipated. Tonnage will be delayed into FY22 although grade reconciliation issues are considered short term. Macquarie downgrades to Underperform from Neutral, noting a number of meaningful catalysts are ahead that could be key to re-setting the production profile. Target is reduced to $1.80 from $1.90.
Ord Minnett lowers the rating to Hold from Buy and reduces the target price to $2 from $2.80, after St Barbara issued another production downgrade. It’s felt the market may take some time to regain confidence in the company and the potential growth story. “Negative grade reconciliation” in both stope ore and stockpiles affected production at Leonora. Production from the Simberi operation in PNG was downgraded -10%, due to ore variability on lower mining rates and lower recoveries. The broker cuts the FY21 production forecast to 320,000oz at AISC of $1,712/oz, and reduces earnings estimates by -40% in FY21 and -30% in FY22.
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.
