In the not-so-good books

AUTOSPORTS GROUP (ASG) was downgraded to Neutral from Outperform by Macquarie

The company has produced strong operating margins over FY21 as demand continues to outstrip supply. Despite some production limitations, supply has performed in line with expectations. Autosports has also acquired an 80% interest in John Newell Mazda, Alexandria. The purchase price is $12m in goodwill and $4m for the net asset interest, to be funded by existing cash. Macquarie expects operating margins will remain elevated for the majority of FY22 but following the recent share price performance downgrades to Neutral from Outperform. Target is raised to $2.50 from $2.15.

BORAL (BLD) was downgraded to Equal-weight from Overweight by Morgan Stanley

Morgan Stanley commends Boral for its actions on the balance sheet and the sale of assets at attractive prices yet believes these are now reflected in the share price. Boral has outperformed the ASX200 by 41% since January and the broker’s building materials coverage by 18%. Capital management is now factored in, the analysts suggest. Following the US divestments Boral will be a mature, Australia-focus construction materials operator. From here transformation benefits should boost earnings but outside of this future growth is less obvious to the broker. Rating is downgraded to Equal-weight from Overweight. Target is $7.60. Industry view is in-line.

COLLINS FOODS (CKF) was downgraded to Hold from Add by Morgans

After Collins Foods’ FY21 result, Morgans’ revenue/earnings forecasts are broadly unchanged, while higher D&A guidance leads to -2-3% EPS downgrades. It’s felt FY22 growth for KFC Australia will be more modest after effectively delivering two years of growth in FY21. The company reported 13% earnings (EBIT) growth and 18% profit growth in FY21, with KFC providing all the uplift, points out the analyst. The broker highlights softening KFC growth in the result, as the base to cycle becomes elevated, with the opposite in Europe. With the stock now trading within 10% of the target (lowered to $12.82 from $13.38), Morgans lowers its rating to Hold from Add.

EVOLUTION MINING (EVN) was downgraded to Underweight from Equal-weight by Morgan Stanley

The main opportunities are the expansion of Red Lake and Cowal underground and are now incorporated into Morgan Stanley’s forecasts, which limits further earnings upside. The broker expects substantial expansion at Red Lake despite the execution risks, with the project reflecting 34% of DCF value. Cowal is expected to reach its target of 350,000 ounces per annum by FY24 and reflects 42% of DCF value. Rating is downgraded to Underweight from Equal-weight as Morgan Stanley believes there is better gold exposure elsewhere. Target is $4.30. Industry view: Attractive.

INGHAMS GROUP (ING) was downgraded to Neutral from Outperform by Macquarie

While Inghams Group is a defensive stock, Macquarie finds better options are available in times of greater volatility. The broker believes the growth cycle in markets has peaked and downgrades to Neutral from Outperform. Some uncertainty is created by a major retail contract that is up for renewal in the first half of FY22 and Macquarie suspects the customer could represent 37% of group revenue. A large proportion of volume is unlikely to be at risk, the broker asserts, but there remains some risk of either volume loss or margin pressure. Target is raised to $4.03 from $3.98.

MAAS GROUP (MGH) was downgraded to Hold from Add by Morgans

Following share price strength, Morgans moves to a Hold rating from Add and increases the target to $5.85 from $4.35. It’s felt several announced acquisitions/investments will contribute meaningfully to near-term earnings and deliver further medium-to-longer-term value. The business acquisitions and property investments have a total upfront consideration of $92.2m, comprised of $62.7m in cash and $29.5m in scrip, with deferred consideration and earn-outs totalling $31.5m. Australian corporate debt facilities have risen to $200m from $160m, and $100m in commercial property finance facilities has been secured. After this strengthening of balance sheet capacity, the analyst feels further M&A will be pursued.

REECE (REH) was downgraded to Underperform from Neutral by Macquarie

Macquarie reviews its investment thesis and downgrades to Underperform from Neutral on valuation grounds. The broker suggests the stock has had a strong run and while the fundamentals are supportive the valuation more than fully discounts any earnings upside. The main risk to this view is if the trading environment stays stronger for longer. Macquarie expects the FY21 result will feature strong trading, given positive market commentary from Australian and US peers. Target is steady at $19.40.

RELIANCE WORLDWIDE CORPORATION (RWC) was downgraded to Neutral from Outperform by Macquarie

While Macquarie believes the trading environment is supportive, the valuation upside is now more limited. Comparables will firm as FY22 progresses so any impetus to growth should be derived from well-executed M&A, in the broker’s opinion. Macquarie considers the current valuation more than adequately balances the risk/reward. Rating is downgraded to Neutral from Outperform. Target is raised to $5.50 from $5.30.

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.