In the good books
Aristocrat Leisure Limited (ALL) was upgraded to Outperform from Neutral by Macquarie
Aristocrat Leisure has made an offer for the UK’s Playtech, worth $5bn, to be funded cash, debt and equity. The acquisition will provide technology and scale in order to pursue the real money gaming (RMG) market, particularly North America where the company is yet to make its presence felt.
Macquarie considers the acquisition highly complementary to Aristocrat Leisure and notes many opportunities. The broker considers the valuation compelling and upgrades to Outperform from Neutral. Target is raised to $52.75 from $39.00.
Atlas Arteria (ALX) was upgraded to Add from Hold by Morgans
Morgans upgrades its rating to Add from Hold for Atlas Arteria on an attractive 12-month potential return and a 5-year equity internal rate of return of 8.6% per annum. The target price lifts to $6.61 from $6.44 on improved asset performance and valuation assumptions.
Had it not been for adverse exchange rate movements, the lift in target price would have been 21cps greater, explains the analyst. It’s conceded there’s still uncertainty over the shape of the traffic recovery.
Bapcor Limited (BAP) was upgraded to Add from Hold by Morgans
Bapcor managed to achieve flat year on year revenue growth in the September quarter, with growth in wholesale of 7% offsetting a -12% drop in retail with 70% of stores locked down. Some margin pressure was suffered due to higher costs, but should ease post-lockdowns.
Morgans suggests the quarter showed the resilience of revenues and the potential once normal operating conditions fully resume. With sufficient valuation upside having emerged, the broker upgrades to Add from Hold.
BHP Group (BHP) was upgraded to Add from Hold by Morgans
Morgans remains cautious on the iron ore market, but has upgraded BHP to Add from Hold, citing three reasons, the fist being recent share price weakness which implies an iron ore price of US$61/t.
Otherwise, the value of the Petroleum demerger has increased on the back of Woodside Petroleum’s ((WPL)) share price increase, on the back of rising oil prices, and furthermore, despite the plunge in the iron ore price BHP will still be able to pay a 10%-plus dividend yield.
GPT Group (GPT) was upgraded to Equal-weight from Underweight by Morgan Stanley
Morgan Stanley upgrades its rating for GPT Group to Equal-weight from Underweight and lifts its target price to $5.30 from $4.70. Industry view is In-Line. This comes as Sydney prime grade office reaches its first material quarter of positive net absorption.
Total absorption is the total new square footage leased by tenants. The analyst likes the portfolio re-balance in in the last 18 months away from retail. The current split is 38% Retail, 39% Office and 23% Industrial compared to the prior split of 43%, 41% and 16%, respectively.
The broker hasn’t included a range of potential positive-catalyst deals in forecasts, which would provide additional impetus above and beyond factors involved in the current rating upgrade.
See downgrade below.
Home Consortium (HMC) was upgraded to Hold from Lighten by Ord Minnett
Home Consortium ((HMC)) and Homeco Daily Needs plan to acquire Aventus Group ((AVN)) at $3.82 per security. Ord Minnett assesses the deal is more favourable for Home Consortium compared with HomeCo Daily Needs based on the premiums paid.
HomeCo forecasts the transaction to be 3% accretive to FY22 earnings and the broker calculates, post merger, will have a free float market cap of $2.5bn.
Hold maintained. Target is $1.58.
IGO Limited (IGO) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse upgrades to Outperform from Neutral, lifting its target multiple for the lithium business to 22x FY23.
The broker believes this multiple is warranted, given the exposure to a tier-1 lithium business, low cost profile and expansion opportunities. Target is raised to $10.70 from $9.20.
Transurban Group (TCL) was upgraded to Add from Hold by Morgans
Morgans upgrades its rating to Add from Hold after adjusting its valuation approach to concession-based assets, which also lifts its target price to $14.82 from $13.99. Following the recent retail entitlement offer, it’s thought there’s a current opportunity to buy shares.
Worley Limited (WOR) was upgraded to Buy from Neutral by UBS
Worley offers leverage to a large increase in sustainable energy and decarbonisation investment, UBS asserts. The broker estimates a cumulative investment of US$115trn is required to achieve net zero emission targets by 2050.
Sustainability projects are small but fast growing and with sales of 14% of the portfolio this is up 24% on FY20 levels, and these projects make up 32% of the company’s future bid pipeline.
UBS upgrades to Buy from Neutral and raises the target to $13.20 from $11.65. FY22-24 earnings estimates are upgraded by 1-5%.
In the not-so-good books
Alumina Limited (AWC) was downgraded to Neutral from Outperform by Credit Suisse
A price spike in September did not translate to the September quarter margin from AWAC, given the one-month lag in alumina pricing. As the current price is US$482/t , Credit Suisse increases its December quarter price realisation estimate for Alumina Ltd to US$450/t.
The broker does not believe the current prices is sustainable as supply interruptions should be temporary, although alumina should not return to the low US$300 range.
Credit Suisse does not recommend chasing the stock at the current price and downgrades to Neutral from Outperform. Nevertheless, dividend yields on a 12-month view are expected to be close to 8% and support the current price. Target is $1.90.
BlueScope Steel Limited (BSL) was downgraded to Equal-weight from Overwight by Morgan Stanley
Morgan Stanley assesses US steel prices have peaked and finds it hard to see BlueScope Steel outperforming in an environment of declining prices. The broker lowers its rating to Equal-weight from Overweight and slashes its target price to $23.50 from $29.50.
According to the broker’s US strategists, lead times in the US have declined and service centre inventories are reading a point of inflexion.
Prices are likely to remain at historically favourable levels across FY22, which will be supportive for cash flows and potentially a continuation of capital management, believes the analyst.
Class Limited (CL1) was downgraded to Hold from Buy by Ord Minnett
HUB24 ((HUB)) has launched a bid for Class through a scheme of arrangement on an implied price of $3.11 – a 72% premium to Class’s last price prior to the offer.
Ord Minnett describes the offer as compelling, and notes the bid price offers little room for a rival bid although stranger things have been known to happen.
HUB24 says Class will continue to operate separately.
Evolution Mining Limited (EVN) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse downgrades to Neutral from Outperform, given relative valuation. FY22 is expected to be weighted to the second half as the company incorporates the Kundana/EKJV assets. Cowal is also expected to provide softer production because of major maintenance in August.
The broker also makes changes to estimates for earnings per share to reflect a modest reduction in Ernest Henry production and the extension of the ramp up at Red Lake. Target is reduced to $3.80 from $4.30.
GPT Group (GPT) was downgraded to Neutral from Outperform by Credit Suisse
GPT Group has confirmed its acquisition of the Ascot portfolio for -$681.7m, containing 24 assets. The transaction is expected to complete in November, and the company is guiding to it being earnings accretive within the first year.
While Credit Suisse estimates the acquisition to generate an additional $15m per annum, the broker notes there is uncertainty in GPT Group’s earnings outlook.
The company has not acquired three office properties and one industrial property that were originally included in the portfolio, reducing the price from an initial $800m. Funds from operations forecasts increase 0.9%, 2.9% and 2.8% through to FY23.
The rating is downgraded to Neutral from Outperform and the target price increases to $5.26 from $5.02.
See upgrade above.
IDP Education Limited (IEL) was downgraded to Hold from Add by Morgans
IDP Educations’ trading update indicated a mostly strong recovery in growth, with IELTS volumes up 84% year on year, of which 55% was organic. However this required 120% growth from the northern hemisphere to counter -24% in Australia.
Growth in the US/Canada was the highlight for Morgans, supporting longer term growth expectations. But while the broker remains attracted to IDP’s market share opportunity through acquisitions, valuation has now become stretched.
Senex Energy Limited (SXY) was downgraded to Neutral from Buy by Citi, to Hold from Add by Morgans, to Hold from Buy by Ord Minnett and to Neutral from Outperform by Credit Suisse
Citi has responded to the prospect of a full take-over by Posco through a downgrade to Neutral from Buy for target Senex Energy. Target $4.32. Citi sees limited scope for suitor Posco to increase its $4.40 offer to Senex shareholders.
Morgans remains bullish on oil fundamentals, thinks the oil cycle has a long way to go and expects Australian oil and gas stocks to gradually re-rate. The broker upgrades its forecasts across the sector to mark-to-market the recent oil price strength.
After a 64% share price rise over the last 12 months for Senex Energy, Morgans reduces its rating to Hold from Add. This is due to valuation and as the company has received a potential takeover offer from Posco International. The target price rises to $4.30 from $4.20.
Ord Minnett believes the conditional offer price of $4.40 is fair and with no obvious reason for the transaction it appears opportunistic. The broker is also unsure whether there could be a counter bid. The Foreign Investment Review Board could also be a significant obstacle as Senex Energy services 4% of east coast gas demand. Ord Minnett raises the target to $4.40 from $4.10 and downgrades to Hold from Buy.
Credit Suisse expects a higher offer (of roughly $4.60) may be in the wings, which would take it closer to the more typical 30% takeover premium. The broker says other suitors may enter the fray. Senex’s September-quarter update met the broker and consensus estimates.
Sunrise Energy Metals Limited (SRL) was downgraded to Neutral from Outperform by Macquarie
Following a first quarter update, Macquarie lowers its rating to Neutral from Outperform over the uncertainty in securing a funding and development partner for the Sunrise Nickel-Cobalt project. The $2.10 target price is unchanged.
In the broker’s base case, it’s assumed the development is funded via US$1.4bn in debt, US$0.5bn in offtake finance and a US$0.5bn equity raising at $1.40. A short-term catalyst is envisaged when assay results from the Phoenix Platinum Zone arrive.
Vimy Resources Limited (VMY) was downgraded to Hold from Add by Morgans
The definitive feasibility study of Vimy Resources’ Mulga Rock project confirmed a robust operation, Morgans notes. Vimy’s exemption from WA’s ban on uranium mining requires commencement of Mulga Rock by December, assuming approvals.
With approvals now received and funding in place, early works have begun. Target rises to 25c from 17c but on the share price run-up from under 10c, driven by higher uranium prices, the broker pulls back to Hold from Add.
West African Resources Limited (WAF) was downgraded to Neutral from Outperform by Macquarie
West African Resources reported in-line production levels for the third quarter, but better-than-expected all-in sustaining costs and gold sales beat Macquarie’s forecasts by -9% and 16% respectively.
The company expects fourth quarter results to exceed the third quarter, implying a full year beat on production guidance. The broker increases earnings per share forecasts 2% in 2021.
Given recent strong share price performance, the rating is downgraded to Neutral from Outperform and the target price increases to $1.50 from $1.20.
Woodside Petroleum Limited (WPL) was downgraded to Neutral from Outperform by Macquarie
Macquarie notes Woodside Petroleum is unlikely to capture current higher spot LNG pricing given weak production driven by impacts from the North West Shelf. The broker expects third quarter production levels to be the weakest reported since the second quarter in FY19.
Earnings per share forecasts for FY21 are updated by -3.1% given lower output. Macquarie also noted Woodside Petroleum share price is up more than 30% since reported lows in August.
The rating is downgraded to Neutral from Outperform and the target price decreases to $27.15 from $27.25.
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.
