The month of May has been rather two-faced: full of buoyancy at first, troubled next and barely keeping a positive return at the finish line. The closing week endured most pressure to the downside, but that did not stop stockbroking analysts from issuing more downgrades than upgrades for individual ASX-listed companies.

In the good books

GALAXY RESOURCES LIMITED (GXY) was upgraded to Outperform from Underperform by Macquarie. B/H/S: 2/2/0. The company has entered a non-binding agreement with POSCO to sell 28% of its Sal de Vida resource for US$280 million. This is a better outcome than Macquarie envisaged as the company is now able to sole fund the development. Target is raised to $3.90 from $3.00.

SPARK NEW ZEALAND LIMITED (SPK) was upgraded to Neutral from Underperform by Macquarie. B/H/S: 2/2/1. The company has confirmed the acceleration of its Quantum program, bringing forward implementation costs of $25-30 million in FY18. Macquarie observes competitive pressures remain, but cost reductions provide an offset. Target is raised to NZ$3.60 from NZ$3.50.

VICINITY CENTRES (VCX) was upgraded to Outperform from Neutral by Macquarie. B/H/S: 4/2/0. Macquarie reviews the mixed-use opportunity for the business as well as the Chatswood Chase development. Near term catalysts in the business strategy suggest the valuation is attractive. An in specie distribution of second-tier retail assets is still considered to be on the agenda and presents potential upside. Target is steady at $2.92.

In the not-so-good books

ERM POWER LIMITED (EPW) was downgraded to Hold from Add by Morgans, to Hold from Buy by Ord Minnett and to Underperform from Neutral by Macquarie. B/H/S: 0/2/1. The company’s business update indicated domestic operations are performing well but the loss-making US venture is less profitable than previously expected. Morgans materially reduces expectations for the US retail business and its target to $1.64 from $1.93. The company has guided to lower sales volumes and margins in its US business, the second downgrade since the beginning of 2018. Ord Minnett understands the reasons but believes this reduces the market’s confidence in the outlook for the US retail business. Ord Minnett lowers its target to $1.69 from $1.75. Macquarie observes the company has a buyback, which will reduce liquidity and slow the weakness, but considers the fundamental value remains stretched. Target is reduced to $1.39 from $1.51.

MONADELPHOUS GROUP LIMITED (MND) was downgraded to Neutral from Outperform by Macquarie. B/H/S: 0/3/2.  Macquarie now forecasts a -16% decline in the company’s FY19 construction revenue, given the low level of wins this year and the time lag for new work flowing through to revenue. Target is reduced to $15.87 from $19.18.

MYOB GROUP LIMITED (MYO) was downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 3/3/0.  MYOB has abandoned its planned acquisition of Reckon’s (RKN) Accountant Group assets due to ACCC concerns, choosing to pursue organic growth instead using the money it had allocated. Credit Suisse has lowered earnings forecasts by -15% to reflect the lost opportunity.  The hit to earnings per share is less due to interest savings and an acceleration of the buyback now the acquisition is off, but the broker has cut its target to $3.00 from $3.75.

SMARTGROUP CORPORATION LTD (SIQ) was downgraded to Hold from Add by Morgans. B/H/S: 4/2/0.  Morgans suggests Smartgroup has sufficient debt capacity to fund an acquisition, although given the remaining salary packaging businesses are small, it would likely have to be in an adjacent sector. This means lower synergies and greater capital investment. Target is unchanged at $11.60.

Earnings forecast

Listed below are the companies that have had their forecast current year earnings raised or lowered by the brokers last week. The qualification is that the stock must be covered by at least two brokers. The table shows the previous forecast on an earnings per share basis, the new forecast, and the percentage change.

 

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