The Australian share market looked a bit shaky in the second half of May, but managed to catch up with more positive sentiment towards global risk assets in the first week of June, only to be met by a wave of stockbroking analysts’ downgrades for ASX-listed stocks.
For the week ending Friday, 8th June 2018, FNArena registered no less than 15 downgrades versus only six upgrades. Three of the upgrades were for resources stocks. Two of those are named BHP and Rio Tinto. Clearly, expectations for continuation of the upgrade cycle for the sector remain very much alive and that’s also the reason behind both upgrades by JPMorgan/Ord Minnett.
In the good books
BHP BILLITON LIMITED (BHP) was upgraded to Accumulate from Hold by Ord Minnett. B/H/S: 7/1/0. Ord Minnett expects strong prices are required to incentivise new supply to come on line in the iron ore and coal markets. This leads the broker to upgrade long-term forecasts to US$60/t for iron ore, US$140/t for hard coking coal and US$77/t for thermal coal. Ord Minnett does not believe the sector is replenishing its project pipeline and that supports commodity prices. Therefore, the consensus upgrade cycle is likely to continue over the medium term. Moreover, low debt across the sector and a favourable macro backdrop are supportive of strong shareholder returns. Target is raised to $38 from $30.
ESTIA HEALTH LIMITED (EHE) was upgraded to Outperform from Neutral by Macquarie. B/H/S: 2/2/0. Macquarie remains cautious about the aged care sector, as operating headwinds are unlikely to be alleviated in the short term. Estia Health remains the broker’s preferred pick, having the most attractive distribution profile. A conservative greenfield development book will reduce earnings drag in the near term. Target is raised to $3.60 from $3.37.
GALAXY RESOURCES LIMITED (GXY) was upgraded to Buy from Neutral by UBS. B/H/S: 3/1/0. The company has updated the definitive feasibility study for the Sal de Vida project and announced the sale of the northern tenements to help fund its development. Capital expenditure guidance is lifted to US$474m. The agreement with POSCO for the sale of the northern tenements provides over half of this requirement. Target is raised to $3.95 from $3.10.
RIO TINTO LIMITED (RIO) was upgraded to Accumulate from Hold by Ord Minnett. B/H/S: 8/0/0. The broker has upgraded long-term forecasts (see BHP above).
Ord Minnett expects strong prices are required to incentivise new supply to come on line in the iron ore and coal markets. This leads the broker to upgrade long-term forecasts to US$60/t for iron ore, US$140/t for hard coking coal and US$77/t for thermal coal. Low debt across the sector and a favourable macro backdrop are supportive of strong shareholder returns. Target is raised to $96 from $78.
In the not-so-good books
ATLAS ARTERIA (ALX) was downgraded to Hold from Add by Morgans. B/H/S: 4/2/0. Morgans continues to expect a strong rise in distributions over coming years, driven by growth in APRR operating earnings, a reduction in debt servicing and legislated tax cuts in France. Dulles Greenway will also pay first distributions after exiting lock-up in FY21. Morgans reduces the target to $6.53 from $6.90, mainly as a result of updating AUD/EUR to current spot rates and also increasing the 2018 performance fee estimate while incorporating the new debt facility. As a result, and because of the share price strength, the broker downgrades to Hold from Add.
CLEANAWAY WASTE MANAGEMENT LIMITED (CWY) was downgraded to Hold from Add by Morgans. B/H/S: 3/3/0. The company has indicated the China Sword policy restricting the import of contaminated recycling waste has impacted FY18 operating earnings (EBITDA) by -$3-6m. The Queensland government’s landfill levy is not expected to have a material impact. While Morgans remains attracted to the stock, the rating is downgraded to Hold from Add because of strength in the share price. Target is raised to $1.78 from $1.68.
INGHAMS GROUP LIMITED (ING) was downgraded to Hold from Add by Morgans and to Neutral from Outperform by Macquarie. B/H/S: 2/4/0. Morgans has reviewed its investment thesis in the light of strong appreciation in the share price. The broker continues to expect the company to provide an impressive FY18 result but downgrades forecasts for FY18-20 in the light of several emerging headwinds. Nevertheless, rolling forward the valuation, the target increases to $4.20 from $4.05. Rating is downgraded to Hold from Add, given less than 10% upside to the new target. CEO, Mick McMahon, will be stepping down at the FY18 results, earlier than Macquarie expected. The share price reaction has reflected this development and the strong regard in which the CEO is held. While valuation is undemanding, Macquarie suggests uncertainty over new management is likely to persist until a permanent CEO arrives and there is clarity on the FY19 outlook. $4.00 target retained.
REGIS HEALTHCARE LIMITED (REG) was downgraded to Underperform from Neutral by Macquarie. B/H/S: 2/1/1. RAD inflows from new facilities are likely to mean capital is recycled into developments and will not contribute to net debt reductions in FY19. Macquarie expects EBITDA growth will be expensed to depreciation and interest payments and result in declines to distributions. Target is reduced to $3.50 from $4.25.
SANTOS LIMITED (STO) was downgraded to Sell from Neutral by UBS. B/H/S: 1/2/3. As part of a general sector review, UBS has decided to downgrade Santos to Sell, preferring Woodside Petroleum (WPL) and Origin Energy (ORG) instead. Target tumbles to $5.45 from $6.40 for Santos.
WESFARMERS LIMITED (WES) was downgraded to Neutral from Outperform by Credit Suisse and to Lighten from Hold by Ord Minnett. B/H/S: 0/4/2. Wesfarmers has emphasised more disciplined capital allocation and a higher risk threshold for M&A at its investor briefing. Credit Suisse envisages no lack of internal opportunities to support improved returns on capital over time but the recent share price appreciation causes the broker to downgrade to Neutral from Outperform. Target is reduced to $47.31 from $47.36.
Ord Minnett finds a lack of valuation support because of the challenges to the Coles business and the risks emerging at Bunnings because of the consumer and housing environment. Ord Minnett lowers the target to $42.50 from $43.00.
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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