There have been 6 upgrades and 3 downgrades from the 7 stockbrokers monitored by FNArena so far this week.
In the good books
BWP Trust (BWP) was upgraded to Neutral from Sell by UBS
UBS notes markets are increasingly pricing in negative outcomes including a potential recession or stagflation. On the back of a material underperformance by the A-REIT sector and revising its valuation framework, UBS adjusts price targets down by -15% on average to reflect valuations that show a “normalised” higher growth/rate environment as well as a DCF-based scenario.
Most sector valuation metrics screen as “cheap” versus the past 10 years, yet the broker notes the earnings yield spread to bonds is lower. The low gearing and strong transaction market remain supportive of BWP Trust but UBS believes this is balanced by risks to upcoming lease expiries along with benign growth.
While upgrading to Neutral from Sell, the broker prefers Centuria Industrial REIT (CIP) as it offers a more defensive exposure. Target is reduced to $3.59 from $3.86.
Charter Hall Group (CHC) was upgraded to Buy from Neutral by UBS
UBS notes markets are increasingly pricing in negative outcomes including a potential recession or stagflation. On the back of a material underperformance by the A-REIT sector and revising its valuation framework, UBS adjusts price targets down by -15% on average, to reflect valuations that show a “normalised” higher growth/rate environment as well as a DCF-based scenario.
Most sector valuation metrics screen as “cheap” versus the past 10 years, yet the broker notes the earnings yield spread to bonds is lower. The broker prefers names with low leverage and high cash flow security and believes Charter Hall is still in a position to grow its assets under management through a period of dislocation, with support from key investors.
Charter Hall is upgraded to Buy from Neutral, with the target lowered to $13.90 from $20.00.
Centuria Industrial REIT (CIP) was upgraded to Buy from Neutral by UBS
UBS notes markets are increasingly pricing in negative outcomes including a potential recession or stagflation. On the back of a material underperformance by the A-REIT sector and revising its valuation framework, UBS adjusts price targets down by -15% on average to reflect valuations that show a “normalised” higher growth/rate environment as well as a DCF-based scenario.
Most sector valuation metrics screen as “cheap” versus the past 10 years, yet the broker notes the earnings yield spread to bonds is lower.
UBS considers Centuria Industrial REIT the leading pure logistics A-REIT, noting the strong demand for space from logistics tenants which supports asset valuations. The longer-term outlook for rental growth should mean industrial segments remain the preferred sub-sector for some years to come.
The broker upgrades to Buy from Neutral and reduces the target to $3.12 from $4.00.
Centuria Office REIT (COF) was upgraded to Neutral from Sell by UBS
UBS notes markets are increasingly pricing in negative outcomes including a potential recession or stagflation. On the back of a material underperformance by the A-REIT sector and revising its valuation framework, UBS adjusts price targets down by -15% on average to reflect valuations that show a “normalised” higher growth/rate environment as well as a DCF-based scenario.
The outlook for suburban office markets is challenging and UBS does not expect this will change over the next 12 months.
While a discount to net tangible assets is expected to remain for Centuria Office REIT until income growth returns, the broker does not envisage material downside and upgrades to Neutral from Sell. Target is lowered to $1.81 from $2.25.
Carnarvon Energy Limited (CVN) was upgraded to Outperform from Neutral by Macquarie
Macquarie observes the stock has materially underperformed peers because of the dry holes at Buffalo and Apus as well as delays to Dorado.
Carnarvon Energy is expected to navigate the remaining risks at Dorado and full value should be recognised between now and soon after the final investment decision, either via a re-rating or acquisitions, the broker asserts.
Trajan Group Holdings Limited (TRJ) was upgraded to Buy from Accumulate by Ord Minnett
Trajan Group has acquired Chromatography Research Supplies for $61.9m. The latter is a manufacturer of chromatography consumables and tools based in the US.
Ord Minnett considers the deal “ticks a lot of boxes” as the two have a long-standing relationship and there are synergies for both cost and revenue lines.
The acquisition multiple of 9.5x FY22 EBITDA generates strong accretion, the broker adds. Rating is upgraded to Buy from Accumulate and the target is reduced to $2.50 from $3.20. Ord Minnett has transferred coverage to another analyst.
In the not-so-good books
Bega Cheese Limited (BGA) was downgraded to Neutral from Buy by UBS
Higher input costs are expected to weigh on the FY23 recovery, mainly relating to increased milk supply costs but also packaging, freight, labour and electricity. As a result, UBS now sits -7% below consensus forecasts for FY23 EBITDA, at $214m.
The broker acknowledges the valuation of Bega Cheese is relatively undemanding and broadly in line with the long-term average.
Although one-offs related to the pandemic, floods and China’s lockdowns will not be repeated in FY23, the broker believes cost inflation will still be a significant headwind. Neutral maintained. Target is reduced to $4.75 from $5.40.
Latitude Group Holdings Limited (LFS) was downgraded to Neutral from Outperform by Macquarie
Latitude Group’s acquisition of the Humm Group (HUM) consumer finance business has been terminated. Further to this, amid the risk of rising impairments, Macquarie shifts its preference within the non-bank lenders to those with a higher skew to secured lending.
The broker had assumed the consumer finance business would be double-digit accretive in FY23. Yet there is an increased risk of earnings impacts from reduced consumer discretionary expenditure and higher impairments as rates rise.
As a result, the broker lowers its rating to Neutral from Outperform and reduces the target to $1.30 from $2.25.
Shopping Centres Australasia Property Group RE Limited (SCP) was downgraded to Neutral from Buy by UBS
UBS notes markets are increasingly pricing in negative outcomes including a potential recession or stagflation. On the back of a material underperformance by the A-REIT sector and revising its valuation framework, UBS adjusts price targets down by -15% on average to reflect valuations that show a “normalised” higher growth/rate environment as well as a DCF-based scenario.
UBS observes Shopping Centres Australasia Property has been a beneficiary of “shop local” trends and a rebound in retail sales. Yet, at the same time, the business is looking to grow its third-party funds management. The broker finds more value in Homeco Daily Needs (HDN).
Rating is downgraded to Neutral from Buy and the target lowered to $2.72 from $3.14.
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.