In the good books
Altium Limited (ALU) was upgraded to Buy from Hold by Deutsche Bank. B/H/S – 1/1/2. Deutsche Bank notes another strong result in FY18, with operating metrics comfortably moving towards FY20 guidance. The broker believes the effort that has gone into product development should continue to yield results for years to come and forecasts a three-year EBIT growth rate of 22%. Target is $24.90.
CSR was upgraded to Equal-weight from Underweight by Morgan Stanley. B/H/0 – 1/5/0. The CSR share price has fallen 22% since the results in May, which, in Morgan Stanley’s view, has been prompted by increased costs in the aluminium business. The valuation now appears more appropriate. CSR carries the greatest exposure to the Australian housing cycle across all major Australian building materials stocks in the broker’s coverage. While the negative news around the sector will create a difficult environment, Morgan Stanley believes CSR remains a quality business at the wrong point in the cycle. Target is $4.75. Industry view is Cautious.
In the not-so-good books
Bank of Queensland (BOQ) was downgraded to Underperform from Neutral by Macquarie. B/H/S – 3/1/3. Retail banking conditions continued to deteriorate in the second half, the broker notes, due to increased competition, higher funding costs and slowing credited growth. Mortgage repricing may offer some reprieve but could backfire if too aggressive. Target falls to $10.75 from $11.00.
Link Administration Holdings (LNK) was downgraded to Neutral from Outperform by Credit Suisse and Lighten from Hold by Ord Minnett. B/H/S – 4/3/1. FY18 results beat expectations. There was a maiden contribution from asset services, which provided a benefit, but Credit Suisse considers the trends in the broader business are soft. The broker also notes the higher levels of fee-for-service revenues may not be repeated at the same level in FY19. The rating is downgraded as the growth profile is envisaged significantly lower than it once was. Target is $8.10. Ord Minnett notes the effects of contract losses in funds administration in the FY18 results. Corporate markets slightly beat forecasts, while Link Asset Services was slightly worse than the broker assumed. Target is reduced to $7.00 from $8.05.
Monadelphous Group (MND) was downgraded to Sell from Hold by Deutsche Bank and Lighten from Hold by Ord Minnett. B/H/S – 1/2/3. Deutsche Bank was disappointed with the FY18 results, noting a severe earnings hole is emerging in FY19. While the company exceeded FY18 revenue guidance, the broker believes the expectation for construction revenue to decline in FY19 implies double-digit declines in earnings. Target is $11.60. Ord Minnett lowers net profit estimates by 13% for FY19 and 15% for FY20. Target is reduced to $13.02 from $18.82.
News Corp (NWS) was downgraded to Underweight from Equal-weight by Morgan Stanley (B/H/S – 2/2/2). Morgan Stanley downgrades after reducing estimates and valuation for the Australian pay-TV unit, Foxtel. In the FY18 result the broker highlights the sharp decline in Foxtel earnings. The broker reduces the target to US$12.50 from US$17.00. Industry view is Attractive.
NIB Holdings (NHF) was downgraded to Underperform from Neutral by Credit Suisse. B/H/S – 1/5/2. FY18 results were slightly ahead of forecasts. Claims inflation is at historical lows and in line with the broker’s analysis of the industry. As the share price is up around 20% since June, the broker downgrades. While underlying trends remain positive and are expected to continue in FY19, the broker believes the capitalising of margins cannot continue. Target is raised to $6.30 from $5.35.
Origin Energy (ORG) was downgraded to Neutral from Buy by Citi. B/H/S – 3/4/0. Analysts at Citi have re-adjusted their modelling for the accountancy changes that have been implemented at Origin Energy. The result is for materially weaker forecasts than were previously modelled. Apart from electricity hedge premiums, other negative factors include weaker gas margins growth, higher capex, weaker cash conversion, and delayed cost out. Target price deflates by 20% to $8.80.
Primary Health Care (PRY) was downgraded to Hold from Buy by Deutsche Bank and to Hold from Accumulate by Ord Minnett. B/H/S – 0/3/5. Deutsche Bank downgrades on the weak outlook, uncertain capex and low shareholder returns. The company reported a weak FY18 result with lower than expected margins and more significant items. Target is reduced to $3.22 from $3.80. Primary Health Care’s FY18 results were in line with Ord Minnett’s estimates. The 10.6c full year dividend represented a 60% payout ratio. The company has announced a $250 million capital raising to aid in the acquisition of a day surgery operator. Ord Minnett notes management failed to clearly indicate its plans for the future or provide adequate explanation of the heavily discounted $250m rights issue. Target is reduced to $3.25 from $4.20.
Woolworths (WOW) was downgraded to Hold from Buy by Deutsche Bank and to Neutral from Buy by UBS. B/H/S – 0/6/2. Deutsche Bank downgrades believing Woolworths’ lost sales momentum will be compounded by higher costs and weigh on first half earnings. The broker expects sales growth to improve in 2Q19 when the headwinds have passed. $30 target maintained. FY18 results were strong but below UBS estimates because of softer outcomes in New Zealand, Big W and liquor. UBS is concerned about the extent to which shoppers left Woolworths in July and August on the back of the Coles (WES) Little Shop promotion. Target is reduced to $28.30 from $30.00.
Westpac (WBC) was downgraded to Neutral from Outperform by Macquarie. B/H/S – 3/4/1. Westpac is downgraded for the same reasons as Bank of Queensland – deteriorating retail banking conditions, higher funding costs and slowing credited growth. FY19 results will come under pressure. Target falls to $32 from $33.
The above was compiled from reports on FN Arena. The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.
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