In the good books
CBA was upgraded to Neutral from Sell by Citi. B/H/S – 1/6/1. Citi observes Commonwealth Bank has underperformed over the last 12 months. While specific issues have been addressed, there are other limits to the outlook, such as falling retail banking profitability. The more modest valuation and the strategies that have been identified to provide upside, along with the prospect of capital returns, signals that a move back to Neutral from Sell is appropriate for the broker. Target is $72.
Incitec Pivot (IPL) was upgraded to Neutral from Underperform by Credit Suisse. B/H/S – 3/4/0. Credit Suisse observes that surplus cash is being used to reduce debt over the near term, creating options for larger scale reinvestment beyond FY19. The broker suggests the focus on downstream expansion in explosives appears relatively low in capital requirements and low risk. Credit Suisse upgrades to Neutral from Underperform. Target is raised to $4.02 from $3.37. The broker suggests earnings will be swept higher because of a tightening in fertiliser prices over the medium term and a gradual tightening in the explosives market.
James Hardie (JHX) was upgraded to Accumulate from Hold by Ord Minnett. B/H/S – 6/1/0. Jack Truong will formally become CEO of James Hardie from next year. Ord Minnett believes the management team is strong and well prepared to drive the business going forward. The share price has de-rated in recent months and is now trading at a rare discount to the S&PASX 200 industrials. Ord Minnett takes the opportunity to upgrade to Accumulate from Hold. Target is $23.
Northern Star Resources (NST) was upgraded to Outperform from Neutral by Macquarie. B/H/S – 4/0/2. Macquarie resumes coverage and upgrades to Outperform from Neutral after a $175 million placement. Target increases by 27% to $9.50. The placement is part of the funds for the acquisition of the Pogo mine in Alaska. Incorporating Pogo delivers a material uplift to the broker’s earnings forecasts, with earnings per share raised by 11% for FY19 and by 22% and 32% for FY20 and FY21 respectively.
Origin Energy (ORG) was upgraded to Accumulate from Hold by Ord Minnett. B/H/S – 4/3/0. Ord Minnett observes the share price has declined more than 20% versus AGL Energy (AGL) since the first half result, as confidence has deteriorated regarding the company’s financials following the emergence of additional hedging costs. The broker considers the stock’s valuation compelling while the current price adequately compensates for the immediate risks. The company is normally unaffected by wholesale prices, because of its short flexible generation portfolio, but Ord Minnett envisages a risk that reliability issues during the summer peak loads may drive detrimental policy changes. The broker upgrades to Accumulate from Hold based on valuation but trims the target to $9.30 from $9.40.
Primary Health Care (PRY) was upgraded to Buy from Sell by Citi. B/H/S -1/3/4. Citi observes the capital raising has led to a re-basing of the business that it did not envisage. The broker increases forecasts for the medical centres business as a result of the $140 million capital injection in that division. Target is raised to $3.20 from $2.85.
South32 (S32) was upgraded to Buy from Hold by Deutsche Bank. B/H/S – 4/3/0. Deutsche Bank upgrades to Buy from Hold and raises the target to $4.10 from $3.80. The broker believes the easy gains have been made and FY19 is likely to feature challenges to price rises from increasing costs and capital expenditure.
Whitehaven Coal (WHC) was upgraded to Buy from Hold by Deutsche Bank for the same reasons it lifted South32’s rating. B/H/S – 4/4/0. The target increases to $5.70 from $5.40. The broker predicts more challenges to prices rises in FY19, however, as also noted for South32, earnings remains satisfactory.
In the not-so-good books
BHP (BHP) was downgraded to Hold from Buy by Deutsche Bank. B/H/S – 6/2/0. Deutsche Bank downgrades after a solid performance over the year to date. Capital returns are likely for the large cap miners, as they promised to return asset sale proceeds to shareholders. While such returns are welcome Deutsche Bank does not believe this is a bullish signal to buy the sector. Target is reduced to $34.50 from $36.00.
BlueScope Steel (BSL) was downgraded to Sell from Buy by Citi. B/H/S – 5/1/1. Citi observes rising steel prices/spreads have begun to reverse and may now be past the peak. Sentiment in US steel markets and China’s macro data are likely to get worse before getting better. China appears to have relaxed stringent winter emission standards, providing local governments with greater flexibility to set winter output reductions. The broker considers this a negative for sentiment, with Chinese steel prices likely to trade lower in the near term. Citi believes the risk/reward at this point has turned negative and downgrades. Target is reduced to $15.00 for $20.50.
Fortescue Metals (FMG) was downgraded to Sell from Buy by Deutsche Bank. B/H/S – 5/1/1. Deutsche Bank downgrades, recognising the whole steel complex may turn around before the discount for 58% iron ore narrows. This will also affect the company’s peers. Steel prices are at seven-year highs but iron ore prices are not. This is despite the weaker iron ore supply. The bottleneck has moved from the iron ore mines to the blast furnace as a result of Chinese policies. Target is reduced to $3.70 from $5.80.
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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