If there is one conclusion that can be drawn from the week past, it is that stockbroking analysts overwhelmingly see opportunities emerging in a shocked and beaten down Australian share market. October has been brutal on multiple accounts, but at least analysts are responding by issuing far more recommendation upgrades than downgrades for individual ASX-listed stocks.
For the week ending Friday, November 2, 2018, FNArena registered no less than 22 upgrades and only six downgrades, with multiple stocks receiving multiple upgrades. Medium-cap mining conglomerate Independence Group received three upgrades during the week, of which two went to Neutral/Hold.
Equally worth pointing out is that upgrades are coming thick and fast for ongoing ‘growth’ stories in the share market, countering the narrative that has been dominating the Australian share market for weeks that the future is now all about ‘value’ stocks outperforming in the face of rising global bond yields.
The six downgrades went to one automotive dealer, two gold producers, one wealth manager, an owner of shopping centres and one troubled engineering firm currently under threat of falling 100% into Belgian ownership. Maybe the double representation of gold is a sign in itself?
With AGM updates ongoing, and the out-of-season financial reporting season heating up locally, the week ahead should see plenty of changes yet again, amidst ongoing events on the macro-calendar.
In the good books
BEACH ENERGY LIMITED ((BPT)) Upgrade to Buy from Hold by Ord Minnett. B/H/S: 2/1/1
September-quarter production growth and higher commodity prices generated strong cash flow and helped reduce debt in the September quarter. Ord Minnett calculates that the company is trading on an annualised free cash-flow yield of 17%.
FY19 guidance is reaffirmed, signalling the business is trending towards the upper end of the guidance range for production and earnings. The rating is upgraded to Buy from Hold. The target is steady at $2.10.
CSL LIMITED ((CSL)) Upgrade to Accumulate from Hold by Ord Minnett. B/H/S: 4/4/0
Ord Minnett believes Seqirus, the company’s flu vaccine, will be able to price Flucelvax at a premium to egg-based vaccines. This opportunity has come after CSL gained regulatory approval for its new manufacturing process that should deliver a doubling of output in FY20.
The broker believes the vaccine business will deliver FY20 EBIT comfortably in excess of the US$200 guidance. The rating is upgraded to Accumulate from Hold and the target is raised to $215 from $201.
INDEPENDENCE GROUP NL ((IGO)) Upgrade to Buy from Neutral by Citi.
Citi acknowledges that downside risk is ongoing for nickel and copper in the face of US-China trade tensions, but this is partly offset by gold’s re-emerging sensitivity to geopolitical risk. Nova production was soft in the September quarter, leading to a target price cut to $4.70 from $5.00, but the broker believes there is clear upside potential from Nova exploration.
Citi considers a -13% sell-off for Independence is overdone, and upgrades to Buy from Neutral.
IRESS MARKET TECHNOLOGY LIMITED ((IRE)) Upgrade to Buy from Hold by Ord Minnett. B/H/S: 2/3/0
The share price has fallen -15% in October and Ord Minnett now believes the valuation is compelling enough to warrant an upgrade to Buy from Hold. The broker now considers IRESS one of the cheapest stocks in the sector.
First-half results were ahead of expectations and the commentary at the time suggested growth in the UK would accelerate in the second half. The target is reduced to $11.73 from $12.36.
LOVISA HOLDINGS LIMITED ((LOV)) Upgrade to Add from Hold by Morgans. B/H/S: 3/0/1
The trading update revealed a softer start to FY19 with like-for-like sales down -0.9%. Morgans suggests the volatility and weakness is likely to persist over the balance of the year, but believes the rolling out of stores has potential as a positive driver of the business.
The broker believes 2019 will be the year the company takes a more assertive stance on the pilot market footprint. The rating is upgraded to Add from Hold.
The broker remains unconcerned about the short-term sales blip and emphasises the global growth potential and growing cash position. The target is reduced to $8.06 from $10.93.
NANOSONICS LIMITED ((NAN)) Upgrade to Add from Hold by Morgans. B/H/S: 1/0/0
Because of market volatility and the resultant fall in the share price, which is down –20% from its peak, Morgans upgrades to Add from Hold.
The broker expects new products to be launched during the next 18 months, which will drive substantial growth in profit. The target is unchanged at $3.32.
NIB HOLDINGS LIMITED ((NHF)) Upgrade to Add from Hold by Morgans and Upgrade to Neutral from Sell by UBS. B/H/S: 2/5/1
The company has upgraded FY19 profit guidance by 5.5% because of a benign claims environment. Morgans suggests previous guidance was always conservative and upgrades the forecast by 4-7% over FY19-20.
The recommendation is moved to Add from Hold. The broker believes the recent sell-off in the shares has been overdone, particularly in light of the upgrade. The target is reduced to $6.49 from $6.77.
The company now believes net margins can be sustained at FY18 levels in FY19 despite lower premium rate increases.
Benefits are likely to be short-lived, however, in the broker’s view as wider margins will add to mounting political pressure for lower premium rate increases.
The rating is upgraded to Neutral from Sell, as the broker envisages limited downside. The target is reduced to $5.95 from $6.10.
REA GROUP LIMITED ((REA)) Upgrade to Accumulate from Lighten by Ord Minnett
Ord Minnett notes the share price has fallen -23% since peaking in August following the weak update from Domain ((DHG)). This formed the basis for a Lighten rating, exacerbated by a global de-rating of technology stocks.
Ord Minnett now believes the correction has run its course and there is greater-than-expected growth in depth penetration, amid a soft property market.
While lowering first-quarter estimates because of a steeper decline in listings, the broker envisages potential upside to its numbers. The rating is upgraded to Accumulate. The target is steady at $79.
WISETECH GLOBAL LIMITED ((WTC)) Upgrade to Buy from Hold by Ord Minnett. B/H/S: 2/2/0
The share price has fallen -27% in October, reflecting a broader sell-off in technology stocks. This is the opportunity Ord Minnett was waiting for.
Earnings have recently been upgraded and, while the stock still trades at a substantial premium to software peers, it is now modestly below the broker’s valuation.
The broker believes the volatility presents an opportunity to take a stronger view on the growth story and the rating is upgraded to Buy from Hold. The target is raised to $17.87 from $17.00.
In the no-so-good books
AUTOMOTIVE HOLDINGS GROUP LIMITED ((AHG)) Downgrade to Underweight from Equal-weight by Morgan Stanley. B/H/S: 1/4/2
Morgan Stanley has lowered forecast earnings for AP Eagers ((APE)) by -5-10% and for Automotive Holdings by -14-17% due to lower commissions, lower organic growth expectations based on falling vehicle sales, and sentiment around wealth effects. The broker sees house prices declining -10-15% from their peak, and thus vehicle sales -6%.
Morgan Stanley prefers AP Eagers to Auto Holdings and notes previous periods of falling house prices and vehicle sales have led to a de-rating for Auto Holdings, which the market is underestimating. The balance sheet is more constrained this time around. There is a downgrade to Underweight from Equal-weight, and the target falls to $1.55 from $2.50. Industry view: In line.
EVOLUTION MINING LIMITED ((EVN)) Downgrade to Hold from Add by Morgans. B/H/S: 3/5/0
Morgans observes that gold production in the September quarter, if annualised, would be at the top of the projected range for the year. At the flagship Cowal mine, work continued on the tails leach project with some success, with high-grade exploration reported.
Meanwhile, treatment of stockpiles will continue at Mt Rawdon with a focus on the stage 4 pit cutback. The board has also approved the underground mine development at Mt Carlton.
The rating is downgraded to Hold from Add, given the rise in the share price. Morgans envisages the primary risk to valuation comes from the gold price, with the copper price less significant. The target is raised to $3.28 from $3.17.
OCEANAGOLD CORPORATION ((OGC)) Downgrade to Neutral from Outperform by Credit Suisse. B/H/S: 4/2/0
Credit Suisse expects production is on track to deliver on full-year guidance, supported by a surprise contribution in the September quarter from the previously-unknown high-grade breccia ore.
This, in all likelihood, was added to the Didipio production schedule to offset the weaker-than-expected result from Haile.
The broker retains a positive outlook, but downgrades to Neutral from Outperform on valuation. The target is raised to $4.00 from $3.80.
SHOPPING CENTRES AUSTRALASIA PROPERTY GROUP ((SCP)) Downgrade to Hold from Accumulate by Ord Minnett. B/H/S: 0/3/2
The stock has re-rated, Ord Minnett believes, because of its superior operating results compared with other retail portfolios, as well as relatively predictable earnings growth.
Pricing on the assets acquired from Vicinity Centres ((VCX)) was also favourable. The broker continues to believe the portfolio is well-positioned with an attractive return on capital and relatively low risk.
As the stock is trading in line with the target, steady at $2.70, the rating is downgraded to Hold from Accumulate.
WATPAC LIMITED ((WTP)) Downgrade to Hold from Add by Morgans. B/H/S: 0/1/0
Watpac has received an off-market takeover bid from BESIX, which currently has a 28.1% stake. The board has unanimously recommended the offer and it has been deemed fair and reasonable by an independent expert.
Morgans had suggested previously that an earnings-led recovery in the share price would take time and, therefore, believes shareholders should accept the offer. A superior offer, while possible, is considered unlikely.
The broker downgrades to Hold from Add. The target is raised to $0.92 a share, in line with the offer price, from $0.86.
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.
 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.
