An interesting dynamic is unfolding inside the Australian share market post October slaughter fest. While price targets and earnings estimates are, on a net basis, falling, stockbroking analysts nevertheless see sufficient value to issue a tsunami of recommendation upgrades, only offset by a small number of downgrades; the latter mostly because corporate market updates do not meet market expectations.

For the week ending Friday 9 November 2018, FNArena registered no less than 26 recommendation upgrades for individual ASX-listed stocks versus only four stocks receiving downgrades, of which Domino’s Pizza received two.

The 26 upgrades represent a true potpourri of Australia’s corporate variety; from the ASX, to CommBank and Corporate Travel (2x), to CSL, Lovisa, Mineral Resources, QBE Insurance, and Treasury Wine Estates (2x).

Meanwhile, four of the five downgrades only went to Neutral.

Offsetting the clear bias towards “value is opening up” is the observation that trends for valuations & price targets, and for underlying earnings estimates has clearly turned to the negative.

As AGM season and the release of out-of-season financial earnings reports continue this week, it will be interesting to watch whether this new dynamic is turning into the new trend for the Australian share market.

In the good books

COMMONWEALTH BANK OF AUSTRALIA (CBA) was upgraded to Outperform from Neutral by Credit Suisse .B/H/S: 2/5/1

Following the first quarter trading update Credit Suisse upgrades FY19-21 earnings estimates by 3%. Compositionally, the broker notes a robust update, with falling operating expenses and a strong capital position.

It seems to the broker that many of the regulatory and compliance headwinds have been, or are being, dealt with. Therefore, a focus on cost reductions is expected and capital management also enters the scene.

Credit Suisse upgrades to Outperform from Neutral and raises the target to $78 from $75.

CSL LIMITED (CSL) was upgraded to Buy from Neutral by UBS .B/H/S: 5/3/0

UBS has had a look at third quarter results from CSL competitors and also adjusted for forex in lowering its earnings forecasts by -6% across the forecast period, resulting in a target price cut to $220 from $232.

However despite competitive pressures, the broker believes CSL can still deliver compound earnings growth of 11% over three years. UBS looks forward to the company’s investor day on December 5 and on valuation has upgraded to Buy from Neutral.

CORPORATE TRAVEL MANAGEMENT LIMITED (CTD) was upgraded to Add from Hold by Morgans  B/H/S: 3/2/0

Having reviewed the VGI reports and the increased disclosure from Corporate Travel, Morgans has more confidence in the company’s business model, growth strategy and financials.

The broker continues to believe the reports contained a number of inaccuracies and are unfounded. The broker retains forecasts and expects strong earnings growth.

Morgans believes the stock has been severely oversold, which provides the opportunity to buy a company with solid long-term growth potential.

Rating is upgraded to Add from Hold. Target is raised to $26.72 from $23.30.

LOVISA HOLDINGS LIMITED (LOV) was upgraded to Equal-weight from Underweight by Morgan Stanley .B/H/S: 3/1/0

The stock has traded down -40% from its peak and, while headwinds continue, Morgan Stanley believes it is far more reasonably priced now. The broker envisages increased traction from the global roll-out of stores and e-commerce offering.

Further softening is envisaged ahead of Christmas as tough comparables are cycled.

The risk/reward is now more balanced and the broker upgrades to Equal-weight from Underweight. Target is reduced to $8.40 from $9.50. Industry view is In-Line.

MCMILLAN SHAKESPEARE LIMITED (MMS) was upgraded to Outperform from Neutral by Macquarie and to Outperform from Neutral by Credit Suisse .B/H/S: 3/2/0

The company has announced an intention to merge with EclipX ((ECX)). Macquarie calculates the bid, of $0.46 cash and 0.1414 McMillan Shakespeare shares, represents a 17% premium to the last close for EclipX.

Macquarie calculates more than 30% accretion post synergies. The broker upgrades to Outperform from Neutral and suspects the market is either not rating the combined business, does not trust EclipX earnings or does not believe the synergies. Target is raised to $17.41 from $16.54.

Credit Suisse upgrades to Outperform from Neutral, regarding the stock is attractively valued even prior to the proposed merger. The broker believes the strategic rationale is sound and the majority of the synergy benefits are achievable. Target is reduced to $17.65 from $18.55 because of a lower market multiple.

See also MMS downgrade.

QBE INSURANCE GROUP LIMITED (QBE) was upgraded to Outperform from Neutral by Credit Suisse .B/H/S: 6/2/0

While the company has operated in a difficult market over the past five years, Credit Suisse notes premium rates have turned positive in early 2018 and premium rate increases have been maintained.

The broker reassesses the growth opportunity and has a more optimistic view. The company is expected to update the market in early December on potential cost reductions.

Credit Suisse upgrades to Outperform from Neutral and raises the target to a $13 from $11.

REA GROUP LIMITED (REA) was upgraded to Outperform from Neutral by Macquarie .B/H/S: 4/3/0

Macquarie observes a very strong first quarter result, with the drivers being the take-up of depth products as well as new revenue from commercial and developer segments.

The broker finds it hard to fault the trajectory of the business, despite the macro trends. A strong FY19 is expected and Macquarie upgrades to Outperform from Neutral. Target is unchanged at $90.

See also REA downgrade.

WORLEYPARSONS LIMITED (WOR) was upgraded to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/0

Since the company announced an intention to buy the ECR business from Jacob’s Engineering the stock has traded well below the entitlement issue price. Still, Dar Group’s intention to take up all its entitlement is a sign of confidence in the deal, Credit Suisse suggests.

Despite the amount of entitlement stock to be absorbed, which may suppress the share price, Credit Suisse moves to Outperform from Neutral on the medium-term outlook. Target is steady at $17.60.

In the not-so-good books

DOMINO’S PIZZA ENTERPRISES LIMITED (DMP) was downgraded to Neutral from Buy by UBS and to Reduce from Hold by Morgans .B/H/S: 2/1/4

At its AGM, Domino’s reiterated FY19 earnings guidance and planned store openings, albeit the latter comes with a greater skew to the second half. UBS has trimmed its first half earnings forecast slightly.

The broker is a fan of the company but having outperformed the ASX200 Industrials by 24% year to date, valuation is now fair and the broker thus pulls back to Neutral from Buy. Target unchanged at $57.

Morgans says that the trading update has revealed a further slowing in same-store sales momentum, particularly in Australasia and Europe. FY19 underlying operating earnings guidance of $227-247m was reiterated, although Morgans suggests the upper end is stretched following this latest update.

While the launch of new menus should assist sales growth, the broker awaits greater clarity on the top-line momentum. Rating is downgraded to Reduce from Hold, based on fundamentals. Target is reduced to $50.01 from $51.28.

MCMILLAN SHAKESPEARE LIMITED (MMS) was downgraded to Hold from Buy by Ord Minnett .B/H/S: 3/2/0

The transaction with EclipX ((ECX)) has caused Ord Minnett to pause, downgrading to Hold from Buy, as further assessment is made of the combined entity. The combined entity becomes much more of a fleet management play with less salary packaging/novated leasing as a percentage.

The broker is uncertain regarding the ongoing contribution from the Right2Drive business, as McMillan Shakespeare management were unwilling to commit to this on the conference call. Target is reduced to $16.00 from $20.50.

See also MMS upgrade.

REA GROUP LIMITED (REA) was downgraded to Hold from Accumulate by Ord Minnett .B/H/S: 4/3/0

First quarter results were stronger than expected, benefiting from continued growth in depth products and softer-than-expected declines in new listings.  There was strong growth in the developer and commercial segments.

Ord Minnett increases developer revenue growth estimates to 10% for FY19 and continues to expect 10% growth in commercial revenues.

As the stock is trading in line with the $79 target the broker downgrades the rating to Hold from Accumulate.

See also REA upgrade.

Earnings forecasts

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.

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.