In the good books

Accent Group (AX1) was upgraded to Add from Hold by Morgans

The company has indicated like-for-like sales in the first 20 weeks of FY19 are up 2.5%. This is broadly in line with Morgans’ estimates. The broker had anticipated sales would slow down after the FY18 result because of a reduction in clearance activity and the cycling of a strong result within Hype. Online sales growth has been exceptionally strong as a result of the investment in this channel in recent years. While December is an important month, the broker envisages upside risk to guidance, predominantly because of the material expansion of gross margin experience to date. Rating is upgraded to Add from Hold. Target is reduced to $1.46 from $1.47.

ALS Limited (ALQ) was upgraded to Accumulate from Hold by Ord Minnett

The first half net profit exceeded Ord Minnett’s forecasts, particularly on the commodity side. The broker upgrades estimates by 8% for FY19 and by 5% for FY20. While the share price has come under pressure because of a lack of margin expansion in life sciences and a forecast slowdown in sales growth, the broker notes the second half will cycle a weak comparable period. Moreover, 30%-plus growth rates off a low base were always going to be unsustainable. Ord Minnett raises the target to $8.29 from $8.19. Rating is upgraded to Accumulate from Hold. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.

Appen (APX) was upgraded to Buy from Neutral  by UBS

Tech sector valuations have been de-rated markedly across the globe, UBS notes, led by a correction for the Nasdaq. Yet Appen has upgraded FY18 guidance, leading the broker to upgrade its FY19 earnings forecast by 15%. The stock is now trading in line with its average PE but positive industry feedback and tailwinds support a positive view. Appen appears to be strengthening its market position hence UBS upgrades to Buy from Neutral. Target rises to $16.00 from $15.65.

Bapcor (BAP) was upgraded to Buy from Neutral by UBS

UBS observes commentary from retailers is becoming more cautious. Christmas is expected to be challenging, creating risks to forecasts. Yet this appears priced into Bapcor. UBS has upgraded to Buy from Neutral and reduced the target to $7.05 from $7.10.

BlueScope Steel (BSL) was upgraded to Neutral from Sell by Citi

The company has reaffirmed first half guidance amid upbeat comments on demand conditions. The company acknowledges steel prices and spreads have moderated, which Citi believes implies a weaker second half. Still, the stock has now priced in much of the expected moderation. Citi expects steel markets will stabilise and a further share buyback will be announced as well as approval for the North Star expansion. Rating is upgraded to Neutral from Sell and the target is reduced to $14 from $15.

Origin Energy (ORG) was upgraded to Buy from Accumulate by Ord Minnett

Ord Minnett believes the recent pull back in benchmark oil prices and the slump in energy-exposed stocks has made the Australian energy sector significantly more attractive. The broker was previously concerned about full valuations but all oil stocks under coverage are now trading below net present value. Ord Minnett upgrades to Buy from Accumulate and reduces the target to $8.85 from $9.25. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.

Oil Search was upgraded to Buy from Hold by Ord Minnett

Following the slump in oil prices, Ord Minnett has reviewed Australian energy stocks (see Origin Energy). The company is expected to increase gearing to pay for the PNG LNG expansion but the broker does not envisage any need for an equity raising. Ord Minnett upgrades to Buy from Hold and reduces the target to $8.65 from $9.10.

Premier Investments (PMV) was upgraded to Buy from Neutral by UBS

UBS has reviewed the retailers ahead of the Christmas trading season (see Bapcor above). The bearish tone appears priced into Premier Investments. UBS has upgraded to Buy from Neutral. Target is reduced to $19.80 from $20.20.

Santos (STO) was upgraded to Buy from Hold by Ord Minnett

Following the slump in oil prices, Ord Minnett has reviewed Australian energy stocks (see Origin Energy). The broker believes the stock offers growth, with production expected to increase more than 75% over the next six years. Ord Minnett upgrades Santos to Buy from Hold, while reducing the target to $7.10 from $7.35.

Senex Energy (SXY) was upgraded to Accumulate from Hold by Ord Minnett

Following the slump in oil prices, Ord Minnett has reviewed Australian energy stocks (see Origin Energy). Ord Minnett upgrades to Accumulate from Hold and reduces the target to $0.42 from $0.43.

SomnoMed (SOM) was upgraded to Add from Hold by Morgans

Morgans was pleasantly surprised at the AGM as the company has announced the full closure of all RSS centres from January 1, 2019. The broker believes this move, after the company called a halt to the roll-out and closed underperforming centres, shows the increasing level of difficulty in navigating this channel. The securing of a large working capital facility is also a positive as it removes a query over any capital raising. This will also allow the company to focus on the profitable core business. Guidance for breaking even in underlying operating earnings (EBITDA) has been reconfirmed. Morgans upgrades to Add from Hold and reduces the target to $2.15 from $2.23.

Super Retail Group (SUL) has been upgraded to Buy from Neutral by UBS

UBS has reviewed the retailers ahead of the Christmas trading season (see Bapcor above). The bearish tone appears priced into Super Retail. UBS has upgraded to Buy from Neutral. Target is reduced to $8.65 from $9.30.

Wesfarmers (WES) was upgraded to Add from Hold by Morgans

Morgans removes Coles ((COL)) from earnings forecasts, resulting in FY19 operating earnings falling by -31%. The broker suggests that, with a number of divestments over the last 12 months, Bunnings will now be a more important driver of earnings. Regardless of the slowdown in residential building activity the broker expects renovations and replacements will remain resilient, given many of the products sold by Bunnings focus on maintenance. The broker envisages a greater focus on the company’s other businesses as a positive for longer-term growth. Rating is upgraded to Add from Hold. Target is reduced to $33.64 from $48.40.

Woodside Petroleum (WPL) was upgraded to Accumulate from Hold by Ord Minnett

Following the slump in oil prices, Ord Minnett has reviewed Australian energy stocks (see Origin Energy). Ord Minnett upgrades to Accumulate from Hold and reduces the target to $35.50 from $37.00.

Woolworths (WOW) was upgraded to Buy from Neutral by UBS

UBS has reviewed the retailers ahead of the Christmas trading season (see Bapcor above). The grocery is outlook is more positive because of a more rational market. UBS has upgraded Woolworths to Buy from Neutral. Target is raised to $31.25 from $28.20.

In the not-so-good books

Ainsworth Gaming Technology (AGI) was downgraded to Underperform from Neutral by Macquarie

Ainsworth’s initial FY19 profit guidance of $22m compares to Macquarie’s prior forecast $33m and consensus $38m. With Ainsworth more than 70% leveraged to outright sales, new game performance is critical in driving revenues, the broker notes. Australia continues to lose market share in early FY19 and the broker suspects improvement in North America is being driven by increased overall volumes rather than increased share. The company plans to beef up its R&D spend which Macquarie sees as a positive, but any benefits will not be near-term. Downgrade to Underperform from Neutral. Target falls to 75c from $1.10.

Automotive Holdings (AHG) was downgraded to Hold from Accumulate by Ord Minnett

Management has indicated trading has been below expectations because of a weak private buyer market, particularly in NSW and Victoria. In FY19 the company is also experiencing structural changes in finance & insurance regulation as well as lower car sales. The company is guiding to a fall in operating net profit of around -23% for FY19. Ord Minnett calculates this implies a recovery in profitability for the remainder of the year. In the automotive division operating earnings (EBITDA) fell -16.1% for the four months to October. Ord Minnett downgrades to Hold from Accumulate and reduces the target to $1.90 from $3.00. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.

Breville Group (BRG) was downgraded to Sell from Neutral by UBS

UBS has reviewed the retailers ahead of the Christmas trading season (see Bapcor). UBS has downgraded Breville to Sell from Neutral. Target is reduced to $11.20 from $13.70.

Coca Cola Amatil (CCL) was downgraded to Sell from Neutral by Citi

Citi expects earnings growth to remain below the 5% target over FY19 and FY20, given the prospects in the Indonesian market. Australian volume growth is also likely to slow while the potential acquisition of Lion Dairy & Drink is by no means certain. The broker makes no changes to estimates but downgrades to Sell from Neutral, as the stock is trading at a 20% premium despite Indonesia offering limited growth. Target is reduced to $8.90 from $9.50.

Janus Henderson (JHG) was downgraded to Equal-weight from Overweight by Morgan Stanley

Morgan Stanley downgrades to Equal-weight from Overweight, expecting flows will get worse before they get better. Factors supporting this view include increased volatility in markets, a sustained soft performance and concerns about INTECH. Morgan Stanley expects INTECH to return to outflows despite the tailwinds for quant strategies. The former Henderson retail funds have also experienced a sustained period of challenges versus the benchmark. Meanwhile, positive catalysts are longer-dated. Target is reduced to $35. Industry view is In-Line.

Millennium Services (MIL) was downgraded to Hold from Buy by Ord Minnett

The company provided a very weak outlook at its AGM update. Operating earnings are anticipated, if current trends persist, to be near breakeven levels versus prior guidance for $15.5-17.5m. Ord Minnett interprets this as suggesting gross margins are now in the range of 9-10% versus historical rates of over 17%. The new board has committed to restoring profitability but there is little visibility to date on when margins and cash flow will stabilise. Ord Minnett downgrades to Hold from Buy and reduces the target to $0.23 from $1.16.

Myer (MYR) was downgraded to Sell from Neutral by UBS

UBS has reviewed the retailers ahead of the Christmas trading season (see Bapcor). UBS has downgraded Myer to Sell from Neutral. Target is reduced to $0.38 from $0.41.

Saracen Minerals (SAR) was downgraded to Neutral from Outperform by Macquarie

Saracen has provided a strong exploration update featuring positive drilling results in all areas, Macquarie notes. The broker anticipates mine life extension at Deep South and expects Thunderbox to accelerate now underground drilling is underway. An improved earnings outlook sees Macquarie’s target rise to $2.60 from $2.50 but current valuation leads to a pullback to Neutral from Outperform.

The above was compiled from reports on FNArena. 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.