In the good books
- Adelaide Brighton (ABC) was upgraded to Outperform from Neutral by Credit Suisse
The company has cited volume weakness in its downgrade to 2018 guidance. Credit Suisse models a partial recovery, excluding WA where the outlook is more uncertain. The broker expects volumes to grow in 2019, amid strong price outcomes and upgrades to Outperform from Neutral. Target is reduced to $5.30 from $6.56. The broker notes WA is establishing as a major processor of lithium hydroxide, ex China. Lime is a key input in the production of this substance, which is used in batteries. The broker calculates that initial projects will require more than 50,000t of lime, approximately 5% of total WA use, and this could well prove to be a substantial new long-term market for the company.
- Inghams (ING) was upgraded to Equal-weight from Underweight by Morgan Stanley
To reflect a stronger pricing environment and further cost cutting potential, Morgan Stanley upgrades estimates for earnings per share by 1-6% across FY19-21. The supply contract for Woolworths ((WOW)) remains the largest risk, in the broker’s opinion. Near-term profitability is expected to be supported by ownership changes at NZ competitor, Tegel, leading to a more rational market and margin expansion from FY20, as well as further automation of production processes. Rating is upgraded to Equal-weight from Underweight. Target is raised to $4.40 from $3.40. Industry view: Cautious.
- QBE Insurance (QBE) was upgraded to Add from Hold by Morgans
Morgans finds there are pros and cons with the new reinsurance program but benefits should increase if QBE is successful in driving down claims’ costs. While the efficiency program has been well explained and scoped, Morgans notes it is lower than similar programs being undertaken by peers. The broker lifts 2018 estimates for earnings per share by 1% but lowers 2019 by -3%, because of lower benefits from the cost reduction plan than previously expected. Target is lowered to $11.61 from $12.28. Rating is upgraded to Add from Hold on valuation grounds.
In the not-so-good books
- Bendigo and Adelaide Bank was downgraded to Sell from Hold by Deutsche Bank
Deutsche Bank observes Bendigo & Adelaide is overweight mortgages, at 71% of its loan book. The broker is now factoring in a significant increase in impairments. The Homesafe business is considered vulnerable, with revaluation gains set to reverse on the back of falling house prices. Deutsche Bank downgrades to Sell from Hold. Target is reduced to $9.50 from $10.75.
- IOOF (IFL) was downgraded to Neutral from Buy by Citi, to Neutral from Outperform by Credit Suisse, to Neutral from Outperform by Macquarie and to Equal-Weight from Over-Weight by Morgan Stanley
The decision by the regulator, APRA, to take action against regulated entities and disqualify a number of senior executives has caught the market by surprise, Citi observes. While the possibility of drastic action from the company exists, Citi finds it hard to envisage enough of a response to lift what is likely to be a prolonged shadow over the stock. Rating is downgraded to Neutral/High Risk from Buy/High Risk. Target is reduced to $4.50 from $8.65. Credit Suisse notes that In terms of the sale of its wealth business, ANZ ((ANZ)) is assessing the various options available and seeking information from both IOOF and APRA. The ANZ wealth business contributes around 35% to Credit Suisse’s IOOF forecasts for outer year earnings. While awaiting further developments, the broker downgrades to Neutral from Outperform. Target is reduced to $4.60 from $10.00.
Macquarie says that while there remains significant value at current levels based on fundamentals, the broker is not inclined to take a positive view and downgrades to Neutral from Outperform. Target is reduced to $5.10 from $10.40.
Morgan Stanley downgrades to Equal-weight from Overweight and reduces the target to $5.00 from $10.80. Industry view: In Line.
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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