At face value the number of broker upgrades to downgrades last week again looks evenly split. However, of the 11 upgrades, 7 went to Buy and of the 11 downgrades, only 3 went to Sell. Of the 11 downgrades, IOOF Holdings copped no less than four following news of APRA’s accusations, but all went from Buy to Hold (or equivalent). As the market continues to correct, the bias remains to the upside in terms of analyst recommendations. Five of the upgrades are attributed to “valuation”, meaning the share price has fallen too far as far as analysts are concerned. In terms of forecast earnings changes, WiseTech Global tops the upside with 8% while HT&E’s suffered a -12% downgrade.

In the good books

ADELAIDE BRIGHTON LIMITED (ABC) was upgraded to Neutral from Sell by Citi. B/H/S: 1/3/2

Citi observes the shares have fallen -38% from highs in early July. The housing cycle may have peaked but the broker believes the company’s exposure to infrastructure and non-residential markets will provide a meaningful offset. While the company has downgraded net profit guidance by -6%, the broker believes the factors are temporary. The broker cannot rule out speculation regarding the logic of a merger between Adelaide Brighton and privately-owned Barro, which is owned by the company’s largest shareholder, the Barro family. Citi upgrades to Neutral from Sell, believing the stock has retreated to fair value. Target is reduced to $4.70 from $5.50.

BEACH ENERGY LIMITED (BPT) was upgraded to Neutral from Sell by Citi. B/H/S: 2/2/0

Citi downgrades oil price forecasts and now expects Brent oil at U $60/bbl for 2018 and US$55/bbl for 2019. The broker maintains a neutral view on the sector but concedes there may be deep value emerging in some names. Following the recent decline in the share price the broker now considers Beach Energy fair value and upgrades to Neutral from Sell. Target is reduced to $1.62 from $1.70.

DULUXGROUP LIMITED (DLX) was upgraded to Add from Hold by Morgans. B/H/S: 1/3/2

The share price has pull backed -16% over the past year, Morgans notes. This comes despite the company continuing to deliver solid earnings growth. The broker believes a good buying opportunity has emerged for a high-quality, defensive business with strong brands. Despite a slowdown in residential building activity, Morgans expects renovation activity to remain resilient, and many of the products that Dulux sells are about maintenance. Rating is upgraded to Add from Hold. Target is steady at $7.67. 

FORTESCUE METALS GROUP LTD (FMG) was upgraded to Overweight from Underweight by Morgan Stanley. B/H/S: 6/1/1

Morgan Stanley’s commodities strategists have lifted long-term iron ore price estimates by 12% to US$63/t. This is the main driver of the upgrade to the stock. The broker expects Chinese steel mill margins to improve in 2019, largely driven by the winter reductions gathering pace in late December and early January. If this does not occur, there is further upside risk to forecasts, the broker adds. Morgan Stanley upgrades to Overweight from Underweight and raises the target to $5.05 from $3.30. Industry view is upgraded to Attractive from In-Line.

NEW HOPE CORPORATION LIMITED (NHC) was upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 2/1/0

Credit Suisse upgrades to Outperform from Neutral on the back of share price weakness, despite the stock being a top performer over 2018. Target is reduced to $4.00 from $4.10.

ORIGIN ENERGY LIMITED (ORG) was upgraded to Add from Hold by Morgans. B/H/S: 6/1/0

Origin Energy has resumed paying dividends with $0.20 a share for FY19 and a formal dividend policy to be announced by early FY20. The company’s performance since offloading Lattice Energy has improved, in Morgan’s view. Origin Energy is exposed to oil price fluctuations through its 37.5% interest in the APLNG JV. Morgans assumes the spot oil price will rise, with long-term Brent averaging US$70/bbl. Additionally, the company has limited downside exposure in FY19 if the price falls below US$60/bbl for a sustained period, as it has purchased put contracts. Morgans upgrades to Add from Hold. Target is reduced to $8.09 from $9.31.

SONIC HEALTHCARE LIMITED (SHL) was upgraded to Buy from Neutral by Citi. B/H/S: 4/4/0

The company will acquire US-based Aurora Diagnostics, funded by a $600m placement, up to $100m in a share purchase plan and debt. The transaction appears a good strategic fit, Citi suggests, and could be transformational for the US business over time. Still, the broker questions whether raising equity at the current point in time is appropriate, given the company has the balance sheet capacity to fully fund the deal with debt. There is also limited visibility on the business, as it was acquired for private equity. Citi upgrades to Buy from Neutral on valuation. Target is reduced to $25.25 from $26.25.

In the not-so-good books

EVOLUTION MINING LIMITED (EVN) was downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 2/5/1

Credit Suisse believes, while Evolution Mining is a high-quality gold producer with a diverse portfolio, the stock is expensive. A strong operating performance has meant acquisitions have been rapidly paid for, which has positioned the business to prosper under a range of gold price scenarios. Still, on the basis of valuation, the broker downgrades to Underperform from Neutral. Target is reduced to $2.55 from $2.65.

RIO TINTO LIMITED (RIO) was downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 5/2/0

Credit Suisse is cautious about the outlook for 2019 and finds it hard to justify an increase in portfolio weightings towards Rio Tinto until there is at least some recovery in China or demand indicators. The broker’s strategists consider the Chinese steel sector has negative implications for seaborne iron ore and metallurgical coal. While the company possesses high-quality assets and free cash flow yields remain healthy, iron ore exposure is substantial. The broker suggests yields will only remain healthy while iron ore prices hold up. Credit Suisse downgrades to Neutral from Outperform and reduces the target to $79 from $89.

ST BARBARA LIMITED (SBM) was downgraded to Underperform from Neutral by Credit Suisse. B/H/S: 3/1/1

Credit Suisse believes the business is performing extremely well, with a record performance across both assets. The challenges lie with identifying another acquisition target that would be a good fit for the portfolio. As a result of its corporate strategy, St Barbara has built various equity positions in Australian-listed gold companies, but the broker observes these are at the early stage and reliant on significant exploration success to define a development. Rating is downgraded to Underperform from Neutral as the stock is considered fully priced. Target is raised to $3.90 from $3.85

TPG TELECOM LIMITED (TPM) was downgraded to Hold from Add by Morgans. B/H/S: 1/2/2

The ACCC has outlined a number of concerns over the merger with Vodafone. The concerns centre on the possible reduction in competition in mobile and broadband. Morgans disagrees with the ACCC argument, given TPG Telecom has been an aggressive operator as a mobile reseller for a number of years and still failed to gain traction. The broker asserts that TPG is not a significant player in the mobile market and price is not the only measure of value. As the merger is now somewhat uncertain, Morgans downgrades to Hold from Add. Target is reduced to $6.65 from $10.70, implying a 50:50 chance of approval.

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.