With many stockbroker analysts on holidays, there haven’t been many rating changes. Those that have changed have largely been moved back to a neutral stance. Here’s a look at all the changes since our last Report on Monday 17 December (see https://switzersuperreport.com.au/buy-hold-sell-what-the-brokers-say-90/ [1])
In the good books
Atlas Arteria (ALX) was upgraded to Add from Hold by Morgans
Stockbroker Morgans sees an opportunity post share price weakness and has subsequently upgraded to Add from Hold. Because of weaker revenue fundamentals for France-based APRR, the price target has pulled back to $6.76 (was $6.80). In the view of the analysts, potential key stock risks include traffic and toll growth, FX exposure, interest rates, capital management, tax, and M&A. APRR represents circa 25% of the broker’s valuation for the company.
Bega Cheese (BGA) was upgraded to Hold from Reduce by Morgans
Bega’s FY19 guidance is well below estimates. A collision of fierce competition for milk supply due to the drought, lower global sales prices and the cost of the Koroit acquisition as led Morgans to cut forecast earnings by -7%. Target falls to $5.01 from $7 but given the share price has already reacted, rating upgraded to Hold from Reduce.
GWA Group (GWA) was upgraded to Buy from Neutral by Citi
Following a drop in the share price and the proposed acquisition of Methven, Citi upgrades to Buy from Neutral. Earnings forecasts for FY19-21 are increased by 4-8%. The company has made an all-cash offer for the Auckland-based designer and manufacturer of showers, taps and valves at NZ$1.60 a share, to be funded by existing debt facilities. Citi believes the deal makes strategic sense as the Methven business complements GWA’s bathrooms and kitchens. The company’s exposure to renovations and replacements in Australia will increase to 57% and Methven will expand the geographic footprint. Target is raised to $3.69 from $3.40.
NIB Holdings (NHF) was upgraded to Neutral from Underperform by Credit Suisse
The government has announced an average premium increase from April of 3.25%. Nib will lift by 3.38%. Credit Suisse has allowed for a slightly higher rate increase than previously assumed, leading to slightly higher margins. Current conditions are favourable but the risk id for a more subdued longer-term outlook, the broker warns. Shifting towards a discounted cash flow model and away from premium to market PE model sees Credit Suisse’ target fall to $4.90 from $6.30. Recent price weakness sparks an upgrade to Neutral.
Paradigm Biopharmaceutical (PAR) was upgraded to Hold from Reduce by Morgans
Paradigm Biopharmaceutical is a clinical stage company focused on the treatment of orthopaedic and viral arthritis through its re-purposed drug, pentosane polysulphate sodium. Phase 2b trials of the drug have left Morgans with more questions than answers. Positive results were only seen in patients with mild to moderate pain. A partner is required to move to Phase 3 and potential commercialisation but deeper analysis will be required, the broker suggests. The positive results see the broker increase its risk-weighted valuation to 78% from 38%, which leads to a target increase to $1.67 from 89 cents. Rating upgraded to Hold but the broker warns this is one for the riskier investor.
Sigma Healthcare (SIG) was upgraded to Neutral from Sell by UBS
Australian Pharmaceutical Industries ((API)) has accrued a 12.95% stake in Sigma and proposes to acquire the business via a scheme of arrangement. The offer is 0.31 API shares and $0.23 cash per Sigma share. On balance, UBS suspects this latest merger deal could be successful, although there are a number of significant risks associated with ACCC acceptance. The broker upgrades to Neutral from Sell and raises the target to $0.58 from $0.45.
Southern Cross Media (SXL) was upgraded to Buy from Neutral by UBS
Southern Cross is battling a weak market environment for its radio operations, which is fully acknowledged by analysts at UBS, but they also believe the share price is simply too low. Hence an upgrade to Buy from Neutral. Price target drops to $1.20 from $1.25 with the analysts highlighting the company is performing better than its competitors.
In the not-so-good books
APA Group (APA) was downgraded to Underperform from Outperform by Credit Suisse
Following confirmation from the Foreign Investment Review Board that the CKI bid will not proceed, Credit Suisse downgrades to Underperform from Outperform. Another takeover bid remains a key risk but the broker believes this recedes with every passing week and a difficult outlook remains. The broker adjusts carrying values and increases estimates for the weighted average cost of capital, in line with government bond yields. Target is reduced to $7.65 from $11.
Inghams (ING) was downgraded to Sell from Neutral by Citi
Citi notes modest price increases in the first half but also the more significant cost headwind in the second half. The broker suspects there may be lower near-term earnings to support future growth, as building new areas for growth may require upfront marketing and product development. Inghams has defensive characteristics that have led to a re-rating over the past three months, yet the broker is cautious about the next 12 months and downgrades to Sell from Neutral. Target is raised to $3.85 from $3.57.
Villa World (VLW) was downgraded to Hold from Add by Morgans
The company has guided to first half net profit of $16-17m and a distribution of 8c. However, FY19 guidance has been withdrawn, because of uncertain pre-sales settlement timing and a deterioration in recent sales and enquiries. Morgans asserts the implied deterioration in sales over the past four weeks puts downside risk on earnings over FY19/20. Continued negative sentiment and news flow in the sector is likely to weigh on valuation and the share price. The broker downgrades to Hold from Add and reduces the target to $1.87 from $2.46. Morgans acknowledges acquisition opportunities but would prefer to witness stabilisation in the sector before taking a more positive view.
Vocus Group (VOC) was downgraded to Sell from Neutral by UBS
UBS has downgraded to Sell from Neutral, believing the recent share price rally is, simply put, unjustifiable. As a matter of fact, while taking into account re-investment and consumer/Commander challenges likely to weigh near-term, the analysts dare to say Vocus shares look expensive. Price target has improved to $3 from $2.60 with UBS analysts warning the market is pricing in a strong earnings rebound from FY20 onwards, but not accounting for execution risk, which remains real.
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.