In the good books
Abacus Property Group (ABP) was upgraded to Buy from Neutral by Citi
Citi believes the stock has sold off on concerns relating to the delays in realising the residential project in NSW, while a slowing residential market is weighing on earnings. The broker suspects the new strategy of moving towards a higher recurring base simplifies the business and could lead to a multiple re-rating. The broker does not believe much has been priced in for the land bank and upgrades to Buy from Neutral. Target is raised to $3.91 from $3.80.
Ansell (ANN) was upgraded to Buy from Hold by Deutsche Bank
Deutsche Bank has a mixed outlook for Australian healthcare companies and expects lower growth in Australian hospital and GP markets. The broker has a positive outlook on the global plasma, OSA and hearing implant markets. Those with exposure to global markets have a better outlook, in the broker’s view, although this is already largely priced in, as valuations are at the upper end of historical ranges. The broker upgrades Ansell to Buy from Hold. Target price improves to $29.78 from $27.25.
Aristocrat Leisure (ALL) was upgraded to Buy from Accumulate by Ord Minnett
Ord Minnett puts Aristocrat Leisure at the top of its picks for the gaming sector and raises the rating to Buy from Accumulate. Target is $32.45. The company remains the land-based market leader in North America while Australasian slot expenditure is expected to stay weak. Nevertheless, the company’s expansion into casual/social gaming puts it to the fore. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
Brambles (BXB) was upgraded to Buy from Neutral by Citi
Citi observes the share price has been pressured in recent years by the decline in earnings for the CHEP Americas business. These headwinds are expected to fade in the second half and lead to double-digit earnings growth from FY20. The broker upgrades to Buy from Neutral and lifts the target to $12.10 from $11.00. Citi now forecasts underlying margins to decline by -190 basis points for the CHEP Americas division in the first half, affected by cost inflation and the timing of costs recovery strategies.
Carindale Property (CDP) was upgraded to Hold from Lighten by Ord Minnett
In Ord Minnett’s view, the outlook for property earnings is robust while balance sheets are well positioned. Nevertheless, various asset classes are at, or approaching, peak cycle conditions. Capitalisation rates are expected to bottom in the first half of FY19 and real estate assets to soften around -25-75 basis points, because of an excess supply of assets for sale and softening rental growth. Office remains the stronger segment but the key market, Sydney, is at risk of reaching an inflection point in 2020. Ord Minnett upgrades to Hold from Lighten based on valuation. Target is reduced to $7.50 from $7.80. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
Charter Hall (CHC) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett expects the company to end FY19 with assets under management of $29bn, up 25%. The broker also forecasts 12% growth in earnings per share. FY20 is forecast to be a strong year for earnings, expected to be up 85%. Estimates are raised and the target is lifted to $8.25 from $7.50. 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.
Coca-Cola Amatil (CCL) was upgraded to Neutral from Underperform by Macquarie
Macquarie believes valuation support is emerging following the underperformance in the share price recently, and upgrades to Neutral from Underperform. Australian beverages are still under pressure and management expects 2019 to be another “transitional year”. Macquarie believes more money will need to be spent to meet growth targets. Target is raised to $8.28 from $8.26.
Cromwell Property (CMW) was upgraded to Accumulate from Lighten by Ord Minnett
Ord Minnett upgrades Cromwell to Accumulate from Lighten because of reduced risk and M&A potential. Target is raised to $1.10 from $1.05. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
Dexus Property (DXS) was upgraded to Neutral from Sell by UBS
UBS upgrades to Neutral from Sell and raises the target to $11.17 from $9.39. The broker had expected office supply would pick up more quickly and there was downside risk to bullish rental expectations. UBS now expects supply to remain constrained amid another good year for rental growth in Sydney. UBS is also attracted to the low gearing and balance sheet flexibility of Dexus.
GPT (GPT) was upgraded to Outperform from Neutral by Macquarie
Macquarie assesses the growth outlook as solid, with gearing potentially declining to less than 20% and putting the business in a good position to capitalise on the next cycle. The broker forecasts 2019 growth of around 5%. As well, a boost should be forthcoming from the sale of its 50% stake in the MLC centre (A-grade Sydney offices). The broker upgrades to Outperform from Neutral. Target is raised to $5.95 from $5.47.
Harvey Norman (HVN) was upgraded to Outperform from Neutral by Macquarie
There are structural threats from online and a cyclical slowdown in housing, Macquarie acknowledges, but the international & property business, around 50% of operating earnings (EBITDA), is likely shielding the downside. The broker upgrades to Outperform from Neutral, contending the stock is cheap. Target is steady at $4.10.
Hotel Property Investments (HPI) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett upgrades to Accumulate from Hold. Target is steady at $3.25. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
Industrial REIT (IDR) was upgraded to Outperform from Neutral by Macquarie
Macquarie forecasts upside risk to valuations, noting strong re-valuations in suburban office and industrial assets over recent months. The broker also believes, with Growthpoint ((GOZ)) holding an 18% stake there is corporate support. The broker upgrades to Outperform from Neutral and raises the target to $2.85 from $2.58.
Kathmandu (KMD) was upgraded to Outperform from Neutral by Credit Suisse
The stock sold off by -26% since its August highs, Credit Suisse observes. Disappointing Christmas trading drove a high percentage of this drop, but the broker believes the current share price overstates the impact from weak trading in a period that typically contributes only 25-30% of full year earnings. The broker believes the stock offers attractive value for a company that is guiding towards earnings growth and has a strong balance sheet. Rating is upgraded to Outperform from Neutral and the target is reduced to NZ$2.90 from NZ$3.25.
Lendlease (LLC) was upgraded to Buy from Neutral by Citi and to Outperform from Neutral by Macquarie
Citi forecasts the year ahead will be one of lower returns for A-REITs, expecting total returns of around 5% in 2019. The main risks are to the downside, in the broker’s view, including falling shopping centre values and the risk that cap rates will rise in office/industrial. A synchronised commercial property downturn is not the broker’s base case but is slated as a possible occurrence if global and domestic economic growth risks recede and upward pressure resumes on global security yields. Citi upgrades LendLease to Buy/High Risk from Neutral. Target is steady at $15.06.
Macquarie observes, while risks continue to exist around completing underperforming projects, the current share price is implying negative value for the construction business. The broker believes there is enough going on to have confidence in the company, and suspects engineering will be labelled non-core at the upcoming results. Rating is upgraded to Outperform from Neutral. Target is raised to $15.15 from $15.08.
Metcash (MTS) was upgraded to Neutral from Underperform by Macquarie
Macquarie accepts the outlook is still challenging and FY20 growth is hampered by the loss of the Drakes contract. Still the recent de-rating of the share price means the broker upgrades to Neutral from Underperform, given the improving valuation. Target is steady at $2.41. The broker notes, despite the difficult trading conditions, the company has done well on costs, although the gains in this area appear to be coming to an end.
Saracen Mineral (SAR) was upgraded to Outperform from Neutral by Macquarie
Macquarie includes Saracen Mineral as one of its preferred producers, as the business displays organic growth prospects. An improved earnings outlook across gold producers drives modest increase in the broker’s target, to $3.20 from $2.90. Rating is upgraded to Outperform from Neutral.
Shopping Centres Australasia (SCP) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett upgrades to Accumulate from Hold. Target is steady at $2.75. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
Stockland (SGP) was upgraded to Buy from Neutral by Citi
The broker prefers fund managers and residential A-REITs in the sub-sector. Citi upgrades Stockland to Buy from Neutral and raises the target to $4.00 from $3.98.
Super Retail (SUL) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse analysts simply cannot believe the present share price accurately reflects the outlook for this company, suggesting things are probably a lot less bad as suggested by how low the share price has fallen. Hence the upgrade to Outperform from Neutral. Target price does fall to $7.75 from $8.39 on downgraded forecasts. The announcement that Anthony Heraghty is the new CEO is considered a potential circuit breaker to negative sentiment.
In the not-so-good books
Bank of Queensland (BOQ) was downgraded to Hold from Add by Morgans
The latest APRA data show Bank of Qld’s home loan book contracting in the three months to November. Loan repricings announced earlier this month will go some way to providing an offset, Morgans notes. Yet now that the St Andrew’s sale is off, the broker is no longer expecting a special dividend. Morgans does not see any earnings growth over the forecast period and thus downgrades to Hold from Add. Target falls to $10.40 from $11.30.
BWP Trust (BWP) was downgraded to Lighten from Hold by Ord Minnett
Ord Minnett downgrades BWP Trust to Lighten from Hold. Target is steady at $3.30. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
Charter Hall Long WALE REIT (CLW) was downgraded to Lighten from Hold by Ord Minnett
Ord Minnett downgrades to Lighten from Hold, because of a reduced growth outlook. Target is steady at $4.15. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
Charter Hall Retail REIT (CQR) was downgraded to Lighten from Hold by Ord Minnett
Ord Minnett downgrades to Lighten from Hold. Target is steady at $4.30. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
Dexus Property (DXS) was downgraded to Neutral from Buy by Citi, to Lighten from Hold by Ord Minnett, and to Neutral from Outperform by Macquarie
Citi trims office exposure and reduces the Dexus rating to Neutral from Buy. Target is raised to $11.05 from $10.83. Ord Minnett downgrades Dexus to Lighten from Hold based on elevated multiples. Target is reduced to $10.60 from $11.00. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
Macquarie reviews its stance on direct office markets and its investment thesis for Dexus, heading into the first half results. Strong rental growth in last few years is expected to underpin growth. Market conditions are expected to soften from 2022 as major projects seeking pre-commitments may target tenants in existing stock and affect the outlook. As the share price is trading largely in line with valuation, Macquarie downgrades to Neutral from Outperform. Target is raised to $11.51 from $11.06.
Goodman Group (GMG) was downgraded to Sell from Lighten by Ord Minnett
Ord Minnett downgrades to Sell from Lighten. Target is steady at $9.10. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
Mirvac (MGR) was downgraded to Hold from Accumulate by Ord Minnett
Ord Minnett downgrades Mirvac to Hold from Accumulate and reduces the target to $2.50 from $2.55. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
National Australia Bank (NAB) was downgraded to Neutral from Outperform by Macquarie
Macquarie suspects National Australia Bank will be unable to sustain its elevated pay-out ratio. The broker downgrades earnings growth forecasts and lowers the target to $25.50 from $28.50. Rating is downgraded to Neutral from Outperform, given potential capital concerns following the announcement of NZ capital rules. Healthy dividends, which should be sustained inside a lower growth environment, should still provide support for the sector at current levels.
Pact Group (PGH) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse observes the share price has rallied ahead of the result, due on February 20. As a result, the broker downgrades to Neutral from Outperform. Target is steady at $3.85. Guidance signals FY19 operating earnings (EBITDA) of around $245m in earnings will be weighted towards the second half, with the full year inclusion of the TIC acquisition. Guidance assumes no changes to resin prices.
Peet & Company (PPC) was downgraded to Neutral from Outperform by Macquarie
As the company’s earnings are solely leveraged to the residential market, Macquarie believes there is a risk that earnings and margins decline.
The buyback provides support but the broker downgrades to Neutral from Outperform. The target is reduced by -28% to $1.06 to reflect the medium-term outlook for residential earnings.
Rio Tinto (RIO) was downgraded to Hold from Add by Morgans
Mined copper production in the December quarter surprised Morgans on the upside, driven by the ramping up of volumes from Escondida and solid output from Kennecott. Healthy volumes were also delivered from the flagship Pilbara iron ore operations. The broker notes the company has built an incredibly strong position after multi-year process of refining the business. With the stock supported by strong fundamentals and a positive share price performance, Morgans downgrades to Hold from Add. Target is raised to $82.55 from $82.28.
ResMed (RMD) was downgraded to Hold from Buy by Deutsche Bank
Deutsche Bank has a mixed outlook for healthcare, being positive on the global plasma, OSA and hearing implant markets and expecting slower growth in Australian hospital and GP markets. Companies with exposure to global markets generally have a better outlook, although this is largely priced into valuations. The broker downgrades ResMed to Hold from Buy. Target is raised to US$123 from US$122.
Scentre Group (SCG) was downgraded to Hold from Accumulate by Ord Minnett
Ord Minnett downgrades Scentre Group to Hold from Accumulate. Target is steady at $4.50. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
Sims Metal Management (SGM) was downgraded to Sell from Neutral by UBS
The company has guided to a downgrade to December half operating earnings (EBIT), to around $110m. UBS observes most of the weakness during the period has reflected for margins in Europe, which in turn reflects underinvestment and increased competition. Municipal recycling was also weak. The broker remains cautious on the outlook, as global scrap markets face increasing disruption. UBS acknowledges forecasting the company’s earnings trajectory has not become easier. Forecasts are reduced by around -15-20% and downside risk is still envisaged. The broker downgrades to Sell from Neutral and reduces the target to $8.50 from $12.50.
Unibail-Rodamco-Westfield (URW) was downgraded to Accumulate from Buy by Ord Minnett
Ord Minnett incorporates downgraded capital growth forecasts for retail property in the UK and Europe, following a challenging fourth quarter. The broker believes the retail challenges will depress investor expectations of future rental growth. This leads Ord Minnett to lower the target to $13 from $15 and downgrade the rating to Accumulate from Buy. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
Woolworths (WOW) was downgraded to Neutral from Buy by Citi
Citi suspects the first half reporting season will be defined by retail trading through the Christmas period. Grocery remains the broker’s preferred exposure, with favourable conditions continuing. Citi downgrades Woolworths to Neutral from Buy as the valuation factors in upside from capital returns and margin expansion. Target is reduced to $31.30 from $33.00.
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.