In the good books

Commonwealth Bank (CBA) Upgraded to Add from Hold by Morgans B/H/S: 1/4/3

Cash earnings for the March quarter tracked in line with Morgans second half expectations. Income was a little softer than expected and credit impairment charges a little better than expected.

The broker upgrades to Add from Hold as a result of recent share price weakness. Cash earnings forecasts are reduced by -0.7% and- 0.5% for FY17 and FY18 respectively. Target is lowered to $87.50 from $88.00.

See downgrade below.

Henderson Group (HGG) Upgraded to Buy from Neutral by UBS B/H/S: 1/4/0

Post shareholder approval of Henderson’s merger with Janus, UBS has swapped analysts and the rating has been upgraded to Buy on the basis it is a transformational deal, offering cost synergies and a performance fee rebound.

Funds flow targets appear ambitious but UBS does not think the market is pricing in any growth. Target rises to 275p from 240p.

Investa Office Fund (IOF) Upgraded to Hold from Lighten by Ord Minnett B/H/S: 0/2/2

The company has revalued its portfolio, booking a $0.30 uplift to net tangible assets to $4.80 a share. The board has also endorsed the potential joint-venture acquisition of the property group platform in the absence of a formal cash offer from Cromwell (CMW).

Ord Minnett observes the revised NTA cuts through the proposed indicative cash offer price of $4.75 a share.  The broker suspects the board is holding out for $5 a share, reflecting more bullish investor sentiment in recent weeks.

Ord Minnett raises its recommendation to Hold from Lighten and the target to $5.00 from $4.75.

In the not-so-good books

AGL (AGL) Downgraded to Neutral from Outperform by Macquarie B/H/S: 3/3/1

Macquarie believes the rapidly falling price of renewables is creating a new threat in the market, namely that the Renewable Energy Certificates market is likely to be structurally oversupplied from FY22.

Macquarie downgrades to Neutral from Outperform. Whilst the company is becoming light on capital needs, there are challenges such as retail pricing reviews, five-minute pricing and the potential REC price collapse, as well as some softening of spot electricity prices.

While none of these affect the near term they undermine the scope of earnings growth and the terminal value of the business, in the broker’s opinion. Target is reduced to $25.00 from $25.81.

Asaleo Care (AHY) Downgraded to Sell from Neutral by Citi B/H/S: 1/1/1

Citi has downgraded to Sell from Neutral with an unchanged price target of $1.50. The analysts do not believe investors are sufficiently appreciating the risks and challenges that lay ahead for the company.

The analysts are anticipating weak results ahead and this can potentially lead to a derating for the shares. Following a strong rally, the shares are now deemed expensive. The dividend outlook remains stable.

Commonwealth Bank (CBA) Downgraded to Underperform from Neutral by Macquarie B/H/S: 1/4/3

The March quarter trading result was short of Macquarie’s expectations and, similar to peers, the improving capital position and organic capital generation were the key positives. Should underlying results remain under pressure, the broker envisages risk to the bank’s ability to maintain its premium over the medium term.

Separately, Macquarie notes the Commonwealth budget has put further pressure on the bank earnings outlook and the proposed bank levy will take -4-5% off earnings. The broker has become increasingly cautious about the sector in recent months.

The main near-term upside risk is that the changes announced in the budget are watered down, while the longer-term theme underpinning the broker’s outlook remains in place.

Rating is downgraded to Underperform from Neutral. Target is reduced to $81 from $85.

See upgrade above.

CSR (CSR) Downgraded to Sell from Neutral by Citi B/H/S: 0/4/2

Citi downgrades to Sell from Neutral as concerns on housing combine with FY17 margin weakness, the analysts explain. Price target drops to $4.10 from $4.32.

The analysts do think there will be one more hurrah, with FY18 projected to be peak earnings year for CSR. As housing approvals fall, compression of peak FY18 earnings should follow, predict the analysts.

Crown Resorts (CWN) Downgraded to Neutral from Buy by UBS B/H/S: 2/4/0

Crown has outperformed the index by 21% since posting its result in Feb, which revealed cost reductions and a more simplified business structure focused on domestic assets. The Melbourne and Brisbane casinos are now passed their capex peaks, UBS notes.

Sydney capex is next, and there is debt to repay, so little likelihood of capital management. UBS warns of the prospect of weaker gaming floor trends and uncertainty with regard VIPs. With the stock now trading on a five-year high relative PE, the broker downgrades to Neutral.

Target falls to $13.19 from $13.39.

G.U.D (GUD) Downgraded to Sell from Neutral by Citi B/H/S: 0/4/1

Citi downgrades to Sell from Neutral as the share price has run well ahead of underlying fundamentals, say the analysts. They reiterate being positive on the prospects for the Automotive division, but clearly the market is so too.

Earnings estimates have been increased by 1-6% for the years ahead. Target price rises to $11.44 from $10.45. Citi continues to see Oates and Davey as noncore businesses and believes GUD should focus on divesting these businesses, in addition to Dexion, which remains up for sale.

Incitec Pivot (IPL) Downgraded to Neutral from Buy by Citi and to Underperform from Neutral by Credit Suisse B/H/S: 3/3/2

Citi analysts applaud management for delivering on its growth strategy thus far. They note the last of three key assets (WALA) is forecast to ramp up to its targeted 800ktpa operating capacity by the end of FY17.

But now what? The analysts seem to suggest a new strategy is lacking. Luckily, the fertiliser price seems to have bottomed. Increased forecasts are premised on the latter. Target price gains 9c to $4.09.

Credit Suisse is not enthusiastic about the first half result, despite the company’s upbeat outlook. The broker believes balancing growth desires with the market reality is likely to be the key to shareholder returns.

The earnings outlook is little changed while the explosives markets continue to be a volume story. Hence, Credit Suisse downgrades its rating to Underperform from Neutral and reduces the target to $3.37 from $3.58.

JB Hi-Fi (JBH) Downgraded to Sell from Neutral by Citi B/H/S: 3/3/2

Following analysis of US, UK and German retailer performance around Amazon Prime launches plus Citi’s survey of price differentials in key categories, the analysts have cut long term earnings forecasts for JB H-Fi by more than -40%.

According to Citi’s proprietary survey, Amazon is -15% cheaper than Australian retailers across three major categories. Target price falls by -35% in response, to $18.50. Downgrade to Sell from Neutral.

Macquarie Group (MQG) Downgraded to Neutral from Buy by UBS B/H/S: 0/6/1

The FY17 result was ahead of UBS estimates.  The element that was most pleasing for the broker was the delivery on costs.

The cost-to-income ratio fell to 68.5% in the second half, continuing its downward trend from 85% in FY12. UBS envisages substantial operating leverage now, with every -5% reduction in the cost-to-income ratio providing 16% upside to earnings per share.

While the broker envisages material upside over time, the stock is up 53% over the last 12 months and ongoing evidence of cost reductions needs to be demonstrated to justify further appreciation. Rating is downgraded to Neutral from Buy. Target is raised to $91 from $89.

Murray River Organics (MRG) Downgraded to Hold from Add by Morgans B/H/S: 0/1/0

The company has made a material revision to FY17 earnings guidance because of adverse seasonal conditions. Underlying guidance for EBITDA is downgraded by -15-21%.

Morgans makes material downgrades to its forecasts and stresses that short-term earnings uncertainty exist, as 80% of the harvest is yet to be completed. The broker also observes gearing is now at uncomfortable levels for a highly cyclical business.

Rating is downgraded to Hold from Add. Target is reduced to $0.68 from $1.57.

Myer (MYR) Downgraded to Underperform from Outperform by Credit Suisse B/H/S: 1/5/1

Credit Suisse suspects the entry of TK Maxx and Amazon and, in the near term, a deteriorating discretionary spending environment are likely to be difficult for the company to overcome.

The two businesses are both selling premium branded products, with TK Maxx at significantly discounted prices. The broker notes TK Maxx is to have 35 stores in Australia after conversion of a former Trade Secret stores, providing a solid geographic footprint.  Meanwhile, Amazon is likely to accelerate a shift to consumers spending online.

The broker downgrades forecasts on the expectation of slower sales growth.  Rating is downgraded to Underperform from Outperform. Target is reduced to $0.82 from $1.44.

National Australia Bank (NAB) Downgrade to Underperform from Outperform by Macquarie B/H/S: 3/1/4

Macquarie notes the Commonwealth budget has put further pressure on the bank earnings outlook and the proposed bank levy will take -4-5% off earnings. The broker has become increasingly cautious about the sector in recent months.

The main near-term upside risk is that the changes announced in the budget are watered down, while the longer-term theme underpinning the broker’s outlook remains in place.

Earnings pressure from the announcement is expected to put the spotlight on NAB’s dividend and Macquarie envisages an increased likelihood the dividend will be cut. Rating is downgraded to Underperform from Outperform. Target is reduced to $31.50 from $34.00.

REA Group (REA) Downgraded to Neutral from Outperform by Credit Suisse, to Neutral from Outperform by Macquarie and to Sell from Neutral by UBS B/H/S: 3/1/4

March quarter EBITDA growth of 20% was reported with Australian revenue growth accelerating to 16%. Credit Suisse observes this was a solid result, particularly given ongoing listing weakness in the period.

The broker reduces FY17 estimates for EBITDA by -2.4% because of higher forecast cost growth. Rating is downgraded to Neutral from Outperform. Target is raised to $65 from $60 to reflect higher longer-term forecasts

March quarter EBITDA was up 20% and in line with Macquarie’s expectations. Volume headwinds still exist in Australia but have eased and the broker notes the company is starting to cycle weaker comparables.

Macquarie observes the company has had a material re-rating over the last six months on the back of stabilising volumes and strong operating performance.

As a result, while remaining very comfortable with the outlook, the broker believes this is now largely reflected in the share price. Downgrade to Neutral from Outperform. Target is raised to $65.00 from $63.50.

REA posted another strong quarterly result despite industry headwinds, with volumes, mix and new products likely the drivers, UBS suggests. The prospect is for continuing strong revenue growth ahead, but increased costs will weigh on earnings.

The broker warns of the signal provided by materially weaker building approvals numbers for March. REA is trading on an FY18 PE of 30x versus 27x for Seek (SEK) and 21x for Carsales (CAR). While UBS likes the long term growth story, near term a lower entry point would be desirable. Downgrade to Sell.

Treasury Wine Estates (TWE) Downgraded to Underperform from Neutral by Macquarie B/H/S: 2/3/2

The recent investor briefing provided a better explanation of the future growth strategy for Macquarie but risks to growth exist as a company relies increasingly on new regions and products to deliver upside.

The company has also announced changes in management, which flags a shift from restructuring to growth in the US but also indicates to the broker the company is planning for a CEO succession and clouds the future.

Macquarie downgrades to Underperform from Neutral. Target is $10.98.

Westpac (WBC) Downgraded to Neutral from Buy by UBS and to Neutral from Outperform by Macquarie B/H/S: 2/5/1

Westpac’s result was slightly ahead of UBS but subdued. As has been the case with the other banks, trading income provided a boost when revenue growth was flat. Capital was strong at 9.97% but the broker questions whether it’s wise to offer a discounted DRP when “unquestionably strong” is yet to be defined.

The main feature of the release was the revelation 50% of the bank’s mortgage book represents interest only loans. This implies a lot of work to get below APRA’s new 30% cap. UBS has thus cut its target to $32.50 from $33.50 and downgraded to Neutral.

Macquarie notes the Commonwealth budget has put further pressure on the bank earnings outlook and the proposed bank levy will take -4-5% off earnings. The broker has become increasingly cautious about the sector in recent months.

The main near-term upside risk is that the changes announced in the budget are watered down, while the longer-term theme underpinning the broker’s outlook remains in place.

Rating is downgraded to Neutral from Outperform. Target is reduced to $33.00 from $35.50.

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