In the good books
ANZ (ANZ) Upgraded to Buy from Neutral by Citi B/H/S: 4/4/0
APRA has finalised its capital requirements, which means the target CET1 ratios were lifted 150 basis points for the major banks and 50 basis points for the regional banks. The new capital targets come into effect by January 2020.
Citi observes banks are likely to achieve this through organic capital generation and the finalisation of these capital adequacy requirements removes a significant overhang for the sector.
Basel 4 remains on the agenda if global agreement can be reached, but the APRA moves were designed not to wait. If agreement is reached, Citi continues to expect mortgage risk weights will be affected, although this is unlikely to be cumulative to this announcement.
ANZ’s rating is upgraded to Buy from Neutral. Target is raised to $31.50 from $31.00.
Crown Resorts (CWN) Upgraded to Buy from Hold by Ord Minnett B/H/S: 3/4/0
Crown has been elevated to Buy at Ord Minnett on more cost savings (opex) to offset weak VIP business, reduced gearing for potential corporate partnership strategies and a better outlook for CrownBet. The analysts throw in a rather cheap looking valuation as well.
All in all, it is Ord Minnett’s view the risks are by now well and truly priced in, while management can provide offsets. The analysts turn temporarily into speculators and believe there is increased potential for a joint bid for Tatts’ (TTS) wagering and lotteries business.
Target price has been increased to $14 from $13. Earnings estimates have been slightly lowered.
CIMIC Group (CIM) Upgraded to Hold from Sell by Deutsche Bank B/H/S: 1/2/2
First half results showed continued growth in work in hand and margins are being maintained. While revenue was below Deutsche Bank’s expectations growth is expected to flow through in the future.
The broker had been wary of low margin contracts that might negatively affect earnings but the benefits of economies of scale appear to be offsetting the competitively-priced contracts.
Deutsche Bank upgrades to Hold from Sell. Target is raised to $34.68 from $30.83.
Dexus Property Group (DXS) Upgraded to Outperform from Neutral by Macquarie B/H/S: 2/1/3
Macquarie believes Dexus will hit its funds from operations guidance at its FY17 result, and expects an update on the office portfolio to be positive given its Sydney focus.
The outlook for the industrial portfolio remains subdued but the broker suggests improving occupancy will see a return to income growth for the first time since 2014. Dexus remains the broker’s preferred office REIT exposure and since the share price fall the market is pricing in no asset value appreciation in the next 12 months. Upgrade to Outperform.
Target unchanged at $10.22.
GPT (GPT) Upgraded to Buy from Neutral by UBS and to Outperform from Neutral by Macquarie B/H/S: 3/2/1
After considering the Amazon threat in more detail UBS believes the risks are priced in and upgrades to Buy from Neutral on valuation grounds.
The broker believes the market has become too negative on the company’s retail portfolio, while at the same time the premium Sydney/Melbourne office portfolio is considered the best way to get exposure to the strong transactions in the market. Target is $5.30.
Macquarie suggests GPT’s result will show retail growth partially dragged down by Dandenong, strong office rents but increased vacancy, and modest industrial growth supplemented by development. There is potential for a minor uplift to guidance.
GPT remains a solid, defensive proposition offering diversity across all of quality retail, office and industrial, Macquarie notes. On a more attractive forecast return and the chance of a minor upside surprise, the broker upgrades to Outperform. Target unchanged at $5.18.
National Australia Bank (NAB) Upgraded to Neutral from Sell by Citi B/H/S: 3/2/2
See ANZ for Citi’s analysis.
Rating is upgraded to Neutral from Sell and the target is raised to $31.00 from $30.50.
Perseus Mining (PRU) Upgraded to Outperform from Neutral by Macquarie and to Overweight from Equal-weight by Morgan Stanley B/H/S: 3/2/0
Production at Edikan in the June quarter exceeded Macquarie’s forecast but costs remain stubbornly high. Assuming Perseus can achieve its grade and throughput guidance, the broker believes costs will begin to decline in FY18.
The Sissingue project i now 61% complete. Target falls to 34c from 40c but the recent fall in share price has raised Macquarie’s total shareholder return valuation to 21%, prompting an upgrade to Outperform.
Edikan is back on track and Morgan Stanley upgrades to Overweight from Equal-weight. The broker observes catalysts exist for three projects in FY18 and the company is fully funded with a US$200/oz all-in sustainable cost margin.
Production at Edikan increased 30% in the June half, after plant upgrades were completed and allowed better throughput. Higher grades and blending ore sources also contributed.
Target is $0.38. Industry view is Attractive.
Scentre Group (SCG) Upgraded to Buy from Neutral by UBS and to Outperform from Underperform by Macquarie B/H/S: 4/1/1
After considering the Amazon threat in more detail UBS believes the risks are priced in and upgrades to Buy from Neutral on valuation grounds.
The stock is implying a 5.9% cap rate versus the sector at 6.1% and the broker expects it to trade 50-60 basis points tighter through the cycle, given its premium asset quality. Target is $4.42.
Macquarie forecasts mid single digit funds from operations growth for Scentre in the first half result while underlying portfolio growth should remain subdued. The broker remains cautious on tenant returns in retail.
That said, Scentre continues to offer a relatively defensive income stream from high quality shopping centres and the REIT now offers a more attractive shareholder return following recent material underperformance, Macquarie notes. Upgrade to Outperform from Underperform. Target falls to $4.36 from $4.52.
Santos (STO) Upgraded to Buy from Hold by Ord Minnett B/H/S: 6/2/0
Ord Minnett continues to recognise the risks associated with Santos, notably the leverage to weak oil prices and the potential impact from the government’s gas security mechanism.
Nevertheless, the underperformance over the past year could provide a value opportunity and Ord Minnett lifts its recommendation to Speculative Buy from Hold. Target is lowered to $3.80 from $4.20.
Vicinity Centres (VCX) Upgraded to Buy from Neutral by UBS and to Outperform from Neutral by Macquarie B/H/S: 4/0/2
After considering the Amazon threat in more detail, UBS believes the risks are priced in and upgrades to Buy from Neutral on valuation grounds.
The broker calculates the stock is now trading at a -7% discount to net tangible assets and on a 7.3% free funds from operation yield.
UBS suspects that, at these levels, a buy-back, funded by a combination of selective lower-tier asset sales and finessing the development pipeline, would be well received. Target is $2.92.
Macquarie expects Vicinity’s FY17 result to be in line with guidance, with the potential for a minor beat, while the FY18 outlook should be for a resumption in growth.
Vicinity offers a relatively defensive income stream from a relatively high quality retail portfolio, and while Macquarie remains cautious on tenant returns, an attractive total shareholder return forecast leads the broker to upgrade to Outperform. Target unchanged at $2.91.
Whitehaven Coal (WHC) Upgraded to Buy from Accumulate by Ord Minnett B/H/S: 4/3/1
Ord Minnett believes the company is well-positioned to pursue numerous avenues for growth in production. The broker notes the capital structure of the business is now transformed, following the significant recovery in coal markets over the last 18 months.
Rating is upgraded to Buy from Accumulate and the target raised to $3.50 from $3.20.
Westpac (WBC) Upgraded to Neutral from Sell by Citi and to Overweight from Equal-weight by Morgan Stanley B/H/S: 4/4/0
See ANZ for Citi’s analysis. Rating is upgraded to Neutral from Sell and the target lifted to $31.00 from $30.50.
Morgan Stanley believes the tail risk relating to bank capital adequacy requirements has now been removed but remains concerned about structural and cyclical headwinds.
Westpac is a beneficiary of re-pricing and has a lower credit risk profile, with the broker believing it offers a better risk/reward at current multiples.
Against this backdrop, the broker upgrades Westpac to Overweight from Equal-weight. Target is raised to $32.70 from $28.80. Industry view is In-Line.
Westfield (WFD) Upgraded to Outperform from Underperform by Macquarie B/H/S: 3/2/1
Macquarie expects Westfield’s first half growth to be subdued due to Brexit and the uncertain timing of a swap receivable. The full year outlook will likely be unchanged, the broker suspects, with recent GBP strength helping. The key will be any insights onto the trajectory in 2018.
Given the stock has materially de-rated and total shareholder return now looks attractive, Macquarie upgrades to Outperform from Underperform. Target rises to $9.14 from $8.93.
In the not-so-good books
ALS Limited (ALQ) Downgraded to Hold from Buy by Deutsche Bank B/H/S: 3/3/1
Deutsche Bank considers the outlook for the sector is mixed, with growth in infrastructure expenditure, declining Australian LNG construction and some signs of recovery in global oil & gas capital expenditure.
The broker assesses these stocks are trading at the upper end of historical ranges and there are minimal buying opportunities.
Deutsche Bank still likes the company’s exposure to the recovering minerals exploration market and structural growth in life sciences but believes this is now fully reflected in the share price. Rating is downgraded to Hold from Buy on valuation. Target is $7.41.
BHP Billiton (BHP) as Downgraded to Neutral from Buy by Citi B/H/S: 5/3/0
Citi downgrades to Neutral from Buy, because of share price appreciation and a reduction in the target price to $25.50 from $26.50.
This target reduction has been driven by FY18 earnings downgrades because of lower production and a reduction in net present value from a lower long-term oil price estimate.
While the company is set to reverse a two-year trend of declining production in FY18 it is still facing price headwinds and the broker prefers Rio Tinto (RIO).
Computershare (CPU) Downgraded to Neutral from Buy by UBS B/H/S: 2/5/1
The stock is now trading at a market multiple on FY20 estimated earnings which is appropriate, UBS believes, as the key growth drivers are going to fade beyond this point.
The value risks now appear more evenly balanced and the broker downgrades to Neutral from Buy. Target is raised to $15.25 from $14.95.
Institute of Drug Technology (IDT) Downgrade to Reduce from Add by Morgans B/H/S: 0/0/1
Dr Paul MacLeman joined IDT in 2013 to turn around the business and acquired a portfolio of 23 generic drugs planned for manufacture and US distribution. Little progress left investors frustrated and now MacLeman has resigned.
His resignation leaves the company’s generic drug strategy under a cloud, the broker suggests. The broker has de-weighted the value of the portfolio and on the basis of uncertainty over leadership and strategy can not now recommend the stock to investors.
JB Hi-Fi (JBH) Downgraded to Neutral from Buy by UBS B/H/S: 1/4/3
UBS has downgraded the stock to Neutral from Buy, lowering the target to $25.80 from $32.50.
Oil Search (OSH) Downgraded to Sell from Neutral by Citi B/H/S: 5/2/1
Citi’s oil and gas analysts have bitten the bullet and succumbed to the realisation that the past is just that and the future holds more limitations to how high oil prices might realistically be able to rise.
Apart from lowering near-term forecasts, by on average US$5/bbl, of more importance is the team has now cut the long-term oil price forecast to US$55/bbl real (from US$65/bbl). This becomes a real problem when many a share price for oil and gas producers is still reflecting a higher price.
On Citi’s calculations, Oil Search’s share price is projecting US$68/bbl, hence there is no other option than to downgrade; to Sell from Neutral. New target price of $5.72 compares with $7.47 prior.
Origin Energy (ORG) Downgraded to Neutral from Buy by Citi B/H/S: 3/4/0
On Citi’s calculations, Origin Energy’s share price is already projecting US$55/bbl, hence the downgrade to Neutral. New target price of $7.34 compares with $8.59 prior.
Program Maintenance (PRG) Downgraded to Hold from Accumulate by Ord Minnett B/H/S: 1/2/0
Persol Holdings has made a cash offer of $3.02 for the company by way of a scheme of arrangement. Ord Minnett observes the offer represents an FY17 enterprise value to operating earnings multiple of 10.3x.
The broker envisages a higher competing offer is unlikely, given some structural concerns in the staffing division, although other companies might be interested in the company’s maintenance contracts.
There is now just 4% potential upside to the broker’s estimates so the rating is downgraded to Hold from Accumulate. Target is raised to $3.08 from $2.07, which reflects the additional upside from franking credits on top of the cash offer.
Rio Tinto (RIO) Downgraded to Hold from Add by Morgans B/H/S: 7/1/0
It was another soft quarter for Rio in the Pilbara although 2018 still looks to be as expected in volume terms, according to Morgans. The miner nevertheless benefitted from solid iron ore and coal prices in the quarter and a strong rebound for aluminium.
Ongoing strong cash flows support a robust balance sheet but a lack of capex plans suggests to Morgans low business confidence among global miners persists. The share price has run up ahead of result season and has reached the broker’s target of $62.30, down from $66.57.
Downgrade to Hold.
Woodside Petroleum (WPL) Downgraded to Hold from Accumulate by Ord Minnett and to Sell from Neutral by Citi B/H/S: 2/4/2
Ord Minnett’s previous positive view was based on the growth outlook but sustained low oil prices have had the effect of not only lowering the estimated value but also potentially delaying or deferring growth projects.
Rating is downgraded to Hold from Accumulate and the target to $30 from $36.
On Citi’s calculations, Woodside’s share price is projecting US$68/bbl, hence there is no other option than to downgrade; to Sell from Neutral. New target price of $27.50 compares with $32.41 prior.
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