The final week of the February reporting season did nothing to stop the ongoing avalanche in stockbroker downgrades for locally listed stocks. For the week ending Friday, 27th February 2015, FNArena registered yet another 46 rating downgrades, only partially offset by 16 upgrades. One major change from past reporting seasons is that QBE Insurance is now on the positive side in terms of rating upgrades, adjustments to price targets and changes to profit forecasts. Other positive standouts include Orora, APA and Adelaide Brighton. The negative side for price targets is completely dominated by mining services providers, followed by resources stocks. A similar picture shows up for re-assessments of profit and loss forecasts, with disappointing Village Roadshow the sole non-resources/non-contractor to show up in the top 10 of negative revisions.
Upgrades
Adelaide Brighton (ABC) upgraded to Buy from Neutral by UBS. 2014 results were better than UBS expected. The broker suspects momentum has carried on into 2015, with good volume growth in the eastern states. The broker is encouraged by the consensus on pricing. Higher volumes suggest concerns about market share and customer wins can ease somewhat. UBS upgrades to Buy from Neutral and raises the target to $4.63 from $3.70.
[1]APA (APA) upgraded to Buy from Neutral by Citi. A day after updating for the result, Citi has decided to upgrade APA to Buy. The broker values APA on an operating cash flow yield premium to long term interest rates and has lowered its rate forecasts.
Blackmores (BKL) upgraded to Hold from Reduce by Morgans. First half results were significantly improved and better than expected. Morgans acknowledges it has been poor in calling the stock in the last six months, upgrading forecasts by 7.7% and 7.3% for FY15 and FY16 respectively. The broker upgrades to Hold from Reduce and raises the target to $38.99 from $33.09.
Breville Group (BRG) upgraded to Add from Hold by Morgans. First half results were in line with the broker, albeit weak. Morgans considers the valuation has become more appealing, with the stock set to resume growth in FY16, on a more diversified and higher quality footing, particularly in the US. Hence, the rating is upgraded to Add from Hold and the target to $7.53 from $7.20.
Charter Hall (CHC) upgraded to Outperform from Neutral by Credit Suisse. First half earnings were in line with the broker. Credit Suisse observes Charter Hall has the greatest leverage to the recent bond rally of the A-REITs, given the valuation impact on co-investments plus net fund flows. The broker believes a larger premium is warranted, given valuation support versus bonds. Rating is upgraded to Outperform from Neutral and the target lifted to $5.46 from $4.65. See also CHC downgrade.
Japara Healthcare (JHC) upgraded to Outperform from Neutral by Macquarie. Japara’s result beat the broker and full year guidance was reaffirmed. Occupancy and accommodation payments drove the solid operating performance. The broker also sees a positive in the decision to accelerate phase one of the brownfield development pipeline. The broker believes Japara can hit guidance, which would be a “beat” given the dementia supplement was scrapped after guidance was set. Earnings risk has now diminished and momentum has returned, hence the broker upgrades to Outperform.
M2 Telecommunications (MTU) upgraded to Outperform from Neutral by Macquarie. M2’s result was broadly in line with expectations, with fixed voice, broadband and energy the main drivers. Following a period of market consolidation, the broker has become more confident in M2’s capacity to achieve organic growth. This puts M2 in a solid position as the NBN reduces barriers to entry, the broker suggests. The company has a proven sales and marketing track record and sufficient scale to generate efficiencies. Upgrade to Outperform.
Orora (ORA) upgraded to Outperform from Underperform by Credit Suisse and to Buy from Neutral by Citi. Leading into the result, CS had an Underperform rating and price target of $1.75. Post the result, enough confidence has been injected to upgrade to Outperform and the switch to a different method for calculating valuation: out goes sum-of-the-parts valuation, in comes DCF with a lowered WACC. The new price target is $2.50. The analysts note the company is considering North America bolt-on acquisitions. Cash flow underlined one of the key attractions in the business, in Citi’s view. On further review of the results, the broker considers the company is in a strong position to pursue value-enhancing initiatives. Citi upgrades to Buy from Neutral. Target is raised to $2.44 from $1.90.
QBE Insurance (QBE) upgraded to Overweight from Equal-weight by Morgan Stanley. Morgan Stanley is making the Big Call: for the first time in years focus at QBE can now genuinely shift towards driving returns for shareholders and towards lifting dividends. Sure, the market is still downgrading 2016 estimates, but looking beyond this, the analysts have sufficient confidence to raise their rating to Overweight from Equal-Weight. Price target lifts to $14.50 from $11.70. To add even more juice to its conviction, Morgan Stanley hereby adds QBE to its Asia Best Ideas, essentially selected buys with a conviction across the Asian region.
WorleyParsons (WOR) upgraded to Add from Hold by Morgans. Underlying first half profit was below Morgans’ expectations. However, the broker continues to believe there is nothing structurally wrong with the business except the current sharp downturn in the market. The broker believes the cyclical downturn has not yet ended and the stock is unlikely to re-rate until it improves. The stock is upgraded to Add from Hold, and the price target drops to $13.33 from $18.35. See also WOR downgrade.
Downgrades
Alumina (AWC) downgraded to Equal-weight from Overweight by Morgan Stanley. Alumina’s FY14 results were in line with the broker’s estimates, but the resumption of dividend payments was a surprise. FY15 production guidance was below expectations, but so too was capex guidance. The broker has lowered its FY15 earnings forecast slightly to reflect the lower production figures. Morgan Stanley downgrades the stock to Equal-Weight from Overweight and lowers the price target to $1.85 from $1.90. The In-Line industry view is maintained.
[2]Amcom Telecom (AMM) downgraded to Hold from Add by Morgans. First half results disappointed the broker, with weakness from resources clients affecting IT services as they deferred discretionary spending. Given the company is under bid by Vocus Communications (VOC), it deemed it inappropriate to provide guidance. Amcom paid an interim dividend of 5c as the board decided to return part of the revenue received from the capital raising, given that it is now unlikely to be spent. A Neutral rating is retained. Target lifts to $2.72 from $2.45.
BC Iron (BCI) downgraded to Underweight from Equal-weight by Morgan Stanley. BC Iron overcame operational issues, improved production and cut costs in the period, but also burnt cash at the current iron ore price, the broker notes. BC Iron does boast 62cps worth of cash backing but this will deteriorate if the iron ore price does not recover above US$70/t. Target drops to 41c from 47c and rating downgraded to Underweight.
Charter Hall (CHC) downgraded to Neutral from Overweight by JP Morgan. First half results were higher than expected, mainly from higher transaction revenue. JP Morgan notes FY15 guidance is unchanged but contains positive news on a number of fronts. The broker believes the company is well placed to exceed its forecast of 7-9% growth in FY15 and upgrades estimates. The strong share price performance has meant the stock is now trading above valuation and the broker downgrades to Neutral from Overweight. Target is raised to $4.77 from $4.47. See also CHC upgrade.
DUET (DUE) downgraded to Neutral from Outperform by Macquarie. Duet’s result missed the broker on a softer performance from Multinet, largely due to one-offs, and a poor working capital performance. It was always going to be a tough period, the broker notes, as Dampier-Bunbury rebases to a lower earnings trajectory post re-contracting. Creating more growth is a challenge for Duet and while the stock is supported by interest from Spark Infrastructure (SKI), valuation has become stretched as far as the broker is concerned. Target unchanged at $2.50 but rating downgraded to Neutral.
Fantastic Holdings (FAN) downgraded to Neutral from Outperform by Credit Suisse. Fantastic delivered an absolute cracker of an interim result, probably best described as firing on all cylinders. Certainly, analysts at Credit Suisse can find no fault. Moreover, they believe this company is set for more of the same to come. The analysts have substantially increased forecasts. They also point out the China manufacturing facility offers additional, considerable upside, with capacity to produce for three retailers the size of Fantastic. Price target improves to $2.35 from $2.00 but since the share price is already in the vicinity, the rating has been pulled down to Neutral from Outperform. The company also decided to pay a special dividend of 4c.
Healthscope (HSO) downgraded to Neutral from Buy by UBS. First half results were in line with expectations and demonstrated steady progress on the strategy set out in the prospectus, in the broker’s view. Margin momentum was ahead of UBS forecasts and modest upgrades are made to earnings expectations. That said, given the share price has already captured much of this uplift the broker downgrades to Neutral from Buy.
Henderson (HGG) downgraded to Neutral from Buy by UBS and to Underperform from Outperform by Credit Suisse. The FY14 report was a little better than expected but things are lining up for further growth ahead, in UBS’ opinion. But all that is now in forecasts and the analysts see reduced potential to positively surprise on earnings leverage given persistent high cost growth. Thus, while the price target increases further to 275p (prev. 230p), the rating has been downgraded to Neutral from Buy. While 2014 financial performance proved better than expected, CS analysts state the outlook is not so rosy. In light of the share price performance, they have decided to double downgrade to Underperform from Outperform. The analysts suggest a change in management fee margin plus a higher cost environment will translate in no growth for profits this year.
iiNet (IIN) downgraded to Underweight from Overweight by Morgan Stanley. The company is being outflanked by competitors in Morgan Stanley’s view, which may translate to metro market share losses. The broker believes the company is at the start of a cycle of earnings misses that will result in negative revisions and further de-rating. While being positive about subscriber growth driven by NBN in regional areas, Morgan Stanley observes competition in the metro broadband is increasing with Foxtel’s entry. Rating is downgraded to Underweight from Overweight. Industry View is In-Line. Target is lowered to $6.00 from $8.70.
IOOF Holdings (IFL) downgraded to Neutral from Buy by Citi. Post the interim report, Citi has pulled back the rating to Neutral from Buy while lifting estimates for the years ahead. In the analysts’ view, strong growth and growing dividends are pretty much a given for the two years ahead. It is this prospect that makes the analysts think the stock may well become too popular for its own good, given the chase for yield. Target lifts to $10.60 from $9.90.
Lend Lease (LLC) downgraded to Hold from Buy by Deutsche Bank. First half results were above the broker’s forecast. The strong performance was driven mainly by residual Bluewater profits and the sale of most of the company’s stake in its UK Infrastructure fund. The Australian development business also outperformed Deutsche Bank’s expectations. The stock has been downgraded to Hold from Buy and the price target rises to $15.00 from $14.50.
Macmahon Holdings (MAH) downgraded to Underperform from Neutral by Macquarie. Macmahon has lost its Fortescue Metals (FMG) contract, the company’s largest, which was expected to provide a substantial share of FY15 revenue. The broker estimates the company will need to cut its overheads by 50% to remain profitable. The CEO and deputy were mysteriously shown the door last month and the loss of the contract will trigger a debt syndicate review. Target falls to 4c from 8c and rating downgraded to Underperform.
Macquarie Atlas (MQA) downgraded to Hold from Add by Morgans. 2014 results were in line and Morgans makes no changes to earnings forecasts. The broker remains positive on the outlook for traffic growth from key assets and ongoing savings from refinancing at APRR. The dispute with the French government is expected to cap the upside in the near term and the broker downgrades to Hold from Add. Target is reduced to $3.38 from $3.44.
OceanaGold (OGC) downgraded to Neutral from Outperform by Credit Suisse and to Neutral from Buy by UBS. Credit Suisse analysts saw their projections being bettered by the company’s interim achievements. A promise to pay at least 2c to shareholders each year now backed by solid cash flows provided the proverbial icing. The downgrade, explain the analysts, has nothing to do with expectations or the outlook. It’s purely related to the share price vis-a-vis valuation. Downgrade to Neutral from Outperform. Target price $2.80 from $2.55. Estimates have been lifted. 2014 results were ahead of UBS, with a full year profit derived from by lower-than-expected costs. The company has declared a maiden 4c dividend, which surprised the broker. UBS downgrades to Neutral from Buy as the valuation looks full following the recent share price strength, but OceanaGold remains one of its favourites in the gold sector, supported by low-cost production from Didipio. The addition of a dividend means the stock will appeal to a broader range of investors.
Pact Group (PGH) downgraded to Hold from Buy by Deutsche Bank, to Neutral from Outperform by Macquarie, to Hold from Add by Morgans and to Neutral from Buy by UBS. First half results were below Deutsche Bank’s expectations, affected by Sulo acquisition costs, higher raw material costs and the NZ drought. Full year guidance for higher revenue and underlying earnings is reiterated but subject to domestic and global economic conditions. Deutsche Bank is downgrading to Hold from Buy and reducing earnings forecasts by 5%. Pact’s profit fell short of Macquarie but was a big gain on last year. Pact is highly cash flow generative and there is potential for acquisitions but the stock has had a pretty good run and the broker now pulls back to Neutral. Target rises to $4.70 from $4.30. First half results were lower than Morgans expected, impacted by higher depreciation costs and tax. Morgans has downgraded its FY15 and FY16 forecasts by 3.2% and 4% respectively. Following the disappointing result, the broker believes it could be some time before confidence in the company returns. The stock is downgraded to Hold from Add. Lower margins and higher interest costs caused a H1 “miss” of some 10% against UBS expectations. And the analysts know exactly what lies behind the disappointment: a lag in pass-through for a decline in raw material input costs. As such, they anticipate further drag until the June quarter. Management has announced an Efficiency Review Program, but UBS analysts suggest the main culprit remains a flattish outlook for volumes in the Australian market. Downgrade to Neutral.
Perpetual (PPT) downgraded to Neutral from Buy by Citi and to Neutral from Outperform by Credit Suisse. Citi has lifted FY15 earnings forecasts by 1%, FY16 by 3% and FY17 by 2%. Although Perpetual offers strong EPS growth, the broker does not see sufficient upside for it to keep a more positive call on the stock and downgrades to Neutral from Buy. Higher than expected performance fees plus earlier than expected realisation of Trust Co synergies helped Perpetual’s interim to beat expectations at Credit Suisse. Price target jumps to $57.00 from $51.50 but rating downgraded to Neutral from Outperform on strong share price appreciation. Underlying profit forecasts have been lifted by 4% in FY15, 2% in FY16 and 1% in FY17. The analysts laud the strong growth profile, assisted by markets in addition to synergies, cost out and operational leverage. Perpetual is preferred in the sector because of its higher growth profile.
Platinum Asset (PTM) downgraded to Underperform from Neutral by Credit Suisse. Credit Suisse has a problem with the share price, leading to the conclusion that peers offer double-digit earnings growth at lower multiples plus they are reporting stronger fund performances. Downgrade to Underperform from Neutral, while the price target rises to $7.90 from $7.35. As far as the reported financial numbers are concerned, CS analysts highlight lower-than-expected performance fees and other income meant it was a “miss”, despite underlying results being in-line. Both dividend and special dividend were a positive surprise. CS does not anticipate any more special dividends, but believes the payout ratio for ordinary dividends will remain high (around 100%).
Retail Food (RFG) downgraded to Hold from Add by Morgans. Retail Food’s first half result were ahead of Morgans’ expectations, driven by a one-off licence fee for the operation of the Gloria Jeans franchise in China. The company has upgraded its FY15 guidance by 10% after including the Di Bella acquisition and China fee. The broker has downgraded the stock to Hold from Add and the price target is raised to $7.86 from $6.41.
Sandfire Resources (SFR) downgraded to Neutral from Outperform by Credit Suisse. The interim report disappointed and Credit Suisse analysts have responded by pulling back their rating to Neutral from Outperform. Net Present Value (NPV) falls and pushes the price target down to $4.55 from $4.75. The analysts point out debt should be no more by year-end, dividends will decline this year before picking up again in FY16. Mine development spending is at its peak and should decline from now onwards.
Spark Infrastructure (SKI) downgraded to Neutral from Buy by UBS. 2014 results were marginally ahead of the broker. The 12c distribution guidance for FY15 is in line. Risks around tax have eased but the broker believes the stock is now reflecting this and trading broadly in line with valuation and target. Rating is reduced to Neutral from Buy and the target is raised to $2.28 from $2.05.
Specialty Fashion (SFH) downgraded to Underperform from Neutral by Credit Suisse. Ex-Rivers, the group is actually performing relatively well. The interim report had been pre-released, but it has now dawned on CS analysts that the turnaround of Rivers is going to take another 12-18 months. This probably implies greater losses first, and ongoing drag on cash flow, say the analysts. They are pleased with the successful rejuvenation of the Millers brand. Downgrade to Underperform from Neutral. Target loses 10c to $0.70. Estimates cut on larger projected losses for Rivers.
Spotless (SPO) downgraded to Hold from Buy by Deutsche Bank. First half results were weaker than expected. Deutsche Bank expects the company to benefit from new outsourcing opportunities but has reduced revenue estimates to account for the delay in outsourcing decisions. The broker continues to like the company’s strong market position and defensive revenues but downgrades to Hold from Buy, given it is trading in line with the revised target. Target is reduced to $2.06 from $2.15.
STW Communications (SGN) downgraded to Neutral from Outperform by Credit Suisse, to Hold from Buy by Deutsche Bank and to Hold from Add by Morgans. The interim report disappointed Credit Suisse by some 5%, despite a trading update in December. Apparently clients have been canceling at the 11th hour, or make that three minutes before midnight. CS also observes the company lost three major clients in 2014. CS analysts suggest it’s best to remain cautious because of balance sheet gearing, particularly with EBITDA likely to remain under pressure. Downgrade to Neutral from Outperform. Deutsche Bank downgrades near-term earnings forecasts. Notwithstanding the undemanding 2015 price/earnings ratio, the poor cash generation and lower earnings means the balance sheet is stretched. Deutsche Bank downgrades to Hold from Buy. STW Group’s FY14 results were below Morgans’ expectations, and also below the guidance given in December. Morgans expects negligible growth in the next twelve months as the company has a number of issues to address. These factors do not rate a positive view from the broker and the stock is downgraded to Hold from Add.
Super Retail (SUL) downgraded to Hold from Add by Morgans. Super Retail’s first half results were slightly above the broker’s expectations. A strategic review has determined that Ray’s remains an attractive opportunity in the market, but the Fishing Camping Outdoors business will be exited in the second half of FY15. The stock is downgraded to Hold from Add and the price target raised to $10.24 from $9.24.
Transpacific Industries (TPI) downgraded to Neutral from Overweight by JP Morgan. Transpacific’s first half results were below the broker’s expectations. The Industrials division appears to be the key area of weakness, with significant margin compression. JP Morgan envisages earnings headwinds in the second half, and reinvestment required in the business is likely to see minimal free cash flow in the near term. The broker has downgraded the stock to Neutral from Overweight and lowered the price target to 83c from 97c.
UGL (UGL) downgraded to Sell from Neutral by Citi. The broker observes the first half results were complicated by the DTZ inclusion and impairments were larger than expected. Citi notes revenue guidance and underlying second half earnings are broadly unchanged. The broker re-bases FY16 and FY17 forecasts lower. The company’s risk profile has changed with the smaller balance sheet but the broader effect of potential contract loses from fixed price large project work is amplified in the smaller group. This is Citi’s impression of the first half. Revenue visibility is good but, for the time being, profit visibility is poor. Downgrade to Sell from Neutral. Target is reduced to $1.73 from $2.66.
Westfield Corp (WFD) downgraded to Hold from Buy by Deutsche Bank. 2014 results were in line. Operational metrics are strong and development activity is ramping up in line with Deutsche Bank’s expectations. The main take on the results commentary was the shift in the likelihood of joint ventures on major projects. Westfield now seems unlikely to sell down stakes in the World Trade Centre and Century City developments to institutions. Deutsche Bank downgrades to Hold from Buy, with the stock now trading in line with valuation and the likely earnings upside from any sell down on developments diminished. Target is raised to $10.06 from $9.67.
WorleyParsons (WOR) downgraded to Neutral from Outperform by Credit Suisse. First half results were in line. Credit Suisse was unimpressed by the lack of a buy-back announcement while poor cash flow remains a concern. The broker notes gearing is still at the lower end of target but remains baffled by WorleyParsons preference for acquisitions. With the prospect of further pain from a lower oil price still to come, the broker downgrades to Neutral from Outperform. Target is lowered to $10 from $11. See also WOR upgrade.
Xero (XRO) downgraded to Neutral from Outperform by Credit Suisse. The company has announced an equity raising of NZ$147.2m, at a good price in the broker’s view. This gives the company time to get its US and UK operations in the right frame but Credit Suisse does not believe this will be straightforward or quick. Once the market response to the deal has played out, the April customer numbers in the US are likely to be the next critical catalyst. With less upside now to the target, reduced to NZ$26.30 from NZ$27.00, the broker downgrades to Neutral from Outperform.
Earnings Forecast
[3]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 regards to your circumstances.