In the good books

Downer EDI (DOW) Upgraded to Neutral from Underperform by Credit Suisse B/H/S: 0/4/1

Credit Suisse adjusted numbers to reflect the full $1bn capital raising and minor changes in FY17 guidance. The broker upgrades to Neutral from Underperform.

Credit Suisse continues to struggle to find the rationale in the deal for Spotless (SPO), particularly the premium and lack of due diligence.

Whilst the company appears wedded to exposure to Spotless, one way or the other, the broker continues to exclude Spotless earnings from estimates for the time being. Target is $5.90.

Galaxy Resources (GXY) Upgraded to Neutral from Underperform by Macquarie B/H/S: 0/1/0

Macquarie reviews its battery sector coverage, ahead of what it believes is a supply-side inflection point. Coverage is transferred to another analyst.

While the broker believes pricing will soon pass its peak, in the near term there is expected to be a benefit from high prices. Galaxy is upgraded to Neutral from Underperform, given it has now secured Mount Cattlin’s position as an independent producer. Target is $0.46.

The broker remains broadly negative on the lithium sector, with significant supply expected to come online.

Independence Group (IGO) Upgraded to Outperform from Neutral by Macquarie B/H/S: 3/2/1

The company has updated FY17 production guidance from Nova. Nova is expected to hit full production during the first quarter of FY18.  Macquarie lifts FY17 nickel production forecast by 5% to better match the guidance.

The broker notes the company appears to have recovered from previously announced operating issues and upgrades to Outperform from Neutral. Target is raised to $4.10 from $4.00.

Insurance Australia Group (IAG) Upgraded to Overweight from Equal-weight by Morgan Stanley B/H/S: 1/7/0

Morgan Stanley believes the company is uniquely placed to capture cost benefits and price tailwinds. The analysis shows margins of 17% in FY20 are achievable.

Organic capital generation is strong and the unwinding of the New Zealand tax losses and continuing quota benefits from Berkshire provide for options on capital. Adjusting for any Asian investment, capacity exists for over $500m in buy-backs, the broker observes.

Rating is upgraded to Overweight from Equal-weight. Target is raised to $6.80 from $6.30. Industry view is In-Line.

Mineral Resources (MIN) Upgraded to Overweight from Equal-weight by Morgan Stanley B/H/S: 2/1/0

Morgan Stanley expects the company can create valuation upside through the lithium operations, while mining services should reach a trough in FY17.

The company has no debt and generates significant amounts of cash, which can either be returned to shareholders or deployed for growth. The broker currently forecasts a 50% pay-out ratio for dividends in future periods.

Morgan Stanley upgrades to Overweight from Equal-weight and raises the target to $13.15 from $11.70. Industry view is In-Line.

Origin Energy (ORG) Upgraded to Neutral from Sell by Citi B/H/S: 4/3/0

It is Citi’s view current high electricity prices are partly a function of limited gas supply reducing competitive pressure within the electricity market. This, the analysts point out, gives Origin the choice between monetising its gas within electricity markets or gas markets.

In the analysts’ opinion, with the current gas price arbitrage between domestic prices and an LNG netback starting to close, today represents the sweet spot for the company’s gas book, as well as for the value of its gas peaking power stations.

In Citi’s view, the medium term outlook remains difficult, given the house prediction for US$65/bbl long-term oil price and expectation for spot LNG prices to materially weaken by mid-year. Upgrade to Neutral. Price target jumps by 10% to $7.58.

Oz Minerals (OZL) Upgraded to Hold from Reduce by Morgans B/H/S: 3/2/3

The stock has corrected by around -16% from its recent high and now trades roughly in line with Morgans’ revised valuation. Hence, the broker upgrades to Hold from Reduce.

Morgans believes the market is now valuing the company’s inherent risks, particularly around the Carrapateena development, more appropriately. Target is raised to $8.30 from $8.20.

Telstra (TLS) Upgraded to Buy from Hold by Ord Minnett B/H/S: 1/4/3

Recent share price weakness has elevated the stock to a Buy rating from Hold, Ord Minnett believes. Target is $5.35.

The stock is now suggesting a 6.8% dividend yield and offering significant value, in the broker’s opinion, and the shares are trading at a level that implies a -20% reduction to the dividend.

Nevertheless, Ord Minnett expects the dividend to be sustained, as the company goes about its strategic transformation.

In the not-so-good books

AGL (AGL) Downgraded to Sell from Buy by Citi B/H/S: 5/1/1

Upon further research, Citi analysts have come to the conclusion that high electricity prices will ultimately command a solution, and thus electricity prices will come down, just not as yet.

In the short term, estimates go up on higher electricity prices, but on the expectation that in 12 months’ time, we should start seeing solutions kicking in to pull down elevated electricity prices, the rating is being downgraded to Sell from Buy.

Target price pushes up by 5% to $26.87.

Ardent Leisure (AAD) Downgraded to Sell from Neutral by UBS B/H/S: 1/4/2

Third quarter sales were broadly in line with UBS’ expectations. Main Event revenues were down -2.5%.

UBS takes a more conservative approach to the opening of new centres, meaning Main Event is not expected to reach its 200 target until around FY32. Free cash flow is not expected until FY27.

The broker downgrades to Sell from Neutral. Target is reduced to $1.75 from $1.80.

Asaleo Care (AHY) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 1/2/0

Credit Suisse observes the company is still making year-on-year declines but sales have stabilised and, importantly, the trend is not worsening.

The broker observes that Kimberly Clarke is avoiding deep discounting in personal care products, which had forced Asaleo Care to cut prices to protect its market share. For now, the downward pressure seems to have abated.

Guidance of low single digit growth remains achievable, in the broker’s view. Nevertheless, stability has been largely priced into the stock and the rating is downgraded to Neutral from Outperform. Target is $1.75.

Regis Resources (RRL) Downgraded to Sell from Neutral by UBS B/H/S: 2/4/2

UBS cuts gold price forecast by around -5% and believes the sector is looking expensive. Elsewhere, the broker remains positive on copper and nickel.

The broker remains cautious on the direction of gold and focuses on company-specific events as a driver of share prices.

The stock has performed strongly in 2017 and the broker believes there is better risk/reward elsewhere. Rating downgraded to Sell from Neutral. Target is reduced to $3.13 from $3.36.

Sandfire (SFR) Downgraded to Hold from Add by Morgans and to Neutral from Buy by UBS B/H/S: 3/4/1

After the release of feasibility metrics for Monty that were slightly worse than Morgans expected, attention is now on the company’s ability to add incremental mine life via exploration.

This is required to justify the valuation/price upside, in the broker’s opinion. Rating is downgraded to Hold from Add. Target is reduced to $7.02 from $7.10.

UBS cuts gold price forecast by around -5% and believes the sector is looking expensive. Elsewhere, the broker remains positive on copper and nickel.

The broker remains cautious on the direction of gold and focuses on company-specific events as a driver of share prices.

UBS believes the company is offering heightened risk/reward and subsequently downgrades to Neutral from Buy. Over the next 12 months, the shorter mine life is likely to add pressure to find ways to extend mine life further, and this could prompt caution among investors, the broker believes.

Target is reduced to $6.81 from $7.43.

TPG (TPM) Downgraded to Neutral from Buy by Citi B/H/S: 2/3/3

Citi analysts have downgraded to Neutral from Buy while cutting their target price by -23% to $6.70 (was $8.65). They suggest expanding into Mobile is the correct strategy for the company, but the chosen path is too expensive for their calculations and comfort.

With a price tag of $1.9bn over three years, the analysts suggest meaningful revenue growth is unlikely to start to flow until the new network is largely built. They have reduced EPS estimates by -28% in FY18 and -62% in FY19. Cash flow projections have been heavily impacted too.

The Reject Shop (TRS) Downgraded to Equal-weight from Overweight by Morgan Stanley and to Neutral from Buy by UBS B/H/S: 0/3/0

Morgan Stanley observes a strong focus on variety products that did not sell well has been exacerbated by weak consumer environment and results in a sharp downgrade to FY17 net profit forecasts.

The broker believes merchandising risk remains high and this poses a risk for the short term, lowering confidence in the business turnaround. Rating is downgraded to Equal-weight from Overweight. Target is reduced to $5.35 from $9.15.

While there is a strategy in place to re-balance the sales mix towards everyday value, with long product lead times, the broker does not expect this to be fully implemented until August-September. This raises the risk of disappointment for the remainder of FY17. Industry view is In-Line.

The company has reported a drop in like-for-like sales growth in the third quarter, down -4% as the impact of the move to variety  from “Everyday Value” worsened.

UBS reduces forecast for earnings per share by -39-45% from FY18 onwards and downgrades to Neutral from Buy. The broker had maintained a Buy rating predicated on the expectation of returning to positive sales growth in the second half.  Target is reduced to $5.75 from $11.15.

The broker notes the weak performance in foot traffic and sales has overwhelmed any operational improvements being made from the supply chain cost reductions.

UBS finds it difficult to separate the macro and competitive issues in Western Australia and the challenging external environment from the impact of merchandising decisions and supply chain disruptions.

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