In the good books

GRAINCORP LIMITED (GNC) Upgrade to Outperform from Neutral by Credit Suisse B/H/S: 2/2/0

Credit Suisse believes a clear way to create value in Graincorp is if the rate of port capacity additions by competitors were to ease and for Graincorp to increase utilisation of its own ports.

The broker believes the stock would be increasingly attractive with the absence of ADM on the register. The broker perceives the potential for ADM to move to full ownership is considered a barrier to co-investment in Graincorp’s ports by other grain traders.

Rating is upgraded to Outperform from Neutral, given the recent share price decline, and a $9 target is retained.

QANTAS AIRWAYS LIMITED (QAN) Upgrade to Buy from Accumulate by Ord Minnett B/H/S: 8/0/0

Ord Minnett cannot envisage a more favourable time in which to invest in Qantas and raises its rating to Buy from Accumulate. Target of $4.75 is maintained.

Fuel costs are the lowest in years, passenger demand is higher and operating costs are being eroded. The broker also notes that, based on its forecasts, Qantas could return $1bn or 52c per share to shareholders or conduct a buy-back of 5-10%, without affecting credit ratings.

RCR TOMLINSON LIMITED (RCR) Upgrade to Buy from Hold by Ord Minnett B/H/S: 2/0/0

Ord Minnett considers the company one of the best positioned in the contractors sector in FY17, leading to earnings growth. FY16 is not expected to be flash and the broker believes it will represent a low point.

The broker also believes the current share price is not reflecting the pipeline of work available to the company. The company’s reputation in the solar and power sectors is expected to provide an edge over competitors. Rating is upgraded to Buy from Hold. Target is raised to $2.42 from $1.94.

In the not-so-good books

APA GROUP (APA) Downgrade to Neutral from Outperform by Macquarie B/H/S: 2/6/0

The latest regulatory review is negative for APA pricing, although nothing has yet been quantified and implementation time is 2020. The market already knew the ACCC would clamp down, yet the stock has continued to rally, Macquarie notes.

The trade off is growth options. But Macquarie notes APA’s multiples are looking a little stretched in comparison to regulated peers when cash flow is similar. Hence a downgrade to Neutral. Target slips to $9.18 from $9.19.

CSR LIMITED (CSR) Downgrade to Lighten from Hold by Ord Minnett B/H/S: 3/0/2

Building materials have performed strongly but Ord Minnett believes the sector is now expensive, given full valuations and lofty multiples.

With an unfavourable outlook for aluminium prices and lack of support from the buy-back program the broker downgrades to Lighten from Hold. Target is raised to $3.55 from $3.50.

ICAR ASIA LIMITED (ICQ) Downgrade to Hold from Add by Morgans B/H/S: 1/1/0

June quarter cash collections were below expectations because of softness in the Malaysian car market. Morgans observes car buyer sentiment across South East Asia has turned and will make for a tougher environment over the next year or so.

While the long-term outlook for online motor vehicle ads in Asia is robust, on the back of the short-term softness Morgans downgrades to Hold from Add. Target is reduced to 73c from $1.25.

INDEPENDENCE GROUP NL (IGO) Downgrade to Equal-weight from Overweight by Morgan Stanley and Downgrade to Sell from Hold by Deutsche Bank B/H/S: 1/3/2

The opportunistic equity raising of $280m surprised Morgan Stanley, given the marked improvement in cash flow from key assets, the recent lift in commodity exposures and the debt availability.

The broker acknowledges the balance sheet is now much stronger and there is flexibility to pursue growth once Nova ramps up.

FY16 and FY17 earnings-per-share forecasts are reduced by 10% and 19% respectively. Morgan Stanley downgrades to Equal-weight from Overweight. Target is raised to $3.70 from $3.40. In-Line sector view retained.

June quarter production results were accompanied by a $280m equity raising and FY16 preliminary financials. Deutsche Bank observes the company has taken advantage of recent share price strength to issue stock at a premium to fair value.

The broker remarks that the company had expected to fund Nova from existing cash and undrawn facilities but this was insufficient and the decision to raise just equity rather than a debt/equity combination is taken as an insight into the company’s perception of fair value for its stock.

Deutsche Bank downgrades to Sell from Hold. Target is raised to $3.20 from $3.00.

JAMES HARDIE INDUSTRIES N.V. (JHX) Downgrade to Lighten from Hold by Ord Minnett B/H/S: 3/2/1

Building materials have performed strongly but Ord Minnett believes the sector is now expensive, given full valuations and lofty multiples.

James Hardie’s share price implies, UBS maintains, a degree of complacency around execution risks. Any further disruptions are expected to exert downward pressure on the share price. Rating is downgraded to Lighten from Hold. Target rises to $19.00 from $17.60.

MACQUARIE GROUP LIMITED (MQG) Downgrade to Hold from Accumulate by Ord Minnett B/H/S: 3/3/1

Guidance for FY17 has been reiterated at the AGM with Ord Minnett noting the year is likely to be a consolidation period and earnings are likely to be flat.

The broker downgrades to Hold from Accumulate following a recovery in the share price. Target is $73.

RELIANCE WORLDWIDE CORPORATION LIMITED (RWC) Downgrade to Hold from Accumulate by Ord Minnett B/H/S: 1/2/0

Building materials have performed strongly but Ord Minnett believes the sector is now expensive, given full valuations and lofty multiples.

Reliance Worldwide has enjoyed a strong start as a publicly listed company but the broker downgrades to Hold from Accumulate. Target is reduced to $3.15 from $3.23.

SMARTGROUP CORPORATION LTD (SIQ) Downgrade to Lighten from Hold by Ord Minnett B/H/S: 3/0/0

Ord Minnett considers the stock to be supporting multiples ahead of its risk profile and would look to lighten on recent price strength.

Conditions are considered supportive for an unexpected negative change to novated leasing, with the Australian government facing a widening budget deficit. The most likely timing for a change is considered to be the May budget in 2017.

The broker observes the market has discounted this risk but the downside is substantial if such an event occurs. Rating is downgraded to Lighten from Hold. Target is raised to $6.36 from $4.94.

SPARK INFRASTRUCTURE GROUP (SKI) Downgrade to Hold from Accumulate by Ord Minnett B/H/S: 3/2/1

Ord Minnett considers the valuations of regulated utilities are increasingly stretched as investors seek out yield. Over the last two months stock prices in the sector have increased by more than 10% and are largely above the broker’s valuation.

Hence, while the macro environment remains supportive, the broker reduces its rating to Hold from Accumulate. The $2.40 target is maintained.

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