In the good books

Ansell (ANN) Upgraded from neutral to buy by UBS. B/H/S: 3/4/1

UBS believes the company has left behind a 12-18 month period of currency and operational headwinds. Underlying trading conditions should gradually improve.

Notwithstanding potential for weakness around the FY16 results the broker envisages upside risk for the FY17-18 outlook. Rating is upgraded to Buy from Neutral.

Carsales.com (CAR) Upgraded from neutral to outperform by Macquarie. B/H/S: 2/4/1

Carsales delivered a strong result, ahead of Macquarie. Display performed better than the broker expected. Numbers were solid overall, with international divisions appearing well positioned.

The scope for improvement in international assets will add an additional layer, Macquarie suggests, to medium term growth.

ComputerShare (CPU) Upgraded from neutral to buy by Citi. Upgraded from hold to add by Morgans and Upgraded from lighten to hold by Ord Minnett. B/H/S: 4/3/1

Citi takes guidance from management’s confidence and agrees growth is likely to accelerate in FY17. On this basis, valuation discount is being removed leading the price target to rise to $11 from $9.90.

The analysts explain they are still forecasting a minor decline (-1%) in EPS this year, but that’s because of negative FX impact. On constant currency the outlook looks a lot better. Investors might have to be patient, but it is worth it, say the analysts.

For Morgans, the FY16 result was above forecasts and FY17 guidance was as expected. The broker suspects the bottom of the earnings cycle is nigh. Morgans lifts FY17 and FY18 earnings by 3-4% to reflect slightly improved revenue assumptions.

The broker believes the core registry is a quality franchise, generating strong cash flow with a dominant market position and the difficult operating conditions are masking the significant work done to improve underlying operations.

Ord Minnett observes the market liked the guidance for a flat FY17. The broker notes the company is undergoing a transition, with the intention of replacing declining revenue in registry with more capital-intensive earnings streams.

FY17 is expected to be a testing year for these initiatives and, if successful, FY18 may provide rewards in terms of earnings growth, the broker contends.

Horizon Oil (HZN) Upgraded from neutral to buy by UBS. B/H/S: 2/0/1

The company has an agreement with major shareholder, IMC Investments, for a US$50m debt facility. This should provide the funds needed to redeem the remaining US$58.8m of convertible bonds, UBS contends.

UBS updates its valuation for production estimates and upgrades to Buy from Neutral, after the recent decline in the share price. Target is lowered to 7c from 8c.

New Hope Corp (NHC) Upgraded from underperform to neutral by Credit Suisse. B/H/S: 1/1/1

Thermal coal price forecasts have been raised to US$55/t from US$50/t for the medium term and Credit Suisse now expects a modest market deficit in 2016 and 2017. Prices are expected to retrace from current levels as China’s air conditioning consumption period ends.

Credit Suisse expects a strong uplift for New Hope’s earnings in FY17 and FY18.

REA Group (REA) Upgraded from reduce to hold by Morgans. B/H/S: 1/4/2

Profit growth in FY16 was slightly less than Morgans expected. The broker believes there is further growth potential in the online share of real estate marketing.

With greater comfort in FY17 revenue the rating is upgraded to Hold from Reduce.

Reckon (RKN) Upgraded from underperform to neutral by Macquarie. B/H/S: 0/4/0

Reckon’s earnings were in line with Macquarie but the interim dividend has been cut to 2.0cps from 4.3cps. There are signs of Reckon’s significant investment in product development, marketing and offshore expansion beginning to provide benefits but it is a slow road and these costs will continue to drag, the broker notes.

ReckonOne has been well received but it’s early days.

Royal Wolf (RWH) Upgraded from neutral to outperform by both Credit Suisse and Macquarie. B/H/S: 4/0/0

Credit Suisse believes FY16 marks the low point, while acknowledging risks and challenges remain for the company. Equally important, earnings should be far more stable from now onwards given Royal Wolf no longer has material resource or oil & gas exposure, point out the analysts.

Estimates have been lowered, but as the analysts believe the outlook looks better, this is not seen as anything substantial.

Royal Wolf’s result was in line with Macquarie, with a 2.5cps dividend exceeding the broker’s 2.0cps forecast. Cash generation was solid and while the company still suffered from its exposure to the energy sector, it has almost now cycled through to a greater emphasis on infrastructure, the broker notes.

It will take time for the market to regain confidence, but given the illiquidity of the stock Macquarie sees now as a good time to revisit the name. Upgrade to Outperform.

Speedcast Intern (SDA) Upgraded from hold to add by Morgans. B/H/S: 2/2/0

Morgans upgrades to Add from Hold ahead of what may be a weaker-than-expected result. The broker believes the share price performance more than compensates for the likely downside in the numbers.

Being below consensus, the broker considers the trading multiples now look attractive relative to expectations for earnings growth.

In the not so good books

Aristocrat Leisure (ALL) Downgraded from outperform to neutral by Credit Suisse. B/H/S: 5/1/0

Credit Suisse expects the company’s new social casino, Fa Fa Fa, may ultimately become a US$50m revenue opportunity. The broker already factors in 50% digital revenue growth to FY18.

The broker now believes the stock is fully valued and lowers the rating to Neutral from Outperform.

Carsales.com (CAR) Downgraded from buy to hold by Ord Minnett. B/H/S: 2/4/1

FY16 profit was in line with Ord Minnett forecasts. The broker envisages upside from the international businesses but prefers to witness more meaningful progress before pricing in a more bullish scenario.

Commonwealth Bank (CBA) Downgraded from add to hold by Morgans. Downgraded from buy to neutral by UBS. B/H/S: 1/6/1

FY16 cash earnings were slightly lower than Morgans expected. The miss is blamed on soft insurance and non-interest income in banking.

Morgans reduces FY17 and FY18 forecasts by 2.2% and 1.9% respectively. The broker is now building a partially underwritten dividend reinvestment plan into forecasts.

UBS finds the highlight was the deposits, especially in cheaper, sticky transaction deposits. The broker notes the bank is continuing to struggle in mortgages.

UBS observes the majority of last week’s mortgage re-pricing was needed to stabilise the mortgage margin and the mortgage back book is paying for the front book discounting.

Centuria Metropolitan REIT (CMA) Downgraded from buy to neutral by UBS. B/H/S: 0/1/0

Earnings per security of 18.4c and distributions of 17.0c were in line with UBS estimates.

The broker downgrades to Neutral from Buy on valuation grounds but expects the distribution yield to provide support in the current environment.

ICar Asia (ICQ) Downgraded from outperform to neutral by Credit Suisse. B/H/S: 0/2/0

The company expects 2016 revenue to be up 7-23%. This is a significant downgrade on Credit Suisse’s previous estimates and implies a slowdown in the second half.

The broker reduces its rating to Neutral from Outperform but remains bullish on the long-term growth potential, with indications from the latest announcement that target markets are at an earlier stage than previously appreciated.

OZ Mineral (OZL) Downgraded from neutral to sell by UBS. B/H/S: 1/4/3

Given the strong share price performance UBS downgrades to Sell from Neutral. The broker notes copper names such as OZ Minerals are receiving little attention, with the uncertainty around the Philippines driving interest in nickel equities.

REA Group Downgraded from outperform to neutral by Credit Suisse. Downgraded from neutral to sell by UBS. B/H/S: 1/4/2

Y16 numbers disappointed UBS. Commentary on operations suggests a more muted outlook. Cost growth accelerated and listing volumes are lower.

The broker makes no changes to FY17 forecasts at this stage but considers the risk is to the downside. The broker considers the valuation now stretched and downgrades to Sell from Neutral.

Credit Suisse rates REA as Downgrade to Neutral from Outperform.

Listing volume weakness affected growth in FY16 with earnings below Credit Suisse forecasts. The broker reduces FY17 profit estimates by 6%.

Credit Suisse considers iProperty an attractive longer term opportunity and its earnings contribution will take time to become meaningful.

Sandfire (SFR) Downgraded from buy to neutral by UBS. B/H/S: 1/6/1

Given the strong share price performance UBS downgrades to Neutral from Buy. The broker notes copper names such as Sandfire are receiving little attention with the uncertainty around the Philippines driving interest in nickel equities.

Sonic Healthcare (SHL) Downgraded from neutral to underperform by Credit Suisse. B/H/S: 3/3/2

Credit Suisse downgrades to Underperform from Neutral, envisaging the recent re-rating reflects the expectations for favourable outcomes from rent regulation.

The potential for an acquisition of size in the absence of an equity raising seems limited to the broker, based on balance sheet constraints.

Ramsay Health Care (RHC) Downgraded from outperform to neutral by Credit Suisse. B/H/S: 2/5/1

The company’s business has grown ahead of the industry average, Credit Suisse observes. and operating theatres due to come online are expected to support near-term outperformance.

The broker downgrades to Neutral from Outperform, given the recent sector-relative share price performance. Credit Suisse expects FY16 earnings of $871m with a final dividend of 70c.

Telstra Corp (TLS) Downgraded from add to hold by Morgans. B/H/S: 0/6/2

Morgans expects subscriber growth to slow in the current half year because of stronger competitors and Telstra’s own network challenges.

While there is some downside to the outlook, the broker expects a buy-back announcement would offset any earnings risk. Following share price appreciation the rating is moved to Hold from Add.

Virgin Australia (VAH) Downgraded from neutral to sell by Citi. B/H/S: 0/6/2

Reported financials were weak, but Citi analysts are doing their best to see the positives through the trees.

They continue to see the domestic market as being “rational” and this, ultimately, will allow both Virgin and Qantas ((QAN)) to improve financial performances, the analysts believe.

They see longer term benefits from repayment of high debt and expensive leases, but in the short term Citi’s valuation drops to 22c and this triggers a Sell rating.

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