In the good books

Ardent Leisure (AAD) Upgraded to Buy from Neutral by Citi B/H/S: 3/4/0

Citi likes the sale of health clubs. It proves management is focused on value creation for shareholders, argue the analysts. They are now talking Ardent 2.0.

APN Outdoor (APO) Upgraded to Accumulate from Hold by Ord Minnett B/H/S: 3/2/0

The company’s first half results were disappointing to the broker, with the overall industry growth experienced elsewhere not evident for APN.

The weak result has led to an earnings downgrade by Ord Minnett of between 9% and 15% over the next three years.

Caltex Australia (CTX) Upgraded to Accumulate from Hold by Ord Minnett B/H/S: 2/5/0

First half results were better than expected, driven by stronger earnings from supply and marketing. Transport fuel volumes are soft yet margins are expanding from product mix and Ampol Singapore, Ord Minnett observes.

Ord Minnett finds greater clarity on the property portfolio now allows its rating to move back to Accumulate from Hold.

See downgrade below.

Cleanaway Waste Management (CWY) Upgraded to Add from Hold by Morgans B/H/S: 4/1/0

FY16 results beat Morgans estimates. The broker makes material upgrades to forecasts and, despite the rally in the share price, believes there is more upside to be had.

The broker also notes the healthy balance sheet with room for growth initiatives or capital management.

Evolution Mining (EVN) Upgraded to Neutral from Sell by Citi B/H/S: 3/4/0

The company has continued its strong track record and cemented its place as Australia’s second largest gold producer, Citi observes.

The broker believes the deal with Glencore over the Ernest Henry copper-gold mine is adding value and earnings and upgrades to Neutral from Sell.

Healthscope (HSO) Upgraded to Buy from Neutral by Citi and Accumulate from Hold by Ord Minnett B/H/S: 5/3/0

FY16 results were slightly below expectations. Citi likes the company’s concentrated exposure in Australia and expects brownfields projects will add to the bottom line over the next five years.

The broker observes each project will ramp up more rapidly than previously anticipated.

FY16 results were robust and ahead of expectations and Ord Minnett expects double digit growth for the next few years as the investment in capacity begins to deliver.

Monadelphous (MND) Upgraded to Hold from Reduce by Morgans B/H/S: 0/2/5

FY16 results were broadly in line with expectations. Market conditions remain difficult and the company provided no formal FY17 guidance.

While Morgans does not envisage an improvement in the operating environment over the next 12 months, the bottom of the resources cycle is considered nigh. Hence, the rating is upgraded to Hold from Reduce.

See downgrade below.

Northern Star (NST) Upgraded to Neutral from Sell by Citi B/H/S: 0/3/2

The combination of a weaker share price and a switch into valuation methodology at Citi has triggered a recommendation upgrade to Neutral from Sell. Price target has gained 20c to 4.90.

Spark Infrastructure (SKI) Upgraded to Buy from Neutral by Citi B/H/S: 3/2/1

Spark Infra is now Citi’s preferred exposure in the utilities space, having received an upgrade to Buy from Neutral. Cash flows in particular proved well above what Citi analysts had penciled in.

The analysts remain sceptical about growth outside regulated assets, but the cash flow profile has triggered higher dividend estimates, and this is overshadowing just about everything else.

Watpac (WTP) Upgraded to Add from Hold by Morgans B/H/S: 1/0/0

FY16 results were at the low end of guidance, affected by problems in the contracting division with two loss-making contracts.

Morgans observes the company’s cash position remains strong and capital has been preserved for strategic growth opportunities.

Rating is upgraded to Add from Hold as the broker believes there will be opportunities to deploy the cash accretively or return a meaningful amount back to shareholders.

WorleyParsons (WOR) Upgraded to Buy from Neutral by Citi B/H/S: 3/1/1
FY16 results were better than expected. Citi’s FY17 forecasts are little changed but FY18 net profit is upgraded by 27%.

The stock has bounced materially since February’s low but the broker suspects this may just be the start and, while the shares should still move with the ebb and flow of oil prices they should also start to reflect the shift in expected earnings momentum.

In the not-so-good books

Aconex (ACX) Downgraded to Neutral from Outperform by Credit Suisse and Downgraded to Hold from Buy by Deutsche Bank B/H/S: 2/4/0

FY16 revenue was below expectations. Credit Suisse, notes, crucially, the company believes 20-25% growth is sustainable over the medium term. The broker’s estimates assume steady 20-25% growth to FY21 before tapering off.

Credit Suisse suspects weakening organic conditions in the Middle East and UK mean volume growth is unlikely to beat in FY17 and cost management and Conject appear more likely to be the catalysts in FY18.

With little upside to estimates in the short term and demanding valuation the broker downgrades to Neutral from Outperform.

Aconex’s FY16 results were below expectations for the broker. UBS has cut FY17 earnings estimates by 3% and FY18 estimates by 4%.

The broker sees Aconex as well placed in the sector, with global construction firms increasingly adopting the company’s technology.

ASX (ASX) Downgraded to Reduce from Hold by Morgans B/H/S: 1/3/4

FY16 profit was slightly above consensus, Morgans observes. The broker notes the stable performance but considers the stock expensive.

Morgans believes management has done a good job in adapting to a rapidly changing environment but expects slower growth in FY17.

Blue Sky Alternative Investments (BLA) Downgraded to Hold from Accumulate by Ord Minnett B/H/S: 0/2/0

FY16 assets under management finished at $2.1bn, up from $1.35bn at the end of FY15. Ord Minnett expects the strong growth to continue.
The broker considers the stock well positioned but finds little valuation head room at current levels and downgrades to Hold from Accumulate.

Boral (BLD) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 3/3/1

Boral’s result beat consensus. Credit Suisse believes there few better ways to play the east coast infra cycle and is attracted to 8%pa earnings growth, a strong balance sheet, latent land value and upside potential from the US brick JV.

However the share price has become a bit rich. Credit Suisse lifts its target to $7.00 from $6.75 but as the stock is trading close to this level, on risk/reward the broker downgrades to Neutral, hoping for a better entry level.

Carindale Property Trust (CDP) Downgraded to Hold from Buy by Ord Minnett B/H/S: 0/1/0

FY16 results were lower than expected. The stock is a moderately geared exposure to a top tier regional mall and Ord Minnett likes the medium-term income growth potential and Scentre Group’s (SCG) management.

However, the share price has re-rated since February and, with lower expected income growth, the broker downgrades to Hold from Buy.

Charter Hall (CHC) Downgraded to Neutral from Buy by Citi B/H/S: 2/2/2

Citi continues to be attracted to the stock but, with the share price moving up strongly, downgrades to Neutral from Buy. Target is raised to $5.54 from $5.36.

The broker notes the market has increasingly moved to a positive stance on the stock, given the interest rate environment is currently lower for longer. Citi no longer has any Buy rated stocks in the A-REITs sector as prices have moved progressively higher and are up 20% in the year to date.

Caltex Australia (CTX) Downgraded to Neutral from Buy by Citi B/H/S: 2/5/0
First half results were in line with July guidance and slightly below Citi’s estimates. Caltex has exhausted short-term opportunities, Citi maintains, and in the absence of M&A the broker expects earnings growth to moderate.

The broker downgrades to Neutral from Buy, given the recent share price performance.

See upgrade above.

Insurance Australia Group (IAG) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 0/6/2

FY16 profit was below Credit Suisse’s forecasts, affected by the inclusion of a $198m charge for amortisation and impairment of software as well as natural peril claims being $59m above allowance.

The broker appreciates the discipline in the provision of the insurance margin guidance but, with the headwinds facing the business, believes the bottom of guidance will be hard to achieve.

With guidance stretched and the dividend less compelling to the broker the rating is downgraded to Underperform from Neutral.

Duet (DUE) Downgraded to Reduce from Hold by Morgans B/H/S: 3/3/2
FY16 results were broadly in line with Morgans. The broker downgrades to Reduce from Hold, given the strength in the share price and concerns about medium-term distribution support.

Morgans suspects the market’s thirst for yield is clouding the long-term fundamentals.

Fortescue Metals (FMG) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 2/3/2

FY16 results were in line with expectations and guidance is unchanged with 165-170mt in shipments expected in FY17.
Credit Suisse expects the Chinese steel price to moderate in October/November and iron ore to follow suit.

GWA Group (GWA) Downgraded to Sell from Neutral by UBS B/H/S: 0/4/2
FY16 results were ahead of UBS expectations. However, the broker notes top line growth appeared relatively soft in the context of current conditions.

UBS has raised FY17 to FY19 earnings estimates by 4% to 11%, reflecting promised reduction in costs and lower shares on issue.

Greencross (GXL) Downgraded to Sell from Hold by Deutsche Bank and Neutral from Outperform by Macquarie B/H/S: 0/2/1

Greencross’s FY16 results were just ahead of the broker’s expectations. The group expects earning growth to continue throughout FY17.

The company is targeting 15 new in-store clinics and 20 new stores in FY17 and 5% growth in its private label pet food product.

Sales momentum slowed for Greencross in the second half but growth was still solid, although the profit result came in modestly below expectation. There were some one-offs involved, and cash conversion improved to over 100%, Macquarie notes.

Macquarie remains attracted to Greencross’ market and the benefits of combining Vet and Pet operations. However after a stumble, the stock’s valuation has pushed back into substantial premium territory and this prompts a downgrade to Neutral.

Insurance Australia Group (IAG) Downgraded to Reduce from Hold by Morgans B/H/S: 0/6/2

FY16 results were below expectations, largely because of a one-off capitalised software impairment charge. Morgans observes capital metrics are now at the bottom of, or slightly below, target ranges and does not believe further capital management is a certainty in FY17.

Japara Healthcare (JHC) Downgraded to Underweight from Equal-weight by Morgan Stanley B/H/S: 2/2/1

FY16 results were weaker than Morgan Stanley expected. The broker is losing confidence in the company’s ability to maintain margins and lowers forecasts and valuation multiples.

Lower organic growth and uncertainty over funding warrants a lower multiple, the broker asserts, even if cash generation is strong.

Lend Lease Corporation (LLC) Downgraded to Neutral from Buy by Citi B/H/S: 5/1/0

Citi analysts were pleased to see that, after years of investing, free cash flow is coming in thick and fast at Lend Lease. Management is de-risking the apartment developments in Australia, which is yet another positive.

McMillian Shakespeare (MMS) Downgraded to Neutral from Buy by Citi B/H/S: 3/1/0
FY16 results were slightly below expectations. Citi is downgrading to Neutral from Buy, believing each division is facing unique headwinds which create too much ambiguity and profit risk.
In light of the FY16 results as well as the potential of reduced profits from the company’s largest client the broker lowers core earnings per share forecast by 5-8%

Medibank Private (MPL) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 1/5/2

FY16 results were in line with Credit Suisse. The broker expects health insurance operating profit to peak in FY16 and now forecasts an 11% decline in earnings in FY17. Premium growth will be slow because of market share losses.

The broker believes FY17 and FY18 offer little in the way of earnings growth, with intense competition and the need to invest to limit further customer attrition signalling downside risk to forecasts.

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

Metcash will purchase Home Timber & Hardware for $165m. Given the existing Mitre 10 business, Citi believes the fit is good and should provide around $17m in synergies or 1.1% of sales.

The broker downgrades to Neutral from Buy, given the share price already had some probability of this deal proceeding.

Mineral Resources (MIN) Downgraded to Equal-weight from Overweight by Morgan Stanley B/H/S: 1/3/0

Full year results were slightly better than the broker had expected. The company expects a 32% increase in earnings in FY17, if the iron ore spot price holds.

Monadelphous (MND) Downgraded to Sell from Neutral by UBS B/H/S: 0/2/5

Monodelphous Group’s FY16 results were broadly in line with UBS forecasts.

The most recent mining sector survey suggests a 38% decline in capex in FY17, a significant headwind for the mining services sector. Given this, UBS estimates the company’s FY17 earnings will fall by 20%.

See upgrade above.

NextDC (NXT) Downgraded to Hold from Add by Morgans B/H/S: 5/2/0

FY16 results were ahead of expectations. Morgans expects the company to deploy most of its cash in FY17 as it expands the existing footprint and the Brisbane and Melbourne data centres become operational.

The broker downgrades to Hold from Add, given the strong run in the share price.

nib (NHF) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 1/5/1

FY16 results were broadly in line with Credit Suisse estimates. The broker observes the trends emerging in the second half and the uncertainty around claims inflation and premium rate increases have led to soft guidance for FY17.

This suggests to Credit Suisse net margins have likely peaked and there are a number of volatile items outside the company’s control.

Platinum Asset Management (PTM) Downgraded to Lighten from Hold by Ord Minnett B/H/S: 0/1/3

Following consistent outflows in the second half of FY16, estimated to be around $600m, Ord Minnett has downgraded the stock to Lighten from Hold.

With the situation likely to continue into FY17 and FY18, the broker has cut earnings estimates by 12% and 17% respectively.

Primary Health Care (PRY) Downgraded to Underweight from Equal-weight by Morgan Stanley B/H/S: 1/6/1

The balance sheet may be strengthened but, near term, the operations appear light to Morgan Stanley. The broker would prefer to be more confident that an operational inflection point has been reached.

Santos (STO) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 4/3/1

First half results were broadly in line with Credit Suisse. Given the loss that was recorded a dividend was not paid. The broker believes new management is doing a good job but struggles to find the valuation compelling.

An improvement in oil could make the downgrade look too early, the broker acknowledges, but the risk/reward is considered more balanced at current levels.

Scentre Group (SCG) Downgraded to Sell from Neutral by Citi B/H/S: 1/2/3
First half results were in line. Citi revises forecasts lower to reflect softer rental income. Citi observes the stock is up 21% year to date after significant outperformance in 2015 and the premium looks too high.

Seek (SEK) Downgraded to Sell from Neutral by UBS B/H/S: 3/3/1

Seek reported in line with guidance and FY17 guidance was reiterated. As expected, Learning was weak due to regulatory and competition pressures, UBS notes.

Guidance has growth moderating in FY17 as the company cycles strong FY16 comps and continues its reinvestment program. UBS notes Seek and its online peers are trading on historic PE premiums, likely because they offer growth in a market rather devoid of growth otherwise.

On valuation, the broker prefers Fairfax’s ((FXJ)) Domain business and downgrades Seek to Sell.

Seymour Whyte (SWL) Upgraded to Add from Hold by Morgans B/H/S: 2/0/0

FY16 results were in line with guidance. Morgans observes the year was affected by problem contracts and expects improvements in the underlying performance in FY17.

The broker acknowledges it may be early but upgrades to Add from Hold, with the stocking looking to be good value at current levels and providing exposure to NSW infrastructure expenditure.

Shine Corporation (SHJ) Upgraded to Add from Hold by Morgans B/H/S: 1/0/0

FY16 results were in line with expectations. Cash flow was the main positive for Morgans.

The broker expects benign growth and, acknowledging there is still work to be done, believes management has identified the issues to put the strategies in place to support sustainable growth.

Tox Free Solutions (TOX) Downgraded to Reduce from Hold by Morgans B/H/S: 1/3/1

FY16 revenue was in line with expectations although Morgans notes at the EBITDA line there was a miss after stripping out the Worth acquisition.

The broker observes the company will continue to be affected by the roll off of high volume construction contracts. Assuming the Worth acquisition is making its pro forma contribution the broker calculates guidance implies the core business is declining by 10.7%.

Virtus Health (VRT) Downgraded to Neutral from Buy by UBS B/H/S: 1/3/0

FY16 results were in line with the broker’s forecasts. Singapore and Ireland performed strongly, but the Australian sector lagged due to fading margins.

The broker believes offshore expansion is important to sustain group growth, and the company says it continues to actively look to the UK and EU.

Westfield Corp (WFD) Downgraded to Underperform from Neutral by Macquarie B/H/S: 3/1/0

Westfield’s first half results were below the broker’s expectations. Macquarie also found the company’s FY17 outlook uninspiring.

The second half is expected to be impacted by currency fluctuations in the USD/GBP rate. The broker has reduced FY17 and FY18 forecasts by 5.4% and 7.8% respectively.

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