In the good books

3P LEARNING LIMITED (3PL) Upgrade to Buy from Hold by Deutsche Bank B/H/S: 1/1/1

3P Learning reported FY16 results ahead of the broker’s expectations and a strong beat to the company’s June guidance.

The company guided to FY17 margin expansion and Learnosity achieving 50% revenue growth. Despite the positive outlook commentary, Deutsche Bank is forecasting only 6% revenue growth, given FX rates and soft lead revenue indicators.

The broker has upgraded the stock to Buy from Hold and raised the target price to $1.10 from 90c.

ASALEO CARE LIMITED (AHY) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Buy from Neutral by Citi B/H/S: 2/1/0

Asaleo Care’s first half results were as expected by the broker, having been previously flagged. Higher pulp prices continue to impact the tissue business throughout the second half.

The on market buy-back continues, with a further $26m to go, and will recommence after the ex-dividend date in September. The firm reiterated guidance for a 10% drop in underlying earnings and a 15% fall in net profit in FY17.

Macquarie upgrades the stock to Outperform from Neutral and retains the $1.60 price target.

Citi analysts have drawn the conclusion that, while headwinds remain for the current half, at least conditions have stabilised after irrational promotional activity in June and this makes the share price look appealing, supported by a share buyback and strong dividend yield.

EPS estimates have been lifted by 4% in FY16 and 10% in FY17. Target price remains $1.60. Upgrade to Buy from Neutral.

AMCOR LIMITED (AMC) Upgrade to Hold from Reduce by Morgans B/H/S: 2/5/1

FY16 results were better than expected. Morgans envisages plenty of acquisition opportunities and upgrades earnings forecasts for FY17 on the back of stronger management guidance.

Rating is upgraded to Hold from Reduce and target rises to $16.66 from $13.39, to reflect the fact the broker is comfortable that the negative financial situation in Venezuela is a one off amid a better expected performance in the remaining emerging market operations.

APA GROUP (APA) Upgrade to Accumulate from Hold by Ord Minnett B/H/S: 3/5/0

APA’s FY16 results were in line with expectations and at the upper end of the guidance range.

The group is moving away from east coast gas and, although there is less certainty in the timing of projects, the company has identified $1.5bn in potential projects over the next three years.

With value now emerging, he broker has upgraded the stock to Accumulate from Hold and lifts the target price to $10.50 from $9.80.

AUB GROUP LIMITED (AUB) Upgrade to Neutral from Underperform by Credit Suisse B/H/S: 2/1/0

AUB slightly beat Credit Suisse thanks to a strong contribution from NZ, offsetting weakness in Aust. A recovery in premium rates is proving slower than many expected, the broker notes.

But Risk Services also performed well alongside NZ and Credit Suisse has thus lifted earnings forecasts. Target raised to $10.20 from $8.90 and this prompts an upgrade to Neutral.

AWE LIMITED (AWE) Upgrade to Neutral from Sell by UBS B/H/S: 3/3/1

FY16 loss was marginally greater than expected, affected by impairments. FY17 production guidance of 2.7-3.0mmboe is 15% below UBS estimates, which signals a more rapid decline in existing assets than previously forecast.

The broker upgrades to Neutral from Sell, with 59% of asset valuation now resting with Ande Ande Lumut and Waitsia. The next catalyst is considered to be the potential sale of the Origin Energy (ORG) Perth Basin assets. Target is raised to 72c from 67c.

See also AWE downgrade.

BREVILLE GROUP LIMITED (BRG) Upgrade to Accumulate from Hold by Ord Minnett B/H/S: 4/0/0

FY16 results were in line with expectations. Ord Minnett remains upbeat on the strategy management has outlined and is pleased with the signs of strength in growth markets.

Rating is upgraded to Accumulate from Hold based on revenue growth and margin expansion and an emphasis on “launching” products to maximise revenue potential. Target is raised to $9.00 from $7.70.

ERM POWER LIMITED (EPW) Upgrade to Neutral from Underperform by Macquarie B/H/S: 2/2/0

ERM Power’s FY16 results were slightly better than the broker had expected. The tough trading conditions are expected to continue into FY17.

Beyond FY17, Maquarie believes the driver of growth will principally be around the company’s US strategy, with the business likely to generate cash flow in FY18.

The broker has upgraded the stock to Neutral from Underperform and the target price rises to $1.24 from $1.09.

MG UNIT TRUST (MGC) Upgrade to Add from Hold by Morgans B/H/S: 2/0/0

FY16 results were in line with recently downgraded guidance. Morgans hopes this is as bad as it gets. FY17 guidance has been maintained for net profit of $42m.

The broker believes there is still a lot to be done to restore the company’s reputation but its strategy is right. Rating is upgraded to Add from Hold. Target is raised to $1.45 from $1.23.

METCASH LIMITED (MTS) Upgrade to Accumulate from Lighten by Ord Minnett B/H/S: 4/2/1

Ord Minnett raises its rating to Accumulate from Lighten and the target to $2.30 from $2.00 in the wake of the company’s acquisition of Home Timber & Hardware.

Management has guided to earnings per share accretion of 4% in FY18 and 6% in FY19 from the acquisition.

Ord Minnett expects that good execution on the acquisition provides a positive catalyst while the exposure to the challenged food & grocery division is reduced.

See also MTS downgrade.

PACT GROUP HOLDINGS LTD (PGH) Upgrade to Buy from Hold by Deutsche Bank B/H/S: 2/2/1

FY16 results were slightly above expectations. Deutsche Bank believes the results are positive as they highlight benefits from recent acquisitions and efficiencies in a subdued trading environment.

The broker upgrades to Buy from Hold as the stock is trading at a 13% discount to the revised valuation. Target is raised to $6.80 from $5.90.

ST BARBARA LIMITED (SBM) Upgrade to Hold from Sell by Deutsche Bank B/H/S: 0/3/0

FY16 results were supported by a number of one-offs while underlying profit was below expectations. The company has lifted reserves at its major asset, Gwalia, to 1.8m ozs.

St Barbara will also complete a ventilation study in the current quarter to remove a bottleneck and bring peripheral resources into the mine plant.

Rating is upgraded to Hold from Sell. Target rises to $2.90 from $2.10.

SPEEDCAST INTERNATIONAL LIMITED (SDA) Upgrade to Outperform from Neutral by Macquarie B/H/S: 3/1/0

SpeedCast’s first half results were broadly in line with Macquarie’s expectations. Full year company guidance was reiterated, and includes a four month contribution from the WINS acquisition.

The broker has upgraded FY16 earnings estimates by 0.7%. FY17 estimates remain unchanged.

Macquarie has upgraded the stock to Outperform from Neutral and raised the target price to $4.42 from $4.15.

SIMS METAL MANAGEMENT LIMITED (SGM) Upgrade to Buy from Neutral by Citi B/H/S: 2/3/2

As the dust settles over the global scrap market, Citi analysts believe this company’s operational leverage will stand shareholders in good stead. Scrap pricing may remain volatile but volumes should hold their own, in the analysts’ view.

Citi is only anticipating a modest 3% recovery in volumes in FY17 but the analysts’ confidence has increased. Sims Metal has arrived at a critical inflection point, in Citi’s view. Price target jumps to $10.70 from $7.40. Rating upgraded to Buy from Neutral.

See also SGM downgrade.

SHINE CORPORATE LTD (SHJ) Upgrade 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.

Rating is upgraded to Add from Hold. Target is raised to $1.46 from 76c.

SEYMOUR WHYTE LIMITED (SWL) Upgrade 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. Target is raised to 91c from 70c.

SOUTHERN CROSS MEDIA GROUP (SXL) Upgrade to Outperform from Neutral by Credit Suisse B/H/S: 1/4/1

Southern Cross’ FY16 result beat Credit Suisse on revenue growth across all divisions and FY17 guidance is well above consensus. The switch of affiliation to Nine (NEC) is expected to drive 30-35% TV revenue growth. Investment in radio is paying off in revenue and ratings.

The broker has materially lifted earnings forecasts and its target to $1.50 from $1.15. Upgrade to Outperform.

WORLEYPARSONS LIMITED (WOR) Upgrade 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.

Rating is upgraded to Buy from Neutral. Target rises to $9.80 from $4.20.

In the not-so-good books

THE A2 MILK COMPANY LIMITED (A2M) Downgrade to Neutral from Buy by UBS B/H/S: 0/2/1

FY16 results were stronger than expected. UBS is encouraged by the NZ$39m in direct sales in China/Asia given the relative immaturity of the infant formula division.

The company now expects start-up losses in the US will be larger than previously anticipated as it moves to critical mass. UBS downgrades to Neutral from Buy based on forecast shareholder return. Target rises to NZ$2.22 from NZ$2.09.

ARDENT LEISURE GROUP (AAD) Downgrade to Neutral from Buy by UBS B/H/S: 2/5/0

Ardent Leisure delivered a solid FY16 performance, even though constant centre revenue declined by -3.8% in Main Event. The big surprise, however, came in the form of a long term target of 200 Main Event centres.

UBS is not sure whether this new target is realistic. The analysts flag some additional research is required. They’ve adjusted forecasts for divestments and new development plans for Main Event.

Rating goes down to Neutral from Buy. Valuation rises by 21.3% to $2.85. New target of $3.05 compares with $2.50 prior.

AWE LIMITED (AWE) Downgrade to Underperform from Neutral by Credit Suisse B/H/S: 3/3/1

AWE had already flagged its FY16 result when it reported June Q production numbers yet it still amounted to a small beat. The disappointment comes from FY17 production guidance which is much lower than expected. No detail was given but Credit Suisse presumes problems at BassGas persist.

AWE has done a good job of deleveraging its balance sheet but as a result, growth options are limited, Credit Suisse notes. While an oil price spike can always fire up the share price, the broker does not see anything to be excited about in terms of value. Downgrade to Underperform. Target falls to 65c from 88c.

See also AWE upgrade.

BLACKMORES LIMITED (BKL) Downgrade to Accumulate from Buy by Ord Minnett B/H/S: 2/1/0

The company’s FY16 profit of $100m beat market consensus, though Ord Minnett was expecting $106.2m. A similar observation seems to apply regarding sales and margins. So far, so good.

Then there’s the outlook for Q1. Lower than twelve months ago due to “retailers destocking and some exporters changing the channels through which they acquire products”. Ord Minnett finds this guidance quite a worry.

The stock guidance has created uncertainty over what is the true level of underlying sales, say the analysts. They have reduced forecasts substantially which pulls back the price target to $150 (was $225). Recommendation goes down one notch to Accumulate from Buy.

That said, the analysts do warn investors not to over-react and any share price weakness post the FY16 release might well represent an opportunity to start accumulating shares ahead of a resumption of growth. The longer term China growth story is still seen as intact.

EUREKA GROUP HOLDINGS LIMITED (EGH) Downgrade to Hold from Add by Morgans B/H/S: 0/1/0

FY16 results were better than expected. Morgans observes the aggressive acquisition strategy remains intact with significant partnership and development opportunities.

The broker increases occupancy rate estimates to 90% from 88% over FY17 and FY18 on the assumption that the additional support provided by Blue Care will bolster rates.

Rating is downgraded to Hold from Add because of share price strength. Target rises to 84c from 72c.

SOUTH32 LIMITED (S32) Downgrade to Sell from Neutral by Citi B/H/S: 3/3/2

FY16 performance beat expectations but Citi has nevertheless downgraded to Sell on a negative outlook for commodities prices, combined with a stronger-for-longer AUD assessment and updated cost and production guidance.

The stockbroker’s Net Present Value (NPV) has remained unchanged at $1.90. Price target loses 5c to $1.70. Citi sits above management on future costs.

SIMS METAL MANAGEMENT LIMITED (SGM) Downgrade to Sell from Hold by Deutsche Bank B/H/S: 2/3/2

FY16 results were in line with guidance. Deutsche Bank believes that despite the volatility highlighted in the results management has done an excellent job in cutting costs.

The broker believes the industry structure is not supporting rational behaviour and remains unsure whether the capital base will be unaffected by the cost reductions given the potential decline in scrap prices.

Deutsche Bank downgrades to Sell from Hold. Target is raised to $8.02 from $7.88.

See also SGM upgrade.

SMARTGROUP CORPORATION LTD (SIQ) Downgrade to Hold from Add by Morgans B/H/S: 3/1/0

First half results were in line with recent guidance. Morgans expects the company will deliver operational leverage and drive organic growth from its larger base in the second half.

The broker expects there are further acquisition opportunities to come. Rating is downgraded to Hold from Add on valuation. Target is steady at $7.55.

SPARK INFRASTRUCTURE GROUP (SKI) Downgrade to Neutral from Outperform by Credit Suisse B/H/S: 3/2/1

First half results were well ahead of Credit Suisse forecasts and cash generation underlines the strong position that led to the recent step change to distribution guidance.

The broker downgrades to Neutral from Outperform, believing the scope for further step changes in distributions is largely exhausted for now. Target is raised to $2.50 from $2.35.

SPOTLESS GROUP HOLDINGS LIMITED (SPO) Downgrade to Hold from Buy by Deutsche Bank B/H/S: 1/2/0

FY16 results missed expectations. Deutsche Bank acknowledges the company has a high level of recurring revenue and strong customer relationships but considers the timing of a recovery in earnings growth is uncertain.

Rating is downgraded to Hold from Buy. Target drops to $1.14 from $1.37.

SANTOS LIMITED (STO) Downgrade to Neutral from Outperform by Credit Suisse B/H/S: 4/3/0

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.

Rating is downgraded to Neutral from Outperform. Target is raised to $4.90 from $4.10.

THE REJECT SHOP LIMITED (TRS) Downgrade to Neutral from Outperform by Macquarie B/H/S: 1/2/0

A strong first half helped Reject Shop deliver an “impressive” FY16 result, which was expected by the broker. Management expects to see further improvement in FY17, with costs well under control.

However, a weaker A$, together with a need to be price competitive could provide headwinds through the first half of FY17, in the broker’s opinion. Consequently, FY17 and FY18 earnings estimates have been reduced by 4%.

Macquarie has downgraded the stock to Neutral from Outperform and reduced the target price to $12.80 from $13.50. The broker anticipates a significant drop in dividend in FY18.

VILLAGE ROADSHOW LIMITED (VRL) Downgrade to Hold from Buy by Deutsche Bank B/H/S: 2/2/0

FY16 earnings missed expectations. Film distribution and theme parks disappointed Deutsche Bank and capex was higher than expected.

The broker takes a more conservative view, notwithstanding management’s optimism. Rating is downgraded to Hold from Buy. Capex and gearing are higher and send the target to $4.90 from $6.95.

Earning Forecast

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