In the good books
ANZ (ANZ) Upgraded to Overweight from Underweight by Morgan Stanley B/H/S: 4/4/0
Morgan Stanley has upgraded ANZ Bank to Overweight from Underweight, representing a double-step upgrade. And the analysts didn’t take this step lightly judging by the 41 pages explanation that accompanies the decision.
Essentially, the analysts take confidence from the restructure that has been set in motion. They believe the new institutional bank strategy “can work”. Of equal importance, the analysts also believe the risk of a capital raising has receded.
Morgan Stanley also suggests ANZ’s dividend outlook is better than that of the other majors. A potential re-rating versus peers could be on the horizon. Sector view In-Line.
Bigair (BGL) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 1/1/0
FY16 results were ahead of expectations. Credit Suisse notes the balance sheet has improved markedly and the trajectory into FY17 is positive.
The company expects more than 10% revenue growth and expansion in recurring margins to 27% in FY17.
The broker upgrades to Outperform from Neutral, believing the stock is good value on current multiples.
Coca-Cola Amatil (CCL) Upgrade to Buy from Hold by Deutsche Bank B/H/S: 3/3/2
Deutsche Bank was particularly pleased with the strong performance from the Indonesian operations. While selling sugary soft drinks in a developed market as is Australia remains a tough task, the analysts continue to see growth ahead.
As a matter of fact, the analysts believe the stock stands out in a largely overvalued Australian share market, with a 6% free cash flow yield.
Decmil (DCG) as Upgrade to Hold from Lighten by Ord Minnett B/H/S: 0/1/0
FY16 results were in line with expectations. Ord Minnett acknowledges its forecasts for FY17 could be too bullish, with 70% of FY17 forecasts covered by the order book, but factors in a full year of contributions from three acquisitions.
The broker upgrades its valuation on the back of higher enterprise value/EBIT multiples and higher forecast earnings for the accommodation division. The share price has rallied in the past fortnight and now appears fully valued.
Evolution Mining (EVN) Upgraded to Buy from Neutral by UBS B/H/S: 5/2/0
The company has acquired more gold exposure with its partnership with Glencore but UBS believes this creates a unique set of risks, for both upside and downside.
The broker believes, ultimately, Glencore will still dictate the direction and outlook for the Ernest Henry mine and the main risk is what happens if the copper price declines materially and there is a mis-alignment of interests.
Flexigroup (FXL) Upgraded to Add from Hold by Morgans B/H/S: 4/2/0
FY16 results were in line with guidance. The company has guided to cash profit in FY17 of $90-97m. Management has reaffirmed the aspiration of returning to over 10% organic growth in FY18, albeit from a lower base.
Morgans believes management has set a realistic base for the business and there are opportunities in cards, commercial leasing and in Ireland, which can return the group to growth.
Independence Group (IGO) Upgraded to Neutral from Underperform by Credit Suisse B/H/S: 0/3/3
The company had pre-released, so no surprises. The analysts find it odd the company pays out 2c in dividend, given recent capital raising (July).
The analysts have made minor changes to estimates. Target remains at $3.70, in line with valuation. Rating upgraded to Neutral from Outperform following share price weakness.
Ramsay Health Care (RHC) Upgraded to Neutral from Underperform by Macquarie B/H/S: 2/5/0
Ramsay’s result was in line with Macquarie but yet again ahead of guidance, with Australia proving to be the growth engine. France remains tough and management is hoping for a change of government.
FY17 guidance has yet again been set at below the historical run rate Ramsay keeps achieving, but it is in-line with consensus forecasts. Despite a risk from the local MBS review, the high quality Australian business should continue to drive growth, Macquarie suggests. Upgrade to Neutral.
Regis Healthcare (REG) Upgraded to Buy from Neutral by UBS B/H/S: 3/1/0
FY16 results met expectations. UBS notes cash generation was strong. The broker expects the company’s mitigation strategies will offset the impact of government reforms in FY18/19.
With recent weakness in the market price combined with a solid earnings performance the broker upgrades to Buy from Neutral.
See downgrade below.
Sandfire (SFR) Upgraded to Add from Hold by Morgans and Upgraded to Hold from Lighten by Ord Minnett B/H/S: 2/5/1
FY16 results were below expectations, with adjustments and depreciation higher than expected. The broker observes the company enjoys robust cash generation from a stable production base.
Morgans also notes the forecast step up in free cash flow from FY17, due to the rapidly diminishing underground development expenditure and interest obligations as the balance of debt is repaid.
FY16 results missed forecasts because of higher depreciation and corporate costs. Following the recent sell off, Ord Minnett raises its rating to Hold from Lighten.
Target is steady at $6.10. The broker acknowledges the valuation attraction and upside potential from further exploration success at Monty, but does not have sufficient confidence to extend estimates for operations beyond 2022.
Moreover, Ord Minnett expects the copper price to decline to an average below US$2/lb and expects weak investor sentiment towards resources to linger for some time.
Super Retail Group (SUL) Upgraded to Buy from Hold by Deutsche Bank B/H/S: 4/3/1
Deutsche Bank has upgraded to Buy from Hold, while pushing up the price target to $11.50 from $8.70.
The analysts draw confidence from strong FY16 performances in the Auto and Sports divisions, while a turnaround in Leisure is building.
The currency headwind from recent years will now turn into a tailwind, predict the analysts.
See downgrade below.
Xenith IP Group (XIP) Upgraded to Add from Hold by Morgans B/H/S: 1/0/0
FY16 results were better than expected and highlighted for Morgans the fact that improved IT platforms and scale are pushing professional fee margins higher.
Morgans is attracted to the balance sheet, reasonable margins and strong cash flow. Given recent share price weakness, the rating is upgraded to Add from Hold.
In the not-so-good books
AWE (AWE) Downgraded to Underperform from Neutral by Macquarie B/H/S: 3/2/2
AWE’s underlying loss was in line with Macquarie but winding back the Waitsia development at this stage and a delay to BassGass compression means FY17 production guidance is much lower than forecast.
The broker had assumed FY17 would be the year of consolidation but this is now likely to stretch trough FY17-18 before the new projects ramp up in 2020. With no catalysts apparent over the next year Macquarie downgrades to Underperform.
Commonwealth Bank of Australia (CBA) Downgraded to Underweight from Equal-weight by Morgan Stanley B/H/S: 1/5/2
Morgan Stanley has downgraded to Underweight from Equal-weight on the belief CommBank might be de-rating versus the other major banks in Australia. Industry view is In Line. Price target drops to $68 from $72.50.
On the analysts’ assessment, CommBank is increasingly facing a tougher outlook for its retail operations, as well as in corporate banking with the Return on Equity (ROE) gap with the other majors in Australia to narrow in the years ahead.
Most importantly, the analysts believe there’s ongoing necessity for $7bn in capital, and this increases the odds for a capital raising and/or DRP underwriting.
Estimates have been reduced. Dividend is expected to remain stable at 420c per annum.
Gateway (GTY) Downgraded to Neutral from Outperform by Macquarie B/H/S: 1/1/0
Gateway’s FY16 result was close enough to Macquarie but FY17 guidance has fallen short. There was not a lot of explanation but the broker notes prior FY17 settlements guidance of 292 has been lowered to 275.
Macquarie still likes the manufactured housing estate thematic and notes Gateway still has plenty of capacity for acquisitions, but the FY17 outlook has surprised, and prompted a downgrade to Neutral.
Harvey Norman (HVN) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 2/2/3
Credit Suisse saw a strong result carried by improving profit across all divisions and property revaluations, but they still believe the shares are overvalued. Hence the downgrade to Underperform from Neutral.
Target price increases to $4.97 from $4.70. The analysts warn investors shouldn’t be chasing momentum through the housing cycle. They do believe positive momentum is likely to carry through H1 FY17.
HUB24 (HUB) Downgraded to Accumulate from Buy by Ord Minnett B/H/S: 1/0/0
FY16 results were in line and the company reported a maiden half-year profit in the second half. Ord Minnett now envisages significant operating leverage beginning to flow.
The broker remains positive despite the limited valuation support and, following a post-result rally, downgrades to Accumulate from Buy, seeking a cheaper entry point.
Macquarie Atlas Roads (MQA) Downgraded to Neutral from Outperform by Macquarie and Downgraded to Neutral from Outperform by Credit SuisseB/H/S: 2/4/0
Mac Atlas’ result was relatively strong and relatively in line with Macquarie. With traffic performance consistent focus turns to corporate activity around Greenway, and then Eiffarie/APRR.
Mac Atlas can either acquire the remaining 50% of Greenway or sell its existing 50%. The broker suggests the latter is most likely in the strong bid environment, suggesting upside, albeit there will be a tax drag. Investors have priced in the value so on that basis Macquarie pulls back to Neutral.
Macquarie Atlas Roads (MQA) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/4/0
Credit Suisse has downgraded to Neutral from Outperform on valuation. The analysts also cite 12-18 months of confusion and multiple possible scenarios with regards the main assets Dulles-Greenway and APRR.
Monash IVF (MVF) Downgraded to Neutral from Outperform by Macquarie B/H/S: 1/2/0
Monash reported ahead of Macquarie and guidance thanks to strong Australian cycles growth. New ventures are also beginning to perform, the broker notes, and solid cash creation provides balance sheet flexibility.
Growth is expected to continue in FY17 but after a solid share price run Macquarie sees little valuation upside from here.
Mirvac (MGR) Downgraded to Neutral from Buy by UBS B/H/S: 2/4/0
UBS is downgrading to Neutral from Buy on valuation terms after the stock has risen 22% in three months versus the A-REIT 200 index rise of 4%. The stock remains the broker’s preferred exposure in the sector.
UBS is looking for more comfort around apartment sales in the next six months and minimal settlement defaults, along with no macro prudential surprises and the sale of the Collins office development.
Regis Food Group (RFG) Downgraded to Sell from Buy by UBS B/H/S: 0/2/1
FY16 results were in line with expectations, supported by coffee. UBS notes foot traffic continues to struggle to grow and only Donut King and Gloria Jeans grew franchisee sales.
The company has acquired Hudson Pacific Corp, a dairy processing, baking and food service distribution business. The synergies are not as clear as the coffee acquisitions and the broker requires more analysis of the potential.
See upgrade above.
Super Retail Group (SUL) Downgraded to Neutral from Buy by Citi B/H/S: 4/3/1
Underlying Super Retail’s FY16 performance was flat, explains Citi, though the analysts admit this consisted of strong growth in Sports and Auto, offset by weakness in Leisure.
Small changes have been made to estimates.
See Upgrade above.
Tox Free Solutions (TOX) Downgraded to Neutral from Buy by UBS B/H/S: 0/4/1
UBS downgrades to Neutral from Buy and reduces the target to $2.40 from $3.10.
Vita Group (VTG) Downgraded to Hold from Add by Morgans B/H/S: 0/1/0
FY16 results were ahead of expectations, driven by a combination of like-for-like revenue growth and store acquisitions.
Morgans considers the outlook is very strong with the potential for scale benefits in the longer term and the company has a well-defined strategy.
Rating is downgraded to Hold from Add on valuation.
Wellard (WLD) Downgraded to Hold from Buy by Deutsche Bank B/H/S: 0/2/1
FY16 results highlighted the company is in breach of its working capital facility and likely to breach certain covenants, Deutsche Bank maintains.
Earnings were in line with guidance, being affected by the inability to pass through the historically high cattle prices to traditional customers in Indonesia and Vietnam. While the company is increasing its source of cattle form South America, conditions are likely to persist in the short to medium term, Deutsche Bank believes.
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