In the good books

Amcor (AMC) Upgraded to Buy from Neutral by Citi and to Buy from Hold by Deutsche Bank B/H/S: 4/3/1

Citi analysts are supportive of the company’s newest acquisition. It is their view the integration of Sonoco Specialty Containers translates into much needed scale for the group’s diversified products. In addition, the add-on brings the non-PET substrate solutions the analysts believe are needed to support growth in this sector.

Estimates for FY18-19 move up by 2% & 3% respectively. Citi has been a long term supporter of this company and management’s strategy, and this remains the case.

The acquisition of Sonoco’s diversified plastics business for US$280m is a positive in Deutsche Bank’s view as it is expected to be accretive by 3.5% and generate a pre-tax return on capital of 16.6%.

Deutsche Bank believes the acquisition will enhance scale and capabilities and upgrades the stock to Buy from Hold.

APN Outdoor (APO) Upgraded to Buy from Neutral by UBS B/H/S: 4/1/0

UBS believes the market is implying in pricing the stock that the structural growth story is broken yet envisages a few reasons for earnings growth to return in the first half.

The company will cycle a period where only four new digital boards were constructed and additional earnings should be forthcoming from the Metrospace and iOM acquisitions.

UBS still finds room for the outdoor segment to growth its share of Australian media advertising spending, particularly against a backdrop of free-to-air TV audience declines. Rating is upgraded to Buy from Neutral and $5.50 target is maintained.

GBST Holdings (GBT) Upgraded to Buy from Neutral by UBS B/H/S: 3/0/0

GBST’s share price has fallen 20% in the last three months, UBS notes, largely on Brexit fears. But the broker feels this risk is now priced in and the Cofunds announcement adds valuation upside.

Huon Aquaculture (HUO) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 1/0/0

FY16 results were weak, as expected. Credit Suisse remains convinced that earnings, balance sheet and the share price are all at a low point.

The broker observes the company is leveraged to the domestic wholesale channel, where pricing is very strong and has the advantage of re-directing 30% of FY16 volumes that went into export into domestic channels.

Hence, earnings-per-share growth is expected to be very strong for the next three years.

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

The company has raised $17.5m in new capital through a placement, which is expected to be sufficient to take it to the point of cash flow being generated in FY19.

Morgans reduces its target to 45c from 57c, as a result of the dilution from the issue.

Macquarie Atlas Roads Group (MQA) Upgraded to Add from Hold by Morgans B/H/S: 3/3/0

Macquarie Group (MQG) has sold down its stake in Macquarie Atlas with its interest now reduced to around 11%. Morgans observes this development has no impact on fundamental valuation.

Still, given the weakness in the share price resulting from the sell down, the broker upgrades to Add from Hold. Target is $5.86.

The key short-term catalyst for the stock is considered to be the Dulles Greenway sales process. The broker observes the road is in one of the fastest growing and more affluent counties in the US.

Oil Search (OSH) Upgraded to Neutral from Sell by Citi B/H/S: 4/4/0

The Oil & Gas sector has gone through weaker times and Citi analysts have grabbed the opportunity to raise their rating for Oil Search in response; to Neutral from Sell.

Orocobre (ORE) Upgraded to Buy from Hold by Deutsche Bank B/H/S: 3/0/1

After attending an analyst’s briefing Deutsche Bank now expects short-term pricing momentum will continue in lithium, with the demand outlook remaining very strong.

Primary Health Care (PRY) Upgraded to Equal-weight from Underweight by Morgan Stanley B/H/S: 1/7/0

While it’s still too early to call an inflection, Morgan Stanley notes the balance sheet is being repaired. The medical centre division remains an ongoing concern, but the broker suspects the market will look through the issues given regulatory risk is turning more positive.

The broker finds the valuation now undemanding and this leads to an upgrade to Equal-weight from Underweight.

QUBE (QUB) Upgraded to Buy from Neutral by UBS B/H/S: 1/4/0

UBS incorporates new forecasts for the Patrick acquisition and updated modelling on Moorebank. This results in lower near-term earnings and cash flow estimates but higher long-term value.

The broker continues to like the company’s strategy of leveraging infrastructure -like assets in the import-export freight chain. Moorebank is not expected to make a meaningful contribution to earnings until FY20.

Sandfire (SFR) Upgraded to Buy from Neutral by UBS B/H/S: 3/4/1

UBS has used a general sector update to lift its rating to Buy from Neutral, while slicing 1c off the price target, to $6.24. The analysts point at lower cost organic growth in comparison with OZ Minerals’ (OZL) Carrapateena project, as well as recent share price weakness to support the move.

Silver Lake Resources (SLR) Upgraded to Buy from Sell by UBS B/H/S: 1/0/0

UBS has used a general sector update to upgrade its rating to Buy from Sell. The key reason mentioned is a positive view on the outlook for nickel prices. UBS’s top pick in the sector remains Independence Group (IGO).

The Star Entertainment Group (SGR) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 7/1/0

Press reports suggesting that the ASF consortium and Crown Resorts (CWN) are progressing with plans for an integrated resort on the Gold Coast are tenuous and well down the track in any case, in Credit Suisse’s view.

The broker believes near-term growth will drive The Star’s share price and notes that, since the emergence of Crown Sydney as a competitive threat, The Star’s share price has actually appreciated.

In the not-so-good books

Altium (ALU) Downgrade to Sell from Buy by UBS B/H/S: 1/0/1

Since mid-June, the Altium share price has risen 60%, including a kick from an earnings “beat” last month. The Nasdaq, in which lies many an Altium-like US stock, has only risen 9%.

UBS can see justification for share price strength but things have gotten a bit out of hand. On current valuation the broker downgrades to Sell from Buy.

Cover-More (CVO) Downgraded to Neutral from Buy by UBS B/H/S: 1/2/0

Cover-More is currently in negotiations for a new underwriting deal and UBS assumes the market will remain cautious until an announcement is made.

But North America JV volumes are likely to slide in the second half, the broker assumes, and domestic price rises are struggling to push through. UBS has decreased its gross written premium forecasts and notes with no forex hedging, Cover-More is exposed to a sharp fall in the A$.

On balance UBS has pulled back to Neutral.

James Hardie (JHX) Downgraded to Equal-weight from Overweight by Morgan Stanley B/H/S: 4/2/1

Morgan Stanley continues to prefer offshore exposure relative to domestic in building materials but after the recent outperformance of the stock envisages an opportunity to take profits and downgrades to Equal-weight from Overweight.

Although the broker is positive on US housing exposure the stock is considered to more than fully reflect this and Fletcher Building ((FBU)) is preferred for offshore exposure.

Regis Resources (RRL) Downgraded to Hold from Add by Morgans B/H/S: 0/4/4

Morgans observes the company has another strong year ahead for gold production, with guidance for 300-330,000 ozs.

Although FY16 earnings bettered the broker’s projections and forecasts have been lifted, the broker downgrades to Hold from Add, to obtain leverage in the current gold price environment.

The broker raises the target to $3.85 from $3.07 to incorporate projected gold prices and exchange rates.

Sonic Health Care (SHL) Downgraded to Equal-weight from Overweight by Morgan Stanley B/H/S: 2/4/2

The stock has risen 30% in the year to date and Morgan Stanley downgrades to Equal-weight from Overweight. The valuation now looks full and the risk/reward less attractive, although the growth outlook remains the same.

Funding risks have been allayed or delayed to FY18 but the broker remains cautious.

Super Retail Group (SUL) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 4/2/2

Credit Suisse upgrades FY17 forecasts and downgrades FY18 and FY19 in the wake of the FY16 result. The broker expects profit growth is likely to return in FY17.

Beyond FY17 the important drivers are the evaluation and improvement required from the new format stores. The broker includes no development costs beyond the current group of stores nor any closure costs.

Credit Suisse also suspects there are downside risks to the sports division resulting in change in the competitive environment and Rebel’s cost structure leaves it more vulnerable to low-cost competition.

Telstra (TLS) Downgrade to Sell from Neutral by Citi B/H/S: 0/5/3

Citi analysts have looked into the future of telecom services in Australia beyond the NBN. Their expectation is that by 2022 Telstra will be forced to cut its dividend to 21c from an until then stable 31c annual payout.

It’s not a prospect that looks particularly enticing and the analysts have decided to cut their price target to $4.50 from $5.72. Their rating moves down one notch too, to Sell from Neutral.

Woolworths (WOW) Downgraded to Hold from Add by Morgans B/H/S: 0/3/4

FY16 results were largely as Morgans expected. The broker suspects the stock is close to the bottom, with new strategies seen gaining traction with customers, although earnings are expected to be constrained for a period.

The broker does not envisage much valuation upside, as any gains are likely to be reinvested to keep abreast of the competitive environment.

The broker considers the new plan outlined by CEO has prospects for returning the company to profit growth from FY18 but some patience is required.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.