In the good books
Beadell Resources (BDR) Upgrade to Outperform from Neutral by Macquarie B/H/S: 1/2/0
Exploration drilling is pointing to higher grades at Tucano and satellite drilling around Duckhead is also turning up positive results. The company has also strengthened its North American alignment, Macquarie notes, ahead of a planned listing on the Toronto exchange.
Macquarie suggests Beadell’s new sense of direction is gathering momentum. Operational improvements need to be confirmed but the trend is in the right direction. With mine life extensions looking likely, the broker upgrades to Outperform.
BigAir (BGL) Upgraded to Add from Hold by Morgans B/H/S: 2/0/0
Superloop (SLC) has lodged a takeover offer for BigAir, which Morgans estimates values the shares at $1.09, assuming shareholders take 100% scrip.
The broker envisages limited downside risk for the transaction, noting the possibility, albeit unlikely, of a higher offer. The main risk is the value on conversion to Superloop stock and the Superloop share price staying at current levels.
Mayne Pharma Group (MYX) Upgraded to Buy from Neutral by UBS B/H/S: 2/0/0
UBS upgrades earnings estimates on the back of FX updates. The broker expects the company can outperform generic industry growth through to 2021 and build a track record with successful integration of recently acquired products.
Given recent share price weakness, UBS upgrades to Buy from Neutral to reflect a forecast excess return above its market return threshold.
Magellan Financial Group (MFG) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 2/2/1
The share price may have fallen since the FY16 result but Credit Suisse observes very strong flows. The broker believes the concerns about a weak fund performance are overdone.
Earnings estimates are upgraded 1-2% to reflect higher funds assumptions. The broker expects the fund performance will benefit as weak quarters roll off. Funds under management were up 4.5% in the September quarter.
Medibank Private (MPL) Upgraded to Neutral from Underperform by Credit Suisse B/H/S: 2/5/1
The share price has fallen 25% from its peak less than six months ago. Credit Suisse now considers the stock fair value and upgrades to Neutral from Underperform. Target is $2.50.
The broker continues to expect earnings will be volatile with potential for large moves in profitability in both directions. Moreover, investors are cautioned to be mindful of the regulatory risk. The broker is in no doubt the industry is over earning and that the magnitude of the 2016 premium rate increases should have been lower.
Motorcycle Holdings (MTO) Upgraded to Add from Hold by Morgans B/H/S: 1/0/0
Industry data suggests motorcycle sales are buoyant and Morgans upgrades FY17 growth assumptions to 7% from 4.5%. The industry remains ripe for consolidation and the broker believes it is just a matter of time before the company makes another acquisition.
The main downside risk is a deterioration in economic conditions and discretionary spending.
Oz Minerals (OZL) Upgraded to Neutral from Sell by UBS B/H/S: 1/5/2
UBS is starting to shift its view, having been negative for some time on copper. The broker observes the demand side is stronger, particularly in China while supply side growth should slow.
2017 earnings estimates lift 19% on higher copper prices.
Despite the risks, with few ways to play copper in Australia, the broker upgrades OZ Minerals to Neutral from Sell.
REA Group (REA) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 3/2/2
Following the recent back tracking of the shares Credit Suisse upgrades to Outperform from Neutral. The share price weakness has been driven by lower property listing volumes but the broker believes this is only a temporary issue.
Hence, there is a buying opportunity and Credit Suisse expects the share price to re-rate as listings recover.
Shopping Centres Australasia (SCP) Upgraded to Accumulate from Lighten by Ord Minnett B/H/S: 1/1/4
Ord Minnett has reviewed earnings and re-assessed the value of the company’s property portfolio. The stock appears to be in sound shape and the portfolio composition improved post the sale of its NZ assets.
The transaction market is still conducive to acquiring neighbourhood centres at reasonable yields and the company is now the leading industry consolidator, the broker observes.
Tabcorp Holdings (TAH) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 3/2/2
The NSW government has reversed its decision to ban greyhound racing from FY18. NSW greyhounds represent 5% of Tabcorp’s wagering turnover.
Credit Suisse does caution investors that early indications of wagering growth could be erased later by intense competition.
The broker reverses its prior downgrade to FY18 estimates and upgrades its rating to Outperform from Neutral rating, despite a lack of constructive views on the UK venture, Sun Bets.
Vocus Communications (VOC) Upgraded to Buy from Neutral by Citi B/H/S: 4/1/0
The Vocus share price has been under the pump in recent weeks and that almost reads like a severe understatement. Citi analysts have now jumped to the rescue, essentially declaring the market is being silly.
Even with slower growth ahead, which has become Citi’s base case scenario, Vocus shares look significantly undervalued in the analysts’ opinion.
In the not-so-good books
Ansell (ANN) Downgraded to Neutral from Buy by UBS B/H/S: 1/6/1
UBS updates its FX assumptions and believes Ansell has exited a 12-18 month period of headwinds in terms of operations and currency and is on the cusp of improving underlying trading.
The broker believes the growth profile is not that different from other industrial stocks and its share price should reflect a similar allocation of value to long-term earnings growth.
Alumina (AWC) Downgraded to Sell from Neutral by Citi and Downgrade to Hold by Ord Minnett B/H/S: 1/4/2
Citi analysts expect alumina prices to be range bound between US$230-260/t over the next 12 months, capped by potential Chinese capacity that can restart when prices rise higher.
Alumina Ltd’s share price has rallied on the back of a favourable agreement with JV partner Alcoa and rising alumina prices.
Alcoa’s September quarter alumina earnings underwhelmed Ord Minnett. Following a strong run up in the share price, the broker suspects Alumina Ltd is approaching fair value.
BHP Billiton (BHP) Downgraded to Neutral from Buy by UBS and Sell from Neutral by Citi B/H/S: 4/3/1
UBS is downgrading to Neutral from Buy believing the risk/reward has become more balanced as iron ore and coal prices are expected to fall back over the next 3-6 months and oil prices stabilise.
The company has largely completed its restructuring in the broker’s view and the priority now is to strengthen the balance sheet. FY17 EBITDA forecasts are upgraded by 13%.
Citi analysts expect prices for bulk commodities to pull back “significantly” in late-16 and into 2017 on cooling demand and as supply responds. They have downgraded to Sell from Neutral and cut the price target to $20 from $21 as a result.
There is a chance for an offset, say the analysts, were Chinese authorities to implement further policy measures to support coal and steel prices and/or monetary stimulus to support growth.
Note: on Citi’s projections, BHP will be enjoying a big boost to profits in FY17, but yet another drop off in momentum in FY18 when current estimates for both EPS and DPS are significantly lower than estimates for the current year.
Bank of Queensland (BOQ) Downgrade to Sell from Neutral by UBS B/H/S: 2/5/1
FY16 results were soft, with margin performance the weakest element. UBS believes the pressure on net interest margins is ongoing but the one area of improvement continues to be asset quality.
Cost initiatives and niche products are expected to be beneficial but unlikely to offset the headwinds. The broker now assumes a reduction in the second half dividend.
Downer EDI (DOW) Downgraded to Hold from Buy by Deutsche Bank B/H/S: 3/3/0
Changes to FX assumptions have led Deutsche Bank to review earnings forecasts and target prices for the engineering and contractor sector. Earnings per share changes for FY17-20 range from reductions of 6.3% to increases of 2.7%.
Investa Office Fund (IOF) Downgraded to Sell from Neutral by UBS B/H/S: 1/4/1
UBS pares back expectations for growth in earnings per share and dividends. While forecasts for Sydney office in 2016/17 envisage robust growth this is tempered by caution on Sydney rents in 2018 and softer growth expected from Melbourne.
The broker also notes material over renting in specific assets in the portfolio.
NAB (NAB) Downgraded to Neutral from Buy by Citi B/H/S: 2/5/1
Citi analysts observe NAB shares have outperformed amidst a notable rotation in investor funds flows in the Australian banking sector. But now the going is expected to get tougher and thus the recommendation has been pulled back to Neutral from Buy.
According to the analysts, continuation of the stocks’ outperformance appears less clear cut now as management at the bank is tackling a number of substantial issues within the remaining operations. Target drops to $30.50 from $31.50. Earnings estimates have been rejigged, a little.
Rio Tinto (RIO) Downgraded to Sell from Neutral by Citi B/H/S: 5/2/1
Citi analysts expect prices for bulk commodities to pull back “significantly” in late-16 and into 2017 on cooling demand and as supply responds. They have downgraded to Sell from Neutral.
There is a chance for an offset, say the analysts, were Chinese authorities to implement further policy measures to support coal and steel prices and/or monetary stimulus to support growth. Price target has moved to $47 from $46.
Also, Citi analysts foresee capex starting to rise again in order to maintain iron ore production levels, to US$5.2bn in 2017 and further to US$5.5bn in 2018. Regardless, the company has room for capital management in 2017 due to an estimated US$2bn in excess capital, even with lower iron ore prices, on Citi’s calculations.
South32 (S32) Downgraded to Neutral from Buy by UBS B/H/S: 2/5/1
UBS downgrades South32 to Neutral from Buy and lifts the target to $2.50 from $2.25. The broker considers the risk/reward is more balanced as coal and manganese prices are expected to fall back over the next three months. The rand is also becoming a headwind.
The company has said it is contemplating two transactions and additional returns are expected in FY17 as cash continues to build. UBS upgrades FY17 EBITDA by 23%.
Whitehaven Coal (WHC) Downgraded to Sell from Neutral by UBS B/H/S: 1/4/3
UBS expects the company to focus on cost controls in FY17. Thermal coal price estimates are lifted for FY17 by 6% to US$68/t and semi soft coking coal by 32% to US$102/t. As a result FY17 earnings are expected to almost double.
The broker downgrades to Sell from Neutral to reflect the premium at which the stock trades versus net present value.
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