In the good books
BT INVESTMENT MANAGEMENT LIMITED (BTT) Upgrade to Outperform from Neutral by Macquarie B/H/S: 2/3/1
BT Investment’s result came in ahead of Macquarie, and the broker’s fund manager criteria of flows, capacity and performance were all met. Fund inflows are now recovering after the initial Brexit drop-off.
The strong performance and post-Brexit recovery sees Macquarie lift earnings forecasts by 18% and 32% in FY17-18. Target rises to $10.76 from $8.74. Upgrade to Outperform.
CSR LIMITED (CSR) Upgrade to Hold from Lighten by Ord Minnett B/H/S: 2/2/2
Ord Minnett notes the building products division benefited from its leverage to the resilient east coast residential cycle in the first half. The broker now expects CSR to maintain its current level of earnings out to FY18.
Building products demand is expected to remain elevated next year. The broker notes management is looking at initiatives to soften the blow when the cycle eventually turns. These initiatives include opportunities to save on costs and a continuation of the search for new cladding products to distribute to the domestic network.
Target is raised to $3.75 from $3.50 and Ord Minnett envisages limited downside to the target, raising its rating to Hold from Lighten.
JAMES HARDIE INDUSTRIES N.V. (JHX) Upgrade to Hold from Lighten by Ord Minnett B/H/S: 4/3/0
The company’s stock price has declined 11% since the first quarter result, underperforming the broader market benchmark by around 5.9 percentage points, Ord Minnett observes.
The broker attributes the decline in part to headlines associated with the moderation of housing starts growth in the US in recent months. As the share price is now trading in line with the target, the broker upgrades to Hold from Lighten. $18.60 target retained.
REA GROUP LIMITED (REA) Upgrade to Outperform from Neutral by Macquarie B/H/S: 4/1/2
The Fairfax AGM warned of much softer listing volumes for Domain across Sydney and Melbourne, which is clearly a negative, Macquarie suggests. Yet Domain was still able to grow revenues, which highlights growth in yield via mix-shift and price. Fairfax pointed to changes in super caps and the long election campaign as having an impact.
But management also noted a very strong last Spring, which brings into question whether any rebound will be seen. Cyclical pressures will drive slower growth rates for REA, Macquarie believes, but the core asset should still provide strong medium term growth. On the recent sell-off, the broker upgrades REA to Outperform.
Target falls to $56 from $58.
RELIANCE WORLDWIDE CORPORATION LIMITED (RWC) Upgrade to Accumulate from Hold by Ord Minnett B/H/S: 2/2/0
The share price has fallen 10.8% since the company delivered its FY16 result. Reliance is now trading with a 9.4% gap to the broker’s target, which is considered too wide to ignore.
Hence, Ord Minnett raises its rating to Accumulate from Hold, while $3.15 price target retained.
SCENTRE GROUP (SCG) Upgrade to Overweight from Underweight by Morgan Stanley B/H/S: 2/2/2
The pullback in Scentre’s share price driven by the global rise in bond yields has taken valuation to 12% below Morgan Stanley’s target price. For the broker, this offers an attractive entry point.
Scentre offers the highest quality retail portfolio in the country, defensive earnings offering 4-5% growth, and a 5% yield, Morgan Stanley notes. Upgrade to Overweight. Target unchanged at $4.75. Industry view: Attractive.
SIMS METAL MANAGEMENT LIMITED (SGM) Upgrade to Accumulate from Hold by Ord Minnett B/H/S: 3/3/1
The outlook for the scrap price is improving and Ord Minnett observes solid premiums in export markets which are likely to improve EBIT per tonne. The broker believes the company’s cost-cutting initiatives are under appreciated.
The rating is upgraded to Accumulate from Hold and the target is raised to $10.90 from $9.90. The stock is now a key sector pick for the broker.
In the not-so-good books
SPEEDCAST INTERNATIONAL LIMITED (SDA) Downgrade to Neutral from Buy by UBS B/H/S: 2/2/0
The company will acquire Harris Caprock for US$425m. The acquisition will be funded by an equity raising and debt.
UBS observes, at face value, the price is attractive but Harris Caprock revenues have been declining, given 66% sit within a challenged energy vertical.
Nevertheless, these are new revenue opportunities for Speedcast, as well as an opportunity to acquire at the low point in the cycle.
UBS notes, with around 60% of the earnings base now stemming from Harris Caprock, outperformance will be reliant on a recovery in energy markets. Gearing has also become more aggressive.
The broker downgrades to Neutral from Buy. Target falls to $3.80 from $4.50.
Earnings forecast
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