In the good books

A2 Milk (A2M) Upgraded to Outperform from Underperform by Credit Suisse B/H/S: 1/2/1

Credit Suisse’s assessment of A2’s Sep Q numbers is that the company is handling the challenges much better than its peers. Revenue has stood out in the face of online issues in China and weaker sales in A&NZ.

A2 is proving more agile in its ability to expand channels locally and direct to China/HK, the broker suggests. The broker has increased its target to NZ$2.28 from NZ$1.87. This results in an upgrade to Outperform from Underperform.

Adairs (ADH) Upgraded to Add from Hold by Morgans B/H/S: 2/0/0

The company issued a very soft trading update, with flat like-for-like sales growth in the first four months of FY17. The company has guided for EBIT and earnings per share declines of around 15% for FY17.

Morgans finds the company’s key competitive advantage of developing its own brands and quick response to changes in demand mean a miss on a product trend is of concern.

Still, while it will take time for investor confidence to be restored, Morgans believes the stock is attractive and upgrades to Add from Hold.

AGL (AGL) Upgraded to Equal-weight from Underweight by Morgan Stanley B/H/S: 5/1/0

The closure of Hazelwood has meant Victorian base load forward contract prices have squeezed higher for FY18, boosting Morgan Stanley’s earnings estimates for AGL.

The broker expects pool prices to stay high on more frequent gas-fired price setting.

BWP Trust (BWP) Upgraded to Neutral from Sell by UBS B/H/S: 0/1/3

The stock has been the second worst performing A-REIT in the year to date and UBS believes the valuation can no longer justify a Sell rating, upgrading to Neutral.

The stock remains expensive versus the rest of the sector, the broker acknowledges, with the lowest growth in the sector after taking into account the potential down time as leases expire. Over the next three years, 20% of the portfolio is expiring, reflecting 17 leases.

Brambles (BXB) Upgraded to Neutral from Underperform by Credit Suisse B/H/S: 2/4/0

It beggars belief why no one thought of it earlier, but Brambles’ initiative to use clinch nails to stop pallets falling apart with use appears to be working, reducing the capex requirement of pallet repair.

This addresses one of three issues Credit Suisse sees facing the company, the other two being mean reversion in emerging market pallets and a rebasing of earnings by new management.

On balance, the broker believes the fall in the share price has brought Brambles closer to risk/reward fair value. Upgrade to Neutral.

Caltex (CTX) Upgraded to Outperform from Neutral by Macquarie B/H/S: 4/3/0

Having announced it may miss out on acquiring Woolworths’ (WOW) petrol assets, Caltex has acquired Vic-based reseller Milemaker Petroleum. Macquarie considers the acquisition defensive as it defends volumes rather than expends scale.

Macquarie did not see value at $35 but at $30, having dropped on the Woolworths news, the stock’s value credentials have improved, the broker suggests, and not winning the business is not the end of the world for Caltex.

Carsales.com (CAR) Upgraded to Add from Hold by Morgans B/H/S: 4/2/1

Stockbroker Morgans has come to the view the recently reported margin crunch being felt by the Stratton Finance division is but a temporary phenomenon. Morgans believes finance profits should stage a solid recovery from FY18 onwards.

On the principle this particular part of the operations is currently bruised, not broken, earnings estimates have been slightly lowered.

Commonwealth Bank (CBA) Upgraded to Add from Hold by Morgans B/H/S: 2/5/1

September quarter cash profits at $2.4bn were unchanged from the prior comparable quarter. Morgans observes life insurance claims continue to be a drag on income growth.

The broker expects the life insurance business will disadvantage CBA’s financial performance in FY17 relative to other major banks.

Morgans upgrades to Add from Hold as a result of recent share price weakness.

Domino’s (DMP) Upgraded to Outperform from Neutral by Macquarie B/H/S: 3/3/0

Following a strong start to the year, Domino’s has delivered upgraded FY17 earnings guidance. Macquarie’s forecast remains 5% above. A&NZ stores booked their largest ever sales growth in October.

European integration is ahead of schedule and while Japan is subdued, it’s performing in line with expectations. Put it all together and the broker feels a 49x forward PE can be justified if long term targets are met.

Incitec Pivot (IPL) Upgraded to Buy from Neutral by UBS B/H/S: 4/3/1

Net profit was ahead of expectations but EBIT was in line. UBS reduces FY17 forecasts for earnings per share by 7%, which reflects lower average fertiliser price assumptions. This is partly offset by the realisation of additional cost reductions.

The broker upgrades to Buy from Neutral because fertiliser prices are forecast to bottom. Also, the company’s cash flow outlook suggests a moderation of gearing metrics.

James Hardie (JHX) Upgraded to Buy from Neutral by Citi B/H/S: 5/2/0

History shows James Hardie shares are more likely to outperform the ASX200 in the year post the election of a new US President, report analysts at Citi. They also note the share price has weakened recently.

Oz Minerals (OZL) Upgrade to Neutral from Underperform by Macquarie B/H/S: 1/6/1

Macquarie has long dismissed Carrapateena as not offering a sufficient potential return on the investment required. However the pre-feasibility study has delivered a materially better outcome than the broker had assumed, suggesting slightly higher operating costs but a larger initial reserve.

The broker still believes a copper price of $3/lb is needed to justify the project but outside of a copper price plunge, the broker can no longer see a near term negative catalyst for OZ. 

REA Group (REA) Upgraded to Hold from Sell by Deutsche Bank and Neutral from Sell by UBS B/H/S: 4/3/0

First quarter results were solid with revenue growth of 16% and EBITDA growth of 9%, Deutsche Bank observes.

Guidance for the remainder of the first half is viewed as somewhat subdued, as management indicates it does not expect an improvement in the listings environment.

Operating expenditure growth is expected to continue at a similar rate in the second quarter, leading to minor downgrades to the broker’s forecast.

UBS believes the growth trajectories for the three main Australian revenue drivers are unlikely to change materially in the second quarter. The company flagged the fact that the lower listing volume environment is expected to continue over the first half.

Assuming both commercial and developer revenue growth is robust, this suggests that Australian revenue growth in aggregate is likely in the range of 12-14%.

Sonic Healthcare (SHL) Upgraded to Neutral from Underperform by Credit Suisse and Overweight from Equal-weight by Morgan Stanley B/H/S: 3/3/1

The company will acquire the Staber Laboratory group in Germany for EUR120m. The purchase will be funded from existing cash/debt facilities. Credit Suisse believes the acquisition is strategically sound, expanding the company’s presence in certain regions where it had limited exposure.

The company will acquire Germany’s Staber Laboratory for EUR120m. Morgan Stanley expects the acquisition to be 3-4% accretive to earnings per share in year one, with further synergies over a three-year period.

The pull back in the share price and the accretive nature of the acquisition provide an opportunity, in the broker’s view. The rating is upgraded to Overweight from Underweight. Target is steady at $24.05. In-Line industry view retained.

Suncorp (SUN) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 4/3/1

Suncorp does not offer compelling earnings growth, Credit Suisse acknowledges, but it does have a relatively simple strategy which offers less earnings risk. The broker believes the current share price is attractive as an entry point.

The main risks are a deterioration in the insurance pricing market, reserving issues and bad debts in the bank.

In the not-so-good books

AWE (AWE) Downgraded to Underweight from Overweight by Morgan Stanley B/H/S: 2/3/2

While only envisaging modest downside, Morgan Stanley downgrades to Underweight from Overweight, a relative call to its sector coverage.

The company’s value is becoming increasingly concentrated in undeveloped assets. This increases the risk profile as these have uncertain timeframes and ramp-up profiles, the broker asserts. Morgan Stanley believes long-term value continues to exist in the portfolio.

Dulux (DLX) Downgraded to Neutral from Buy by Citi B/H/S: 0/4/4

Citi analysts saw yet another solid and resilient performance, as has become the company’s habit, and they point out leading indicators remain positive and existing housing resilient.

Yet, they have downgraded to Neutral from Buy on slightly lowered estimates, which pulls back the price target by -4% to $6.68. The Masters (WOW) stock liquidation could impact the market in 1H17, say the analysts, but otherwise no disasters expected.

Orica (ORI) Downgraded to Neutral from Buy by Citi B/H/S: 1/5/2

Citi analysts have been riding the theme of a cyclical and self-help transformation at Orica for a while. Post the FY16 report, their view is one of: you ain’t seen nothing yet. They have, however, made small (negative) changes to forecasts.

As the target price only rises to $17.50 from $17.00 (for now, we presume), the rating is being pulled back to Neutral from Buy. But don’t be fooled by these moves: Citi is expecting many positives from this company’s future.

UGL (UGL) Downgraded to Hold from Buy by Deutsche Bank B/H/S: 0/3/1

The majority of the board has recommended shareholders accept the offer from Cimic (CIM) at $3.15 a share.

Deutsche Bank observes the offer represents an attractive premium to the historical trading price and acquisition multiples, and provides relative certainty given no superior proposal has emerged.

Westpac (WBC) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 4/4/0

Following the FY16 result, Credit Suisse downgrades estimates by 3-4%. The result was compositionally softer than expected, but the analysts note there was no reduction to the dividend.

The broker downgrades to Neutral from Outperform and reduces the target to $31.50 from $33.00. The downgraded rating reflects the fact the broker believes the stock to be fair value and the cost out story to be less compelling.

Xero (XRO) Downgraded to Accumulate from Buy by Ord Minnett B/H/S: 2/3/0

First half results were in line with forecasts. Ord Minnett continues to envisage considerable opportunities for the company, especially in the US and UK markets where cloud penetration remains relatively low.

The broker expects the restructuring of the North American business, combined with its migration to Amazon Web Services, to ease cost pressures.

Ord Minnett downgrades to Accumulate from Buy as the share price has had a strong run.

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