In the good books
Alumina (AWC) Upgraded to Neutral from Underperform by Macquarie B/H/S: 1/5/1
Macquarie upgrades near-term price forecasts for alumina, although remains bearish over the medium term. The broker forecasts Chinese market deficits for alumina in 2017 and 2018, and the gap to be filled by international market.
The broker upgrades to Neutral from Underperform on the back of increased estimates. Target is raised to $1.50 from $1.00.
On the broker’s estimates the stock offers an attractive dividend yield but this collapses to around 1% after 2018, as Macquarie believes new refinery capacity will displace merchant alumina in the seaborne market.
Ausnet Services (AST) Upgraded to Overweight from Underweight by Morgan Stanley B/H/S: 3/4/0
Morgan Stanley anticipates regulated utilities will outperform contracted utilities, expecting a continued rotation away from bond proxies. The broker estimates a large opportunity for Australian energy infrastructure.
The broker expects more detail on the efficiency and growth targets when the company reports on November 18.
Morgan Stanley upgrades to Overweight from Underweight on relative valuation. Cautious industry view.
Carsales.com (CAR) Upgraded to Buy from Hold by Ord Minnett B/H/S: 5/1/1
After the share price fell, as the company signalled that the first half revenue and EBITDA would be substantially below FY16 for the Stratton business, Ord Minnett suggests investors have over-reacted.
Management has indicated the issue is unique to the lender involved and not related to the wider industry. The broker upgrades to Buy from Hold, envisaging quality in the core business and options in the international investments.
Charter Hall (CQR) Upgraded to Neutral from Sell by UBS B/H/S: 0/2/4
After a challenging reporting season, in which the stock underperformed the sector, UBS anticipates that the presence of Shopping Centres of Australasia (SCP) provides some downside protection.
Combined with the current valuation after a sector wide pull-back, the broker can no longer justify a Sell rating and upgrades to Neutral.
National Storage REIT (NSR) Upgraded to Accumulate from Hold by Ord Minnett B/H/S: 2/1/1
The company’s decision to increase upfront rent concessions and introduce modest rental discounts to stimulate growth in occupancy should not be a negative for revenue, Ord Minnett believes.
If managed well, the company should be able to recover the decrease in average rental rate, recorded since June, over the next two years.
OzForex (OFX) Upgraded to Outperform from Neutral by Macquarie B/H/S: 2/0/0
First half underlying profit was down 22%. Macquarie does not believe the business model is broken but that there is clearly lots of work to do to get it back on track.
The current valuation, post the sell-off, already appears to be discounting the prospect of achieving anything like revised FY17 guidance, in the brokers opinion, which would then provide an improved trajectory in the second half into FY18.
Macquarie believes the company’s active and lapsed client base, technology, licences and banking relationships should appeal to trade and financial buyers well above current levels.
Oz Minerals (OZL) Upgraded to Outperform from Neutral by Macquarie and to Buy from Neutral by UBS B/H/S: 3/3/2
Macquarie upgrades copper price forecast by 11-15% for the next four years and believes improving supply/demand fundamentals should provide some support for the recent rise in copper prices.
The broker incorporates the improved outlook, which drives material upgrades to earnings forecasts. The company is expected to swing back to profit in 2018.
The company has de-risked previously held views on Carrapateena and provided a resource update for Prominent Hill, which extends the underground mine life to 2028.
UBS expects interest in the company to build now it has a business that is supported by two long-life Australian domiciled copper assets that, together, are expected to deliver average production of around 100,000tpa over the next 10 or more years.
This represents a marked turnaround from a year ago, and the broker upgrades to Buy from Neutral.
See downgrade below.
Premier Investments (PMV) Upgraded to Neutral from Sell by Citi and to Neutral from Underperform by Credit Suisse B/H/S: 0/6/0
Citi analysts have upgraded to Neutral from Sell following share price weakness. The official explanation is that risks are now much more balanced.
They do anticipate weak sales in H1, in particular from womenswear, but Smiggle remains the all-important offset. Target retained at $13.80. The company is cycling a very strong Christmas 2015 too.
Following small adjustments to estimates, Citi is now positioned 6% below consensus for FY17 and 3% below consensus for FY18.
Improving commodity prices are positive for national income and, thus, should provide a more supportive backdrop to consumer spending in the medium term, Credit Suisse observes.
While there remains some downside risks to earnings because of softer market-wide trading conditions in the first half, Credit Suisse upgrades its rating to Neutral from Underperform following share price weakness.
Sandfire Resources (SFR) Upgraded to Outperform from Neutral by Macquarie B/H/S: 4/3/1
Macquarie upgrades copper price forecast by 11-15% for the next four years and believes improving supply/demand fundamentals should provide some support for the recent rise in copper prices.
The broker incorporates the improved outlook, which drives material upgrades to earnings forecasts and the rating is upgraded to Outperform from Neutral.
Spark Infrastructure (SKI) Upgraded to Overweight from Equal-weight by Morgan Stanley B/H/S: 4/2/0
Morgan Stanley anticipates regulated utilities will outperform contracted utilities, expecting a continued rotation away from bond proxies. The broker estimates a large opportunity for Australian energy infrastructure.
Spark Infra provides a good simple yield, in the broker’s opinion, underpinned by high quality regulated assets.
Webjet (WEB) Upgraded to Buy from Neutral by UBS B/H/S: 3/2/0
The company will sell the Zuji business in Hong Kongand Singapore for $56m. This compares with the purchase price of $30m. UBS notes the incoming cash for the deal will offset $36m cash upload for the recent Thomas Cook tie up.
The broker notes trading to date has been strong for FY17 and guidance for EBITDA from continuing operations is $60m. UBS upgrades forecasts by 1-2% for FY17-19.
Woolworths (WOW) Upgraded to Buy from Hold by Deutsche Bank B/H/S: 1/2/3
Woolworths has made large investments to re-start growth and Deutsche Bank believes the turnaround is beginning. The broker’s survey suggests shoppers are seeing improvements in price and execution and are buying more groceries.
Store location remains the main driver of shopper behaviour, which should provide the company with a long-term competitive advantage in the broker’s opinion.
Deutsche Bank upgrades to Buy from Hold on the basis that competitors, such as Wesfarmers (WES) and Metcash (MTS) should experience erosion of growth as Woolworths improves.
In the not-so-good books
APA Group (APA) Downgraded to Underweight from Overweight by Morgan Stanley B/H/S:2/3/2
Morgan Stanley anticipates regulated utilities will outperform contracted utilities, expecting a continued rotation away from bond proxies. The broker estimates a large opportunity for Australian energy infrastructure.
While expecting the final outcome of this year’s gas market reviews will be benign for APA, the broker believes changes to the coverage test could take around 12 months to implement and this is unhelpful for share price sentiment and growth prospects in the near term.
Beacon Lighting Group (BLX) Downgraded to Hold from Add by Morgans B/H/S: 0/1/0
Morgans expects the first half result will be affected by soft like-for-like sales growth because of the aggressive clearance activity by Masters as it exits the market.
It will also be affected by lower gross margin in response to the lower Australian dollar/hedge rate and lower operating cost leverage.
This should be partially offset by the acquisition of three franchise stores in the first half. With the stock trading within 10% of the broker’s new target, the rating is downgraded to Hold from Add.
Duet Group (DUE) Downgraded to Equal-weight from Overweight by Morgan Stanley B/H/S: 2/3/2
Morgan Stanley anticipates regulated utilities will outperform contracted utilities, expecting a continued rotation away from bond proxies. The broker estimates a large opportunity for Australian energy infrastructure.
The stock remains the highest-yielding under coverage which the broker believes rewards investors for the manageable merchant and refinancing risk.
The broker downgrades to Equal-weight from Overweight as the downside risk is envisaged deepening with the valuation headwind.
Metcash (MTS) Downgrade to Sell from Hold by Deutsche Bank B/H/S: 4/1/2
Deutsche Bank believes the recent period of stabilising sales has been enabled by the loss of market share experienced by Woolworths (WOW).
Accordingly, as the sales trajectory improves for Woolworths so the broker expects independent supermarkets to come under increasing pressure.
Oz Minerals (OZL) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 3/3/2
Credit Suisse found the cost accounting for the Carrapateena pre-feasibility study did not add up. Management has now reconciled some of the modelling.
The broker is still sceptical regarding some of the numbers but revises earnings and valuation to reflect the implementation of a revised model now that substantial differences have been explained.
There remain several unresolved risk factors regarding the project and Credit Suisse downgrades to Underperform from Neutral.
See upgrade above.
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