In the good books
Abacus Property Group (ABP) as Upgraded to Buy from Hold by Ord Minnett B/H/S: 1/1/1
Ord Minnett has undertaken a sector-wide review, analysing implications for passive property trusts after the recent sharp pull-back.
The company is envisaged making good progress in FY17 and realising more than $30m in profits on the sale of two transactions – Browns Road in Clayton, Victoria, and Westpac House in Adelaide.
The broker believes the market is valuing the company’s investment portfolio below its conservative book value.
Alacer Gold (AQG) Upgraded to Outperform from Neutral by Macquarie B/H/S: 4/1/0
Macquarie acknowledges the unforeseen plunge in the gold price post-Trump and while expecting further volatility, on a medium to long term outlook believes there’s an 80% chance US economic outcomes will be positive for gold.
The broker thus believes some miners have been sold off too far.
Altium (ALU) Upgrade to Neutral from Sell by UBS B/H/S: 1/2/0
The company’s share price has declined 12% since the beginning of September. At the AGM management reiterated guidance for US$100m  in revenue in FY17 rising to US$200m in FY 20. UBS believes these targets are achievable.
The broker believes current valuation levels appropriately reflect the fundamentals and upgrades its rating to Neutral from Sell.
Doray Minerals (DRM) Upgraded to Neutral from Underperform by Macquarie B/H/S: 0/1/0
Macquarie acknowledges the unforeseen plunge in the gold price post-Trump and while expecting further volatility, on a medium to long term outlook believes there’s an 80% chance US economic outcomes will be positive for gold.
The broker thus believes some miners have been sold off too far.
GPT (GPT) Upgraded to Buy from Hold by Ord Minnett and to Outperform from Neutral by Macquarie B/H/S: 2/2/2
Ord Minnett has undertaken a sector-wide review, analysing implications for large capitalisation passive property trusts after the recent sharp pull-back. The broker considers GPT oversold, warranting a better cost of capital given its asset quality and growth prospects.
The broker upgrades to Buy from Hold on the basis that its portfolio is in sound shape, with sector leading portfolio income growth over the next three years translating into circa 4% distribution growth over five years.
Back when REITs were still in fashion, Macquarie had an Underperform rating on GPT due to its low earnings growth profile compared to peers. As REITs began to sell off, the broker upgraded to Neutral in September.
More recently, REITs have been trashed along with all bond proxy stocks. At its current share price, GPT is trading at net asset value while offering a 5.6% yield, Macquarie notes.
Insurance Australia Group (IAG) Upgraded to Hold from Reduce by Morgans B/H/S: 0/7/1
The company expects net claims cost of $200m from the recent NZ storm and earthquake. Despite this, FY17 reported insurance margin guidance of 12.5-14.5% is maintained.
The broker believes the update highlights the strength of the company’s reinsurance planning with guidance affirmed despite two significant recent events. Nevertheless, such events take away the potential upside in FY17, ex any particularly large reserve releases, in the broker’s view.
Morgan’s upgrades to Hold from Reduce, with the stock now looking closer to fair value.
Mirvac Group (MGR) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 4/2/0
The company’s commercial asset quality has been transformed and residential risks are more than priced in, Credit Suisse observes.
The company’s residential business is at an unprecedented level of earnings visibility, with pre-sales representing around 170% of development capital employed.
Mirvac is one of the few in the sector which can truly generate value, rather than simply ride the bond yield cycle, the broker believes.
Northern Star (NST) Upgraded to Hold from Sell by Deutsche Bank B/H/S: 2/2/1
Market expectations of US fiscal stimulus should lead to higher 10-year bond yields and an increase in inflation, although not at the same pace, Deutsche Bank believes. As a result real interest rates are likely to rise.
Despite this outlook, the Australian dollar gold price is only 10% below its record high of $1820/oz, the broker notes, and the sector has de-rated 25% in the last four months to be on the lowest multiples since early 2016.
OceanaGold (OGC) Upgraded to Buy from Hold by Deutsche Bank B/H/S: 3/0/1
Market expectations of US fiscal stimulus should lead to higher 10-year bond yields and an increase in inflation, although not at the same pace, Deutsche Bank believes. As a result real interest rates are likely to rise.
Despite this outlook, the Australian dollar gold price is only 10% below its record high of $1820/oz, the broker notes, and the sector has de-rated 25% in the last four months to be on the lowest multiples since early 2016.
Regis Resources (RRL) Upgraded to Hold from Sell by Deutsche Bank and to Outperform from Neutral by Macquarie B/H/S: 2/3/3
Market expectations of US fiscal stimulus should lead to higher 10-year bond yields and an increase in inflation, although not at the same pace, Deutsche Bank believes. As a result real interest rates are likely to rise.
Despite this outlook, the Australian dollar gold price is only 10% below its record high of $1820//oz, the broker notes, and the sector has de-rated 25% in the last four months to be on the lowest multiples since early 2016.
Macquarie acknowledges the unforeseen plunge in the gold price post-Trump and while expecting further volatility, on a medium to long term outlook believes there’s an 80% chance US economic outcomes will be positive for gold.
The broker thus believes some miners have been sold off too far.
Scentre Group (SCG) Upgraded to Buy from Hold by Ord Minnett B/H/S: 3/1/2
Ord Minnett has undertaken a sector-wide review, analysing implications for large capitalisation passive property trusts after the recent sharp pull-back.
Scentre Group has the best portfolio and the most conservative valuations, in the broker’s opinion. It also has the best development track record and a growing work book.
Silver Chef (SIV) Upgraded to Add from Hold by Morgans B/H/S: 1/1/0
The company has announced a material fraud loss within its GoGetta division, which will impact FY17 net profit by $2.3m. Morgans believes the quantum of this event is a one-off and the company can rectify the operational gaps which have been exploited.
The broker expects further expansion pains over the medium term but this is in the context of a solid growth profile.
St Barbara (SBM) Upgraded to Buy from Hold by Deutsche Bank B/H/S: 2/1/0
Market expectations of US fiscal stimulus should lead to higher 10-year bond yields and an increase in inflation, although not at the same pace, Deutsche Bank believes. As a result real interest rates are likely to rise.
Despite this outlook, the Australian dollar gold price is only 10% below its record high of $1820//oz, the broker notes, and the sector has de-rated 25% in the last four months to be on the lowest multiples since early 2016.
Stockland (SGP) Upgraded to Neutral from Underperform by Macquarie and to Buy from Neutral by UBS B/H/S: 3/3/0
Macquarie previously held an Underperform rating on Stockland given the longer-term structural headwinds the broker expects a number of Stockland’s commercial assets will face. On a combination of rising bond yields and the assumption the housing cycle is maturing the stock has since been sold off heavily.
There is no change in the broker’s view but having fallen to a reasonable valuation, Macquarie upgrades to Neutral.
UBS believes Stockland can grow its residential earnings despite market volumes declining in FY17/18.
This is considered likely, given the company’s increasing market share, which is driven by more capital being employed and more active projects, as well as diversity and product mix.
The broker upgrades to Buy from Neutral, given the material movements in the market and a 18% decline from its peak.
Westfield Corporation (WFD) Upgraded to Outperform from Underperform by Macquarie B/H/S: 5/0/1
Westfield began underperforming the REIT sector following its August earnings result, Macquarie notes, on Brexit concerns and the plunge in the pound. The REIT sector has since been sold off heavily on rising bond yields.
The market has been waiting a long time for signs of earnings accretion from Westfield’s pipeline but the broker believes the income will eventually arrive. Risks remain to FY17 earnings guidance but funds are being allocated to “the best retail product in the world”, Macquarie claims, and the stock is now offering an attractive shareholder return.
In the not-so-good books
Alumina (AWC) Downgraded to Underweight from Overweight by Morgan Stanley B/H/S: 0/5/2
Alumina prices are up 53% year-to-date and the stock is up 48%, Morgan Stanley observes. The broker now believes the value proposition is fully captured and downgrades to Underweight  from Overweight.
While there are now specific downside risks the broker is concerned about, other equities sit above Alumina Ltd in order of preference.
CSG (CSV) Downgraded to Equal-weight from Overweight by Morgan Stanley B/H/S: 0/2/0
The broker downgrades to Equal-weight from Overweight after the company issued a second disappointment, within three months of FY17 guidance. FY17 EBITDA guidance is now reduced to $38-42m from the $44-48m provided in August.
The company has indicated pressure in the SME print business in Australasia, with page volumes likely under pressure, although the broker believes the customer count is stable and the up-selling of technology solutions is going to plan. In-Line sector view.
CYBG (CYB) Downgraded to Reduce from Hold by Morgans B/H/S: 1/1/4
Morgans changes its cash earnings per share estimates, reducing forecasts by 4.7% in FY18 and raising by 2.7% for FY19, ahead of the FY16 results.
This is because of higher net interest margin forecasts in each of these years as well as higher credit impairments in FY18.
The rating is downgraded to Reduce from Hold as the broker considers the rally this month has resulted in the stock being overvalued.
Fisher & Paykel (FPH) Downgrade to Hold from Buy by Deutsche Bank B/H/S: 2/3/0
The company delivered a strong first half result, with net profit up 26% and ahead of guidance. Deutsche Bank updates its analysis of the ongoing litigation with ResMed (RMD), following a detailed review of risks around the action of the International Trade Commission.
While the stock remains an attractive long-term growth story, given significant uncertainty from the litigation the broker does not believe the risk/reward balance is attractive.
Integral Diagnostics (IDX) Downgraded to Underweight from Overweight by Morgan Stanley B/H/S: 2/0/1
While appreciating the long-term industry dynamics, given ongoing disappointment, Morgan Stanley no longer has confidence in Integral Diagnostic’s earnings trajectory.
The stock is expected to remain depressed, with risk of further negative earnings revisions. The broker prefers the IVF companies in the sector.
Monadelphous (MND) Downgraded to Sell from Hold by Deutsche Bank B/H/S: 0/1/5
The company’s AGM signalled slightly more positive expectations for first half revenues.
Yet the outlook for resources capital expenditure has been negative for a while and Deutsche Bank does not believe the growth projects being evaluated presently are enough to replace the role of large capital expenditure incurred over the last two years. The broker increases FY17 forecast revenues to reflect the company’s contract wins and first half guidance.
Rhipe (RHP) Downgrade to Hold from Add by Morgans B/H/S: 1/1/0
The company’s AGM update has shown good revenue trajectory in the first quarter. Underlying guidance has been reiterated but a number of one-offs now mean reported EBITDA guidance has been downgraded to $4m from $5m. Morgans downgrades its forecasts in line guidance and believes management will need to achieve this revised guidance for investor confidence to be restored.
Sigma Pharmaceuticals (SIP) Downgraded to Underweight from Equal-weight by Morgan Stanley B/H/S: 2/0/2
The sector has de-rated since August and Morgan Stanley observes some value is emerging. Yet, while Sigma has maintained its business momentum this is considered to be more than captured in the share price. The broker believes longer-term risk is not reflected in the multiple and on a sector-relative basis prefers to hold IVF names.
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