In the good books
Alumina (AWC) Upgraded to Accumulate from Hold by Ord Minnett B/H/S: 1/3/3
Ord Minnett has increased its forecasts for coal, iron ore and copper, while downgrading near-term gold price forecasts. The broker also raises forecasts for alumina. Spot alumina continues to look strong at US$325/t and presents upside potential to the broker’s earnings estimates.
The broker upgrades AWC to Accumulate from Hold and raises the target to $1.80 from $1.60. The upgrade is driven by a higher valuation and strong forecasts for free cash flow.
BAPCOR LIMITED (BAP) Upgrade to Buy from Neutral by UBS and Upgrade to Add from Hold by Morgans B/H/S: 3/1/0
The company has lifted its offer for Hellaby Holdings, to NZ $3.60, which is at the lower end of the independent expert’s valuation range.
The Board has stated it will not recommend the offer unless a dividend is paid, making use of its imputation credits.
Regardless of whether the Board endorses the offer, UBS believes it’s highly likely that Bapcor will attain at least a majority ownership. Given this likelihood, UBS incorporates the business into forecasts.
Morgans now factors in the acquisition, but notes there is some risk to Bapcor gaining full control. The broker acknowledges the company has been particularly accretive in recent years, which brings higher integration risk.
Nonetheless, the broker believes the deal stacks up from an accretion perspective.
Beadell Resources (BDR) Upgraded to Buy from Neutral by Citi B/H/S: 2/0/1
Citi commodities analysts have changed their view on commodities, now expecting 2016’s momentum is likely to remain the dominant theme for 2017 and 2018.
For gold producers in particular, the combination of flat prices in the Australian dollar and a pull back in share prices has inspired upgrades. Rating moved to Buy/High Risk from Neutral.
BHP Billiton (BHP) Upgraded to Neutral from Sell by Citi B/H/S: 2/6/0
Citi commodities analysts have changed their view on commodities, now expecting 2016’s momentum is likely to remain the dominant theme for 2017 and 2018.
Price estimates have all gone up.
See downgrade below.
Carsales.com (CAR) Upgraded to Neutral from Sell by UBS B/H/S: 6/2/0
UBS upgrades to Neutral from Sell without accompanying commentary. Target is $10.50.
DUET Group (DUE) Upgraded to Neutral from Underperform by Credit Suisse and to Hold from Reduce by Morgans B/H/S: 6/2/0
The company has confirmed a non-binding offer of $3.00 from Cheung Kong infrastructure. Credit Suisse observes the bid price is in line with the upper end of recent transactions in NSW for Transgrid and Ausgrid.
The high initial offer reduces the likelihood of a counter bid. The broker acknowledges some uncertainty regarding approval by the Foreign Investment Review Board.
Given the corporate activity, Morgans lifts its rating to Hold from Reduce. The broker does not factor corporate activity into the target, including the takeover premium that the company may be willing to pay to gain control of the stock. The broker sets the target at the indicative bid price of $3.00.
Cheung Kong may be attracted to the yield but also could merge its Victorian distribution networks with DUET networks, the broker observes. Morgans expects cash flow supporting the distribution to materially fall away early next decade.
Evolution Mining (EVN) Upgraded to Buy from Neutral by Citi B/H/S: 7/0/0
Citi commodities analysts have changed their view on commodities, now expecting 2016’s momentum is likely to remain the dominant theme for 2017 and 2018.
For gold producers in particular, the combination of flat prices in AUD and a pull back in share prices has inspired to upgrades. Rating moved to Buy/High Risk from Neutral.
Fortescue Metals Group (FMG) Upgraded to Neutral from Sell by Citi B/H/S: 2/4/1
Citi commodities analysts have changed their view on commodities, now expecting 2016’s momentum is likely to remain the dominant theme for 2017 and 2018.
Graincorp (GNC) Upgraded to Outperform from Neutral by Macquarie B/H/S: 3/3/0
A strong crop season and the latest receivables data suggest that the company is catching up after a delayed start to harvest and Macquarie lifts its forecast for FY17 receivables to 11.2mt and also raises export expectations to 5mt.
The broker also removes the overhang from ADM’s sell down of its stake and transfers coverage to another analyst. FY17 and FY18 earnings per share estimates are raised by 14% and 4% respectively.
Independence Group (IGO) Upgraded to Neutral from Sell by Citi B/H/S: 1/4/1
Citi commodities analysts have changed their view on commodities, now expecting 2016’s momentum is likely to remain the dominant theme for 2017 and 2018. For gold producers in particular, the combination of flat prices in AUD and a pull back in share prices has inspired to upgrades.
Japara Healthcare (JHC) Upgraded to Outperform from Neutral by Macquarie B/H/S: 2/1/1
After reviewing the aged care sector Macquarie upgrades Japara to Outperform from Neutral. Target is $2.50.
The broker believes the company is well placed for the uncertainty inherent in the regulatory environment, with more conservative gearing levels and more generous staff costs per place.
The broker expects the tight funding environment will restrict earnings growth from places, which increases the importance of portfolio growth.
See downgrade below.
JB Hi-Fi (JBH) Upgraded to Neutral from Sell by Citi B/H/S: 3/4/0
Citi analysts ask the question: Is JB Hi-Fi’s sales growth sustainable? The combination of anticipated slowing in sales growth and the incorporation of The Good Guys only results in minor increases to estimates.
Luckily the shares are trading at a discount vis-a-vis the broader market ex-resources, and below the price target (unchanged at $27.20), so Citi analysts still upgrade to Neutral from Sell.
Bottom line: JB Hi-Fi is expected to outperform a market (consumer electronics) that is facing headwinds, in the analysts’ view.
New Hope Corporation (NHC) Upgraded to Neutral from Underperform by Credit Suisse B/H/S: 1/2/0
Credit Suisse updates its commodity price forecasts for 2017, upgrading iron ore, thermal coal and copper prices by 22%, 25% and 23% respectively.
While China has pushed up the price of thermal coal recently, a policy reversal is expected to lift local supply and cool prices into 2017.
Given recent developments with the new Queensland water legislation, the broker again defers the inclusion of the expansion of New Acland mine and assumes a 12-month hiatus between depletion of stage 2 and the commencement of stage 3.
Northern Star Resources (NST) Upgraded to Outperform from Underperform by Credit Suisse B/H/S: 3/2/0
Credit Suisse observes the company’s exceptional returns have been extracted from low-cost operating practice, an elevated Australian dollar gold price, and disciplined acquisitions.
The broker upgrades to Outperform from Underperform, a valuation-based call given recent share price declines.
Regis Resources (RRL) Upgraded to Buy from Neutral by Citi B/H/S: 3/2/3
Citi commodities analysts have changed their view on commodities, now expecting 2016’s momentum is likely to remain the dominant theme for 2017 and 2018. For gold producers in particular, the combination of flat prices in AUD and a pull back in share prices has inspired to upgrades.
REA Group (REA) Upgraded to Buy from Neutral by UBS B/H/S: 6/2/0
UBS suspects investors may not fully appreciate the potential for Australian residential revenue to re-accelerate in FY18, even without a rebound in volumes.
If the companies in Australia’s media sector could replicate their domestic models overseas, the broker believes the upside would be material. However, market structures are also less favourable and competition is fiercer.
Regis Resources (RRL) Upgraded to Neutral from Underperform by Credit Suisse and to Buy from Sell by UBS B/H/S: 4/3/1
Credit Suisse observes management understands well its prospective ground at Duketon, and the operation has become a robust, cash generating project.
Reliable commercial outcomes that are readily developed and quickly converted to cash flow are being delivered, the broker notes.
UBS trims 2017 gold price forecasts to US$1350//oz and remains bullish on gold. The broker notes it was a volatile year for the company and remains drawn to the stock, although a premium valuation versus peers was always difficult to appreciate.
Nevertheless, with the share price pulling back and organic growth options turning into production growth, as well as a strong balance sheet, the broker expects investor interest to remain high.
Resolute Mining (RSG) Upgraded to Buy from Neutral by Citi B/H/S: 1/1/0
Citi commodities analysts have changed their view on commodities, now expecting 2016’s momentum is likely to remain the dominant theme for 2017 and 2018. For gold producers in particular, the combination of flat prices in AUD and a pull back in share prices has inspired to upgrades.
Rio Tinto (RIO) Upgraded to Neutral from Sell by Citi and to Outperform from Neutral by Credit Suisse B/H/S: 5/3/0
Citi commodities analysts have changed their view on commodities, now expecting 2016’s momentum is likely to remain the dominant theme for 2017 and 2018.
Credit Suisse updates its commodity price forecasts for 2017, upgrading iron ore, thermal coal and copper prices by 22%, 25% and 23% respectively.
Rio Tinto has recently revised the capital expenditure guidance and committed to a further US$5bn of free cash flow in productivity improvements over five years. The company has promised a minimum 2016 dividend of US$1.10 and the broker assumes US$1.50.
Sandfire (SFR) Upgraded to Buy from Neutral by Citi B/H/S: 5/1/1
Citi commodities analysts have changed their view on commodities, now expecting 2016’s momentum is likely to remain the dominant theme for 2017 and 2018. For gold producers in particular, the combination of flat prices in AUD and a pull back in share prices has inspired to upgrades.
Saracen (SAR) Upgraded to Outperform from Neutral by Macquarie B/H/S: 1/0/0
Drilling at Thunderbox and Carosue Dam continue to return positive results, Macquarie notes. Confirmation of thick mineralisation at Thunderbox is particularly encouraging as it supports the broker’s assumption of an underground operation down the track.
This confirmation, and Saracen’s recent share price fall, leads Macquarie to upgrade to Outperform.
South32 (S32) Upgraded to Buy from Sell by Citi B/H/S: 3/4/0
Citi commodities analysts have changed their view on commodities, now expecting 2016’s momentum is likely to remain the dominant theme for 2017 and 2018. The analysts remain bearish on bulk commodities whose rallies are labelled “a fluke” on the back of China changing its policies.
Price estimates have all gone up. South32 has received a double-whammy upgrade to Buy from Sell.
St Barbara (SBM) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 3/0/0
Credit Suisse considers the company’s operational and financial turnaround has been stunning. Free cash generation from the maturing Gwalia asset has been maximised and the life of the operation has been extended.
The challenge is now to replace the short life Simberi asset with a value-adding acquisition. Credit Suisse removes the Simberi sulphide contribution from forecasts, with the recent strategic review indicating there are no plans to develop the project and no willing buyers in the current climate.
Whitehaven Coal (WHC) Upgraded to Accumulate from Hold by Ord Minnett and Buy from Sell by Citi B/H/S: 4/3/1
Ord Minnett has increased its forecasts for coal, iron ore and copper, while downgrading near-term gold price forecasts. The broker upgrades Whitehaven Coal to Accumulate from Hold and the target to $3.30 from $3.00.
The upgrade is driven by a higher valuation and a strong free cash flow forecast. Ord Minnett recognises it is late in its call but estimates the stock will be net cash within a year.
Citi commodities analysts have changed their view on commodities, now expecting 2016’s momentum is likely to remain the dominant theme for 2017 and 2018. Price estimates have all gone up. Whitehaven Coal has received a double-whammy upgrade to Buy from Sell.
In the not-so-good books
Bellamy’s (BAL) Downgraded to Hold from Add by Morgans and to Hold from Buy by Ord Minnett B/H/S: 0/2/1
The company’s trading update and FY17 guidance were well below estimates. Morgans downgrades FY17 and FY18 net profit forecasts by 45% and 55% respectively.
The company’s second quarter has not been as strong as expected. The company is also being affected by regulatory changes in China, which is causing brands which won’t meet the December 31 2017 CFDA approval deadline to heavily discount their excess stock.
Revenue for the year to November 20 2016 is up 24%, which compares with Ord Minnett’s FY17 estimate of up 59.3%. FY17 EBIT margins are now expected to be below 20%, depending on the sales channel mix.
With momentum materially slowing, market dislocation from regulatory changes, and the stock trading on FY17 price/earnings ratio of 20x post the downgrade, the broker lowers its recommendation to Hold from Buy.
BHP Billiton (BHP) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/6/0
Credit Suisse updates its commodity price forecasts for 2017, upgrading iron ore, thermal coal and copper prices by 22%, 25% and 23% respectively.
Underlying EBITDA is revised up 33% and 35% in FY17 and FY18 respectively. The broker notes BHP has been widely criticised for under investing in its conventional oil business but has now sanctioned the Mad Dog 2 expansion and first oil is expected in 2023. The company is also the winning bidder for 60% of the block containing the Trion discovery in the Gulf of Mexico.
The stock has outperformed the Australian market by 37% in the past year and is now at around fair value, in the broker’s opinion.
See upgrade above.
Downer EDI (DOW) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 2/3/1
The company has been awarded the Sydney growth trains contract. The $1.7bn contract follows the contractual close on the Victorian government’s $2bn high-capacity metro trains project.
Credit Suisse takes the opportunity to review its assumptions, noting that the company has positioned itself to diversify away from the challenged mining and engineering construction sectors. Over 55% of revenue is now generated from servicing public infrastructure customers in Australasia.
Despite raising the target to $5.30 from $4.70, the broker downgrades to Underperform from Neutral, as the business needs to prove its earnings now that it is trading almost on a market multiple where earnings estimates for FY19 will be roughly flat versus FY16.
Japara Healthcare (JHC) Downgraded to Hold from Add by Morgans B/H/S: 2/1/1
Given the rally in the company’s share price, Morgans downgrades to Hold from Add.
After a period of uncertainty, the broker notes the industry and the government have reached a broad agreement with some of the measures outlined in the FY16 budget regarding funding cuts being moderated.
The broker remains comfortable that current forecasts reflect the new arrangements.
See upgrade above.
Origin Energy (ORG) Downgraded to Neutral from Buy by Citi, to Underperform from Neutral by Credit Suisse, to Hold from Add by Morgans and to Hold from Accumulate by Ord Minnett B/H/S: 1/5/1
Citi has lifted its price target to $6.95 from $6.61 on the news Origin is looking to spin off its conventional oil assets through an IPO, while pulling back the rating to Neutral from Buy.
The analysts think the initiative is “OK”, but not game changing. Debt will be reduced and the spin-off requires board approval without shareholders having their say, note the analysts.
Also, the analysts observe AGL Energy (AGL) is currently trading at a comparable premium, but this seems justified, in their opinion, because AGL has a stronger growth outlook and a stronger balance sheet, even after the planned divestment. Citi thinks a meaningful multiple re-rating for Origin may take several years.
Credit Suisse believes that the IPO of its conventional upstream assets is strategically, and financially, the right thing to do. That said, the broker is baffled by a decision to sell to the equity market versus a trade sale.
The broker carries a value of $1.4bn for the assets noting that this is inclusive of the $350m in hedging cost. This does not include remediation or corporate costs, which are either not disclosed or unknown, and both will reduce the net present value.
Credit Suisse downgrades to Underperform from Neutral, reluctantly, but notes the valuation is hard to measure and an IPO is unlikely to be materially accretive to value. While the company will be a more investable business after this IPO, the broker believes the starting point share price is wrong.
With the intention of fast tracking the de-gearing of its balance sheet, the company is preparing to spin off its conventional upstream oil & gas assets via an IPO.
Morgans values the combined assets at $1.5-1.7bn, Although recognises that the debt load, corporate costs and offtake contracts will have an impact.
Ord Minnett says that the spin out of its conventional petroleum business partially addresses its immediate concerns regarding the balance sheet. While the sale proceeds could net as much as $3bn, the downside, the broker envisages, is that it removes the natural hedge for the gas retailing business. It also remains to be seen what contractual or other arrangements the company can make.
Oroton (ORL) Downgraded to Sell from Neutral by Citi B/H/S: 0/0/1
Citi has downgraded to Sell from Neutral, while reducing forecasts and pulling back the price target to $2.05 from $2.40. Clearly, Oroton’s trading update did not meet expectations.
Citi analysts observe the majority of weakness in sales was driven by the core handbag category and the exit of categories such as apparel, footwear and lingerie. Factory stores are under pressure from international competitors, they add.
Platinum Asset Management (PTM) Downgraded to Sell from Hold by Ord Minnett B/H/S: 0/1/3
Ord Minnett has double-downgraded Platinum Asset Management to Sell from Hold. Apart from recent net funds outflows, the analysts are referring to increased competition for retail funds from the likes of Hyperion, Magellan ((MFG)) and ex-Platinum PM run, Antipodes.
As a result, Ord Minnett thinks the outlook remains challenging. The analysts have reduced estimates. The 10% buyback should provide some downward protection, the analysts acknowledge, but at what share price level exactly?
Western Areas (WSA) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/1/4
Nickel prices have risen strongly on the back supply restrictions. Nickel in stainless steel had also been stronger than expected. Credit Suisse maintains its price forecasts at US$5/lb in the first half of 2017 and at US$5.50/lb in the second half, increasing to US$6/lb in 2018.
The broker notes Western Areas has now completed a favourable offtake tender process which will result in a greater return from nickel produced in concentrate versus the contracts that are due to expire in January 31 2017.
As the shares have rallied 60% since the beginning of the year the stock has become less attractive and the broker downgrades to Neutral from Outperform.
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