In the good books
Ardent Leisure (AAD) Upgrade to Buy from Neutral by Citi B/H/S: 1/6/0
Ardent Leisure selling its Marinas operations is seen as yet another move to unlock value, with Citi analysts explaining the proceeds from the low returning asset will be reinvested in the high growth Main Events expansion in the USA.
On Citi’s calculation, Ardent Leisure will have circa $102m left over “net” from the sale, which could fund 10 new Main Event centres. The bottom line should also benefit from a weaker Australian dollar.
All in all, small reductions to estimates have been implemented. DPS forecasts have been cut too. Target price gains 10c to $2.65. Upgrade to Buy from Neutral.
Boral (BLD) Upgraded to Equal-weight from Underweight by Morgan Stanley B/H/S: 0/3/0
Uncertainty surrounding the Headwaters transaction is likely to continue for some time, but Morgan Stanley believes the current price fairly incorporates this.
Headwaters’ guidance appears achievable to the broker, as the US housing market continues to improve.
The valuation now appears more attractive, given the movement in the stock price after the capital raising, and the broker upgrades to Equal-weight from Underweight. Target is $5.58. Industry view is In-Line.
Caltex (CTX) Upgraded to Buy from Neutral by UBS B/H/S: 5/2/0
November sales and margins data reveal a run-rate that suggests the best year for Caltex in UBS’ recent memory. Operational performance at Lytton has been the key focus since Kurnell closed, and on a belief that outperformance can be sustained, the broker has lifted earnings forecasts.
Caltex’ share price has been weak for the past couple of months, on concerns that the sale of Woolworth’s ((WOW)) fuel business may mean the end of the Caltex contract. While this would clearly impact on earnings, UBS suggests the share price fall has already taken such a loss into account. Upgrade to Buy. Target rises to $34.50 from $33.90.
Corporate Travel Management (CTD) by Ord Minnett B/H/S: 3/1/0
Corporate Travel Management has acquired govt/corporate focused agency Redfern Travel in the UK. Given Redfern’s bookings are almost 100% online, significant technology and back office synergy is available, Ord Minnett suggests.
Corporate Travel is offering global scale, significant margin improvement potential, solid organic growth in most businesses and a forecast total shareholder return of around 12%, the broker calculates. Upgrade to Buy. Target rises to $18.54 from $16.38.
Dulux (DLX) by Ord Minnett B/H/S: 0/5/3
At its AGM, Dulux highlighted a strong performance in early FY17 and reiterated guidance of FY17 profit being higher than FY16. While Ord Minnett does not dispute guidance, the broker believes growth will be more subdued in FY17 as the macro tailwind of the housing boom begins to fade.
That said, Ords does believe Dulux can continue to make market share gains in paints and coatings thanks to its alignment with Bunnings ((WES)) and the expectation Bunnings will make its own market share gains. Given Dulux’ share price is now trading near to Ords’ target price of $5.90, the broker upgrades to Hold from Lighten.
Domino’s Pizza (DMP) Upgraded to Buy from Neutral by UBS B/H/S: 4/2/0
Domino’s has been caught in the high growth stock sell off, UBS notes, dropping 20% since August despite 5% consensus earnings upgrades. This has put the share price back into the attractive territory.
Domino’s is looking to expand takeaway in A&NZ from its pizza dominance, is starting to integrate its new A&NZ technology into Europe and there remains significant store count upside, UBS believes. The market is now under-pricing this growth potential and hence the broker upgrades to Buy. Target rises to 79.70 from $56.00.
Iluka Resources (ILU) Upgraded to Neutral from Underperform by Macquarie B/H/S: 3/3/1
The company has completed its merger with Sierra Rutile. The total transaction costs of $473m are fully funded from existing debt facilities.
This cements the company’s position as a dominant player in the global chloride titanium dioxide market. Yet, Macquarie notes it also skews the company’s resource base away from a predominantly sulphate route Chinese pigment market.
With the planned expenditure at the Sierra Leone operations and likely construction of the Cataby project in Western Australia in FY18, Macquarie expects gearing will peak at 31% in FY17/FY18. The broker also believes that, without a significant uplift in mineral sands prices, the company’s dividend could potentially be suspended during the construction of new projects.
Rating is upgraded to Neutral from Underperform. Target rises to $6.40 from $4.60.
Lovisa (LOV) Upgraded to Add from Hold by Morgans B/H/S: 2/1/0
Morgans found the first half trading update and guidance particularly strong. Like-for-like sales growth is around 10%, with a 77% gross margin. The broker notes the sales growth was entirely driven by price increases.
Morgans considers the trading update highlights just how the company can perform when product execution is strong.
Based on the quantum of upward revisions to earnings per share, the broker upgrades to Add from Hold. Target is raised to $4.26 from $3.43.
NextDC (NXT) Upgraded to Add from Hold by Morgans B/H/S: 6/0/0
The share price has fallen dramatically over the last six months and now looks compelling to Morgans. Thus, the broker upgrades to an Add rating. Target is reduced to $4.01 from $4.43.
The broker believes investors have the jitters, as new wholesale supply comes to the market.
The broker attributes a large portion of the share price fall to rising interest rates, which lowers valuations, and also to confusion over market dynamics. The former may be justified but the latter is misplaced, in the broker’s opinion, and that creates an opportunity.
Sirtex (SRX) Upgraded to Hold from Reduce by Morgans B/H/S: 3/0/0
The company has downgraded FY17 dose sales growth expectations. Issues such as competition, reimbursement, a short sales cycle, and the first admission that SIRFLOX survival data is needed to drive front-line use, have been cited as causing the weakness.
Morgans considers the timing of the update curious but believes the base business is viable and able to recover, although SIR-Spheres remains relegated to last resort treatment.
The broker considers the sell-off in the stock now better balances the risk/return profile and upgrades to Hold from Reduce. Target is lowered to $15.60 from $20.08.
Speedcast International (SDA) Upgraded to Buy from Neutral by UBS B/H/S: 3/1/0
UBS observes the market, at current prices, is attributing zero value to Harris CapRock synergies. The risk, therefore, is skewed to the upside.
The broker upgrades to Buy on valuation, despite concerns over exposure to the energy sector and the reliance on an overall energy sector rebound.
Gearing also looks aggressive to UBS and there is little earnings visibility, particularly given two operational downgrades in FY16. A $3.80 target is retained
Village Roadshow (VRL) Upgraded to Buy from Hold Deutsche Bank B/H/S: 2/2/0
The stock has underperformed the market materially over the last two months, in large part because of concerns about the impact of the Dreamworld incident on theme parks.
Deutsche Bank notes the impact is difficult to determine but retains a more relevant concern about the high level of gearing and weak cash flow at Village Roadshow.
The broker envisages a need to reduce debt through asset sales or an equity issue and believes the stock has meaningful latent asset value, which could deliver valuation upside through divestments.
Rating is upgraded to Buy from Hold. Target is reduced to $4.75 from $4.90.
In the not-so-good books
APN Outdoor (APO) by Credit Suisse B/H/S: 3/2/0
The company is proposing to merge with its main competitor, oOh!media (OML) in an all-scrip transaction.Credit Suisse believes APO shareholders will benefit from stronger accretion in earnings per share and are clear winners from a portfolio diversification point of view.
The broker has no complaint about the logic of the merger, as both companies have leading market positions in key outdoor verticals and are well-managed.
While the sector continues to enjoy tail winds, the broker suspects issues around the proposed merger will dominate sentiment in the near term and, therefore, downgrades to Neutral from Outperform. Target falls to $6.10 from $6.70.
See upgrade above.
Beach Energy (BPT) Downgraded to Sell from Neutral by Citi B/H/S: 1/3/2
Short to medium term, Citi remains of the view that oil prices are in an uptrend. Longer term, the analysts have come to the conclusion that the global cost curve has compressed. This implies the long-term incentive price for new supply is no longer at US$70/bbl but instead inside the US$55-65/bbl range.
Citi has reduced its long term price estimate to US$65/bbl from US$70/bbl. In general terms, the analysts note oil & gas stocks are no longer cheaply priced. For Beach Energy, the rating has been pulled back to Sell/High Risk from Neutral/High Risk. Target falls to $0.65 from $0.74.
Flight Centre (FLT) Downgraded to Underweight from Equal-weight by Morgan Stanley B/H/S: 1/4/2
Morgan Stanley suspects second half guidance is again too bullish. The broker’s data points to an acceleration in international flight price deflation. Analysis of historical seasonality trends also highlights a risk to FY17 profit guidance.
Morgan Stanley takes advantage of the recent share price strength to downgrade to Underweight from Equal-weight. Target is reduced to $25 from $30. Industry view is In-Line.
oOh!Media (OML) by Credit Suisse and to Accumulate from Buy by Ord Minnett B/H/S: 1/1/0
The company is proposing to merge with its main competitor, APN Outdoor (APO) in an all-scrip transaction. Credit Suisse has no complaint about the logic of the merger, as both companies have leading market positions in key outdoor verticals and are well managed.
While the sector continues to enjoy tail winds, the broker suspects issues around the proposed merger will dominate sentiment in the near term and, therefore, downgrades to Neutral from Outperform.
Credit Suisse believes the rally in the share price fully captures the accretion to OML shareholders, without factoring in the risks around the deal completing. Target falls to $5.15 from $6.00.
oOh!media and peer APN Outdoor (APO) plan to merge via a nil-premium scrip swap that would see oOh! shareholders receive 0.83 APN shares for one. Ord Minnett sees the deal as earnings accretive for both parties given the significant cost savings available.
Now it’s over to the ACCC, noting the combined entity would dominate the out-of-home ad market. Ords nevertheless suggests the ACCC will approve on the basis of the wider media market, with o-o-h merely one advertising option for clients among many.
On the rally the news sparked in the share price, the broker downgrades to Accumulate from Buy. Target unchanged at $5.25.
Origin (ORG) Downgraded to Sell from Neutral Citi B/H/S: 1/4/2
Citi has reduced its long-term price estimate to US$65/bbl from US$70/bbl. In general terms, the analysts note oil & gas stocks are no longer cheaply priced. For Origin Energy, the rating has been pulled back to Sell from Neutral. Target falls to $6.32 from $6.95.
Senex Energy (SXY) Downgraded to Neutral from Buy by Citi B/H/S: 3/3/0
Citi has reduced its long term price estimate to US$65/bbl from US$70/bbl. In general terms, the analysts note oil & gas stocks are no longer cheaply priced. For Senex Energy, the rating has been pulled back to Neutral/High Risk from Buy/High Risk. Target falls to $0.28 from $0.33.
Tatts Group (TTS) by Morgans B/H/S: 3/3/0
The company has received a proposal from Pacific Consortium at $3.40 cash and one share in “Wagering & Gaming Co”. The board has not yet formed a view on the proposal.
With the stock trading marginally below valuation and, given Morgans considers the likelihood of a higher bid emerging as low, the rating is downgraded to Hold from Add. Target is raised to $4.53 from $4.47.
Woodside Petroleum (WPL) Downgraded to Neutral from Buy by Citi B/H/S: 2/5/1
Citi has reduced its long term price estimate to US$65/bbl from US$70/bbl. In general terms, the analysts note oil & gas stocks are no longer cheaply priced. For Woodside, the rating has been pulled back to Neutral from Buy. Target falls to $30.53 from $33.48.
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