In the good books

Adelaide Brighton (ABC) Upgraded to Hold from Lighten by Ord Minnett B/H/S: 1/4/1

The company’s share price has underperformed the market since it reached its all-time high back on August 1, 2016.

Ord Minnett believes the correction has been driven by a recognition of the difficulty in achieving realised cement price increases amid tepid underlying demand.

Both these dynamics are expected to improve in 2017. The broker upgrades to Hold from Lighten and raises the target to $4.90 from $4.60.

BT Investment Management (BTT) Upgraded to Neutral from Underperform by Credit Suisse B/H/S: 2/4/0

Credit Suisse suspects the departure of Gavin Rochussen will weigh on BT’s capacity to maintain fund inflows at the same level of recent years. Target falls to $10.00 from $10.50 as a result. The broker remains cautious given fund flow and equity market volatility.

However, BT’s share price has fallen around -15% since December to a point at which Credit Suisse sees valuation support. BT consistently delivers superior funds flows to peers and is successfully executing on its global expansion, the broker notes. Upgrade to Neutral.

Charter Hall Group (CHC) Upgraded to Buy from Neutral by Citi B/H/S: 3/1/2

In a general update on the sector, Citi analysts observe investors are very much focused on global bond yields in order to recalibrate their strategies with regards to AREITs, but history shows, point out the analysts, cap rates are a more important factor to keep an eye on.

The cap rate is the ratio of Net Operating Income (NOI) to property asset value. Citi analysts suggest investors should watch for potential trend changes.

Charter Hall has been upgraded to Buy from Neutral. Price target gains 5c to $5.59. Estimates have been lifted ever so slightly.

CSR (CSR) Downgraded to Lighten from Hold by Ord Minnett B/H/S: 1/2/3

Transport restrictions in China have led to tight supply for aluminium in recent months. As this unwinds in the first quarter of 2017, Ord Minnett expects the underlying commodity price to retrace.

In addition, a shift in the global supply/demand balance to an oversupplied position presents another risk. The broker downgrades to Lighten from Hold and raises the target to $3.80 from $3.75.

GBST (GBT) Downgraded to Neutral from Buy by UBS B/H/S: 2/1/0

GBST has issued a profit warning ahead of its result, cutting FY17 earnings guidance to 33% below UBS’ prior forecast. Project delays, deferred spending on major projects in the UK, and the weak GBP are all to blame.

While the risks are not new, the broker is concerned about the size of the downgrade. Improvement in FY18 is dependent on a recovery in services work and/or new contract wins. Elevated R&D costs will remain a significant drag over FY17, the broker notes.

UBS has cut earnings forecasts and lowered its target to $3.40 from $4.35. Downgrade to Neutral.

Navitas (NVT) Upgraded to Neutral from Underperform by Credit Suisse, to Outperform from Neutral by Macquarie and to Buy from Neutral by UBS B/H/S: 2/3/0

Campus closures and currency headwinds meant Navitas’ result was a messy one, but in line with Credit Suisse at the headline. The broker expects a return to growth in the second half that will finally put the Macquarie Uni contract loss in the past.

Taking a conservative view, Credit Suisse has nevertheless lowered earnings forecasts and its target to $4.40 from $4.95. On recent share price weakness, the broker upgrades to Neutral.

Macquarie expects sustained earnings growth, with the risks for contract losses and regulation reduced. The broker transfers coverage to a new analyst.

The stock is upgraded to Outperform from Neutral, reflecting these expectations. The broker considers contract losses, which have been a significant concern for prospective investors, are significantly reduced following a successful run of renewals. Target is $5.25.

With the transition period from the loss of the Macquarie University contract largely completed, and the recent addition of another US college locked in, UBS believes the market can now focus on potential earnings growth and other attractive attributes.

UBS upgrades to Buy from Neutral. Target is reduced to $5.18 from $5.65. The company continues to expect FY17 EBITDA to be broadly in line with the prior year on a constant currency basis.

Newcrest Mining (NCM) Upgraded to Equal-weight from Underweight by Morgan Stanley B/H/S: 2/2/4

December quarter gold production met Morgan Stanley’s estimates. The broker considers the metrics are fair and the free cash flow supportive and that the stock can be a defensive exposure in periods of volatility.

The broker believes the operational issues are dissipating, while margins and scale are robust. Morgan Stanley upgrades to Equal-weight from Underweight. Target is raised to $22.00 from $21.75. Industry view: Attractive.

See downgrade below.

Northern Star (NST) Upgraded to Overweight from Equal-weight by Morgan Stanley B/H/S: 2/2/0

Morgan Stanley is adding the stock to its preferred list of miners. After applying updated commodity prices and operational data, Morgan Stanley’s FY17 estimate for earnings per share is down -27%. Nevertheless, FY18 and FY19 are changed  to be up 3% and down -8% respectively.

The broker notes the company is carrying a sizeable cash buffer and no bank debt. The FY17 dividend and yield are projected at 9.1c and 2.3% respectively, based on 25% pay-out of free cash flow per share.

Morgan Stanley upgrades to Overweight from Equal-weight. Target is $5.30. Industry view: Attractive.

Oil Search (OSH) Upgraded to Neutral from Sell by Citi B/H/S: 4/3/1

Citi analysts are of the view that exploration success at Muruk & Antelope changes the outlook for PNG expansion which has now become more feasible.

As such these latest results support 3 Train expansion including potential for reserve increases.

Target price lifts to $7.03 from $6.48. Upgrade to Neutral from Sell.

Qube Holdings (QUB) Upgraded to Add from Hold by Morgans B/H/S: 4/3/1

The Moorebank development project has reached financial closure which is significant event, Morgans suggests, triggering long term earnings growth potential for Qube. The broker believes revenue contracts have been awaiting final closure.

Morgans has upgraded earnings forecasts, also adjusting for the Patrick and ATT acquisitions and capital raising. Target rises to $2.63 from $2.53. On a potential total shareholder reward of 15%, the broker upgrades to Add.

Scentre Group (SCG) Upgraded to Neutral from Sell by Citi B/H/S: 3/2/1

In a general update on the sector, Citi analysts observe investors are very much focused on global bond yields in order to recalibrate their strategies with regards to AREITs, but history shows, point out the analysts, cap rates are a more important factor to keep an eye on.

The cap rate is the ratio of Net Operating Income (NOI) to property asset value. Citi analysts suggest investors should watch for potential trend changes.

Scentre Group has been upgraded to Neutral from Sell. Price target moves to $4.35 from $4.28.

Sydney Airport (SYD) Upgraded to Add from Hold by Morgans B/H/S: 4/2/1

Two factors underpin Morgans’ decision to upgrade to Add from Hold. First comes the share price slump. Then follows the assumption Sydney Airport will not participate in the development of a second airport at Badgerys Creek, at least not under the conditions proposed.

Morgans acknowledges the long term uncertainty about precise impact from a second airport in Sydney, but for now, growth and yield seem too attractive to ignore. Target remains unchanged at $7.04.

Transurban (TCL) Upgraded to Add from Hold by Morgans B/H/S: 5/2/0

The rise in government bond rates has weighed heavily on Transurban’s share price. Morgans has cut its target on more conservative assumptions, but the new target of $11.23, down from $12.00, suggests 10% upside from the current price.

Transurban’s underlying business remains robust, Morgans suggests, and forecast dividend growth remains strong. On a current total shareholder return forecast of 15%, the broker upgrades to Add.

Woolworths (WOW) Upgraded to Buy from Sell by UBS B/H/S: 3/2/2

It appears UBS has upgraded to Buy from Sell, raising the price target to $27.30 from $19.10.

In the not-so-good books

Ansell (ANN) Downgraded to Hold from Buy by Ord Minnett B/H/S: 0/6/1

The broker observes the company is leveraged to a potential uplift in economic conditions but believes this is now largely reflected in the share price, especially given the near doubling of latex costs.

Despite the benefit from the Nitritex acquisition, the broker is wary, noting Ansell could face challenges from US tax reform given its Asian-based manufacturing.

Rating is downgraded to Hold from Buy. Target is $25.

Carsales.com (CAR) Downgraded to Hold from Add by Morgans B/H/S: 5/3/0

The company has expanded its Latin American footprint with the purchase of the Demotores online classifieds businesses in Argentina, Colombia and Chile. While the deal a small, Morgans notes it reveals a broader continental strategy is emerging.

Separately, the broker adjusts earnings forecasts to include price rises implemented this month and higher advertising costs as the company responds to the arrival of Cox Enterprises as a competitor.

The broker believes the home competitive environment is about to get a lot tougher and, while retaining a positive long-term view on the stock, winds back its rating to Hold from Add. Target is reduced to $11.07 from $12.03.

Cleanaway Waste Management (CWY) Downgraded to Hold from Add by Morgans B/H/S: 3/2/0

Morgans adjusts first half forecasts to show 1% revenue growth and a -1% decline in costs, to deliver 7% growth in EBITDA.

The target lifts to $1.19 from $1.13, to reflect the changes, largely because of the broker’s oil price outlook.

Morgans downgrades to Hold from Add as, at current prices, the potential shareholder return is around 5%.

Iluka (ILU) Downgraded to Lighten from Hold by Ord Minnett B/H/S: 3/2/2

Ord Minnett observes feedstock price rises are taking longer than previously anticipated and the latest 2017 guidance highlights a slow start in Sierra Leone.

The stock screens relatively expensive compared with its peers at a 2017 enterprise value/operating earnings multiple. Ord Minnett cuts its rating to Lighten from Hold. Target is raised to $6.60 from $6.50.

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

The stock is up 20% against the Australian market since it reported FY16 results.

UBS believes this reflects stronger nitrogen fertiliser prices, positive sentiment around the US election and the potential impact on infrastructure-led explosives demand and the ongoing ramp up of the Louisiana project.

While the broker believes there is further upside to fertiliser prices, a large degree of success is now incorporated in the valuation and the rating is downgraded to Neutral from Buy. Target rises to $3.80 from $3.40.

Independence Group (IGO) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 0/5/1

December quarter production delivered in line with, or better than, guidance. Credit Suisse reduces FY17 revenue estimates by -3% and underlying EBITDA by -10%.

The broker assumes a modestly slower ramp up for Nova, given mine development rates in the December quarter fell short of internal targets.

With a potential relaxation of the ban on Indonesian nickel ore exports, the broker reduces the target to $4.00 from $4.50 and downgrades to Neutral from Outperform.

Newcrest Mining (NCM) Downgraded to Neutral from Outperform by Macquarie B/H/S: 2/2/4

Newcrest’s Dec Q production and sales were largely in line with Macquarie’s forecasts. FY17 production guidance has been maintained for all projects. Modest earnings upgrades follow on a solid performance. Target rises to $23 from $20.

But the stock has had a solid run since December, outperforming the market and both local and global gold mining peers, the broker notes. With little upside apparent from the target, Macquarie downgrades to Neutral.

See upgrade above.

Orocobre (ORE) Downgraded to Neutral from Outperform by Macquarie B/H/S: 2/2/0

Pricing in the December quarter was lower than Macquarie expected, and cash flow was negative. Production was at the bottom of the guidance range.

While the miss on pricing and sales was disappointing, it is the broader impact on funding and cash flow that drives the broker to downgrade to Neutral from Outperform. The target is reduced to $4.35 from $4.60.

Oz Minerals (OZL) Downgraded to Reduce from Hold by Morgans B/H/S: 2/3/3

Morgans has updated its OZ valuation, applying increased copper price assumptions, pricing operational improvements at Prominent Hill and reducing the risk-weighting for Carrapateena. The result is a target price increase to $7.30 from $5.95.

This remains well shy of the current trading price. The broker believes the market has re-rated OZ by some 50% on global growth exuberance and a lack of other large, high margin copper exposures on the market. Downgrade to Reduce. The broker prefers Sandfire Resources (SFR) in the copper space.

Perseus (PRU) Downgraded to Sell from Neutral by Citi B/H/S: 2/2/1

As the disappointing news flow continues at Perseus, with the second production downgrade in two weeks, Citi analysts have downgraded to Sell/High Risk from Neutral/High Risk.

The analysts estimate another $30m external funding will be needed to complete the new mine at Sissingue for first production in Q1 2018. Target falls to 37c from 42c.

Sonic Healthcare (SHL) Downgraded to Hold from Accumulate by Ord Minnett B/H/S: 2/4/1

Ord Minnett finds the announcement of yet another acquisition in Germany “encouraging”, but otherwise is worried about weak demand in Australia and the USA. On this basis, the recommendation is being pulled back to Hold from Accumulate.

In addition, the analysts point at the lack of progress on the hoped-for reform of collections centres in Australia and pending funding cuts in the USA. Incorporating new FX forecasts has triggered mild reductions to estimates. Price target falls to $23 from $24.30. The analysts see little room for upside surprise.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.