In the good books

Altium (ALU) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 2/1/0

First half results were ahead of expectations and the company has reiterated its target for long-term revenue of US$200m by FY20. Credit Suisse believes targets are within reach.

The broker acknowledges the stock is not cheap but believes this should be viewed in the context of over 20% growth in earnings per share, and multiple avenues for further incremental growth. Rating is upgraded to Outperform from Neutral. Target is raised to $9.50 from $9.00.

Beach Energy (BPT) Upgraded to Neutral from Sell by Citi B/H/S: 1/3/2

Citi analysts have upgraded to Neutral/High Risk, inspired by a significant fall in the share price. Price target price gained 9% to $0.80.

The released interim performance proved better-than-expected. The analysts point at the non-recurring tax benefit, as well as the fact management kept FY17 guidance unchanged.

Citi analysts suggest it remains an open question whether management can add shareholder value through M&A, as is its current focus.

Bluescope Steel (BSL) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 5/2/0

BlueScope’s profit was in line with Credit Suisse and the broker notes second half guidance is based on more conservative parameters than current prices suggest. The company has announced 30-50% of free cash flow will be used for a buyback and to maintain steady dividends.

Credit Suisse has increased forecasts to above guidance using the broker’s own price assumptions. Target rises to $13.30 from $10.70. Upgrade to Outperform.

See downgrade below

DUET Group (DUE) Upgraded to Buy from Neutral by Citi B/H/S: 1/5/0

First half proportionate earnings were -11% below Citi’s estimates because of weaker realised pricing and volumes in Energy Developments (EDL).

Citi upgrades to Buy from Neutral, noting CKI would have known of the weak EDL results in the first half before launching its bid. Therefore, the broker does not envisage a weak EDL result is likely to change the suitor’s view. Target is $3.

G8 Education (GEM) Upgraded to Buy from Accumulate by Ord Minnett B/H/S: 3/1/0

2016 EBIT was up 11% and in line with expectations. The main news is the $212m investment from China First Capital. Ord Minnett considers this a positive as it provides financial flexibility to pursue growth options.

Forecasts, while upgraded, sit below management’s FY19 target for earnings per share of 40c (Ords: 31.2c). Rating is upgraded to Buy from Accumulate. Target is raised to $4.11 from $3.78.

Insurance Australia Group (IAG) Upgraded to Neutral from Underperform by Credit Suisse B/H/S: 0/7/1

First half net profit was ahead of forecasts. Credit Suisse upgrades to Neutral from Underperform following the underperformance of the share price and an expectation that reserve releases will continue in the near term.

The broker suspects original FY17 guidance was too optimistic and the softer underlying margin in the first half is more in line with expectations.  The deterioration in the underlying margin is expected to slow or even turn around from the first half level. Target is raised to $6.05 from $5.75.

See downgrade below.

Mantra Group (MTR) Upgraded to Buy from Neutral by UBS B/H/S: 4/2/1

First half results were in line with the broker’s forecasts. Soft CBD was offset by resort strength and the Ala Moana acquisition. Management has confirmed FY17 guidance, in line with UBS expectations.

In FY18, the broker expects mid-single digit organic growth, together with new property acquisitions, to drive an 11% increase in EPS.

UBS upgrades the stock to Buy from Neutral and lowers the target price to $3.15 from $3.48.

McMillan Shakespeare (MMS) Upgraded to Buy from Neutral by Citi and toto Outperform from Neutral by Macqurarie B/H/S: 3/0/1

Upgrade to Buy as Citi analysts have become a lot more comfortable with the risks surrounding the QLD government contract, while momentum is seen building.

The analysts see clearly defined organic growth opportunities with Government clients while valuation is still at a considerable discount vis-a-vis other small industrials.

Despite small reductions in core profit estimates, target price jumps by 19% to $14.33 as the 15% risk discount (QLD contract) is removed.

First half results were just below the broker’s expectations. No FY17 guidance was forthcoming, other than management’s statement that early performance on the QLD contract was solid.

Macquarie has raised FY17 and FY18 earnings estimates by 0.2% and 0.6% respectively.

The broker has upgraded the stock to Outperform from Neutral and raised the target price to $13.20 from $13.17.

Rhipe (RHP) Upgraded to Add from Hold by Morgans B/H/S: 2/0/0

First half results were slightly below expectations. The broker suspects investors panicked because of a slowing in revenue growth and the perception the company was losing market share from increased competition.

The broker suspects that the company’s public cloud program is partly cannibalising the private cloud and overall growth remains intact. Rating is upgraded to Add from Hold. Target reduced to 63c from 86c.

WorleyParsons (WOR) Upgraded to Hold from Sell by Deutsche Bank B/H/S: 2/2/1

First half results were below the broker’s expectations. However, margins and earnings were better than Deutsche Bank had been expecting.

The broker has reduced its revenue forecasts, but increased margin assumptions, to reflect the expanded cost out program. The net impact has been a 10% to 18% EPS increase between FY17 and FY19,

The stock has been upgraded to Hold from Sell and the target price raised to $8.60 from $8.39.

In the not-so-good books

Aconex (ACX) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/3/1

First half results were soft, but expected following the previous month’s warning. Credit Suisse observes the company was roughly breaking even on an operating cash-flow basis.

The company has backed away from guidance for expanded margins. While the company has a good offering and a large addressable market, the broker expects concerns around growth and unproven unit economics will weigh.

Rating downgraded to Neutral from Outperform. Target is reduced to $3.50 from $3.75.

ASX (ASX) Downgraded to Underperform from Neutral by Credit Suisse and to Equal-weight from Overweight by Morgan Stanley B/H/S: 0/3/4

First half results were slightly better than the broker’s forecasts. The result was partially muted by 6% cost growth, but Credit Suisse notes above inflation costs are not much of a headwind.

ASX has previously flagged an impact from the transition of its investment portfolio, to meet new guidelines, leading to lower investment earnings in FY17, with the full impact from FY18. It appears this transition will predominantly show up in second half FY17.

The broker downgrades the stock to Underperform from Neutral and raised the target price to $49.00 from $48.00.

The stock lacks near-term catalysts and has closed the gap to global peers, so Morgan Stanley downgrades to Equal-weight from Overweight.

Despite this, the strength of the franchise was evident to the broker in the first half earnings. Target is $53. Industry view: In-Line.

Baby Bunting (BBN) Downgraded to Neutral from Outperform by Macquarie and to Hold from Add by Morgans B/H/S: 1/2/0

Baby Bunting’s first half results were below Macquarie’s estimates. Total sales increased in the period, driven by 8.2% LFL growth and ongoing store rollouts.

Full year guidance of $21.5m to $24.5m, representing 15% to 31% growth was reiterated. Macquarie has lowered FY17 and FY18 forecasts by -9%.

The broker downgrades to Neutral from Outperform and target drops to $2.60 from $3.20.

First half results were largely in line with Morgans. A wide guidance range for FY17 EBITDA of $21.5-24.5m has been reiterated but the broker suspects the top end is now more of a stretch, given softer gross margins.

Morgans downgrades to Hold from Add on valuation grounds. The broker still believes the company will continue to extend its power over competitors in coming years and that the store footprint can double. Target is reduced to $2.54 from $2.83.

Blackmores (BKL) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 1/2/0

First half underlying EBITDA missed expectations. While Credit Suisse believes the worst is behind the company the road ahead is not smooth.

March/June quarter revenue could be flat sequentially, with weaker seasonality in China, while cost savings continue to be re-invested in price.

The company appears to the broker to be behind competitors in building up its China presence. Rating is downgraded to Neutral from Outperform. Target is reduced to $110 from $125.

BlueScope Steel (BSL) Downgraded to Hold from Accumulate by Ord Minnett B/H/S: 5/2/0

First half results were largely pre-reported Ord Minnett observes, and the main issue is capital management and guidance. The company has announced a $150m buy-back and guided towards incrementally better volumes at both its Australian and US steel-making operations.

Ord Minnett suspects earnings are reaching a cyclical peak and, given the stock is also approaching valuation, downgrades to Hold from Accumulate. Target is raised to $13.00 from $12.50.

See upgrade above.

Brambles (BXB) Downgraded to Neutral from Buy by Citi, to Hold from Buy by Deutsche Bank, to Neutral from Outperform by Macquarie and to Hold from Add by Morgans B/H/S: 1/5/1

As it turned out, Brambles’ interim result was even weaker than what was suggested at the time of the sudden profit warning in January. Plus management has now abandoned medium-term financial targets.

At least the dividend was in line with expectations, Citi analysts observe. Disappointing is the term that sums it all up in Citi’s initial response. The analysts already had been taken by surprise in January.

Downgrade to Neutral from Buy. Target price falls to $10.15 from $12.33. It has become clear, suggest the analysts, competition in the US is having a much larger impact than previously anticipated.

Brambles’s first half results were in line with Deutsche’s forecasts. The company has removed its 2019 target of 20% ROCI and has indicated the current return levels of 16% strike the right balance between returns and growth.

The business in the Americas appears to be facing increased competition, and Deutsche Bank does not know if these issues are temporary or structural.

Deutsche Bank downgrades the stock to Hold from Buy and lowers the target price to $10.45 from $13.20.

First half results were in line with the profit warning in January. The company has guided to FY17 constant currency underlying profit to be in line with FY16.

The company has also withdrawn its FY19 returns target of 20%, as Macquarie suspected.

The broker now only expects modest 3% growth in FY18 and downgrades to Neutral from Outperform. Target is reduced to $10.25 from $12.65.

First half results were weaker than expected but the outlook for FY17 disappointed Morgans even more so.

While the broker believes the long-term fundamentals are sound, the results suggest that structural problems will take longer to be addressed than previously expected.

Morgans downgrades to Hold from Add. Target is reduced to $9.72 from $11.61.

Cabcharge (CAB) Downgraded to Neutral from Buy by UBS B/H/S: 0/2/0

UBS has downgraded Cabcharge to Neutral from Buy. Uber’s momentum in Australia is stronger than the broker expected, and whilst Cabcharge is fairing better than its peers, it is yet to really drive its technology strategy.

The company’s new driver terminal product could potentially win back share from traditional competitors and provide some upside. Price target is reduced to $3.95 from $4.00.

Godfrey’s (GFY) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 0/1/0

First half results disappointed Credit Suisse, although marginally ahead of subdued expectations. Until the company can demonstrate a sustainable return to positive like-for-like growth the broker does not envisage a material re-rating emerging.

While more favourable FX should benefit margins the broker remains cautious and downgrades to Neutral from Outperform. Target is reduced to 95c from $1.35.

GWA Group (GWA) Downgraded to Underperform from Neutral by Macquarie B/H/S: 0/3/3

GWA’s first half results were broadly in line with the broker expectations. No specific guidance was provided, but based on current market conditions, second half earnings are expected to match or slightly beat the first half.

Macquarie has raised FY17 forecast by 0.3% but lowered FY18 forecast by -4.8%.

The stock has been downgraded to Underperform from Neutral and the target price reduced to $2.60 from $2.72.

Insurance Australia Group (IAG) Downgrade to Underperform from Neutral by Macquarie B/H/S: 0/7/1

IAG’s first half results were better than Macquarie’s forecasts. FY17 outlook is for better premium growth, largely driven by claims inflation, offset by softer margins.

The broker has cut FY17 earnings forecasts by -0.9%, FY18 by -7.7% and FY19 by -3.3%.

See upgrade above.

iSenia (ISD) Downgraded to Hold from Buy by Deutsche Bank B/H/S: 1/2/0

First half results missed expectations. Margins declined to 25.4%, reflecting losses in King Content and higher publishing costs in the core business.

Deutsche Bank observes the core Australasian business has reached a limit in its ability to harvest returns through price increases. King Content disappointed the broker, reinforcing concerns around the quality of the business and execution.

Recent trends suggest to the broker that a turnaround will be difficult, increasing the likelihood of further disappointment. Rating is downgraded to Hold from Buy. Target is reduced to $2.10 from $2.90.

Medibank Private (MPL) Downgraded to Reduce from Hold by Morgans and to Hold from Accumulate by Ord Minnett B/H/S: 1/5/2

First half net profit beat expectations but mostly on the back of lower quality items, Morgans observes. Gross profit margin was a positive but the broker remains concerned about the decline in policy holder numbers.

The broker believes the stock is expensive, given the near- term headwinds. Rating is downgraded to Reduce from Hold. Target is reduced to $2.40 from $2.47.

The interim report was broadly in-line, say the analysts, but volume trends remain a challenge. Gross margin held up, but the analysts are concerned due to consumers increasingly opting for a lower, cheaper level of cover.

Given these concerns, Ord Minnett downgrades to Hold from Accumulate. Price target drops to $2.95 from $3.The analysts acknowledge the share price looks “undemanding”, but there are no short-term catalysts in sight.

Senex (SXY) Downgraded to Sell from Neutral by Citi B/H/S: 3/2/1

Citi analysts have decided to downgrade to Sell/High Risk with an increased price target of 35c (was 31c). The analysts make an effort to emphasise they do like the potential as well as company management, but the share price has simply run too hard too fast.

Given the industry’s track record, the analysts argue it is not wise to pay up for future potential too early in the process. Citi reduces FY17-19 Core NPAT estimates due to higher D&A plus higher interest costs.

WorleyParsons (WOR) Downgraded to Neutral from Outperform by Credit Suisse and to Underperform from Neutral by Macquarie B/H/S: 2/2/1

Worley’s FY16 result alleviated a lot of balance sheet concerns for investors, Credit Suisse notes. The company’s weak first half FY17 result has reignited those concerns. Most worrying for the broker is that “slow progress” on reducing days sales outstanding (DSO) on remaining receivables is actually no progress.

While there is considerable leverage in the business to growth in development & contracting, the broker needs to be more confident in Worley’s ability to reduce debt. Downgrade to Neutral. Target falls to $8.50 from $9.20.

First half results were below expectations. Revenue disappointed Macquarie although margins were better. The balance sheet is now back in focus as net debt increased to $1.015bn.

Macquarie reduces FY17 forecasts for earnings per share by 14%. Recovery is expected to be gradual and cost cutting momentum to slow, putting the pressure on the top line to deliver.

Rating is downgraded to Underperform from Neutral. Target falls to $8.28 from $9.00.

See upgrade above.

Village Roadshow (VRL) Downgraded to Hold from Buy by Deutsche Bank B/H/S: 1/3/0

Village Roadshow’s first half results were slightly below the broker’s expectations, with earnings weakness across the whole group. Management has highlighted that it is actively pursuing potential asset sales and undertaking a review of costs and capex reduction.

No formal FY17 guidance was forthcoming. Deutsche Bank’s lower margin assumptions see FY17 and FY18 earnings predictions for cinema and film distribution reduce by -3-9%.

The broker has downgraded the stock to Hold from Buy and the target price falls to $4.20 from $4.60.

Woolworths (WOW) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 3/1/3

First half earnings were broadly in line with forecasts. Credit Suisse increases forecast food EBIT on the back of improvements in key operating metrics and envisages trend total sales growth at 3-4% as realistic.

The balance sheet was helped by a significant slowing in property investment, payments for the divestment of home improvement assets and property disposals.

Credit Suisse downgrades to Underperform from Neutral. Competitive risks are not abating and the stock appears a little expensive to the broker. Target is raised to $24.50 from $24.30.

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