In the good books
Boral (BLD) Upgraded to Accumulate from Hold by Ord Minnett B/H/S: 2/1/0
Ord Minnett perceives a broad view that approvals and commencements activity has peaked. Nevertheless, with a full pipeline of work, the eventual impact on building products and heavy construction materials demand may not be seen until the end of the year, particularly in the eastern states.
The broker expects Boral to be a key beneficiary of the market dynamics, in addition to continued growth in the US residential sector. Hence, rating is upgraded to Accumulate from Hold. Target is $6.50.
Capitol Health (CAJ) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 1/0/0
The company has proposed a $40m equity raising, effectively removing gearing concerns. Credit Suisse observes, under a new team, cost savings and radiologist re-engagement seem to be the priority and the valuation is undemanding.
Against a backdrop of improving market dynamics, the broker suspects an equity re-rating is garnering momentum. Credit Suisse upgrades to Outperform from Neutral. Target is raised to $0.21 from $0.15.
Fortescue Metals Group (FMG) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 3/4/1
Credit Suisse expects the current level of iron ore prices to contract late this year but still considers the company’s valuation and prospective 12-month dividend warrants an Outperform rating, upgrading from Neutral. Target is $7.35.
Chinese steel consumption has surprise to the upside, as have Chinese steel prices. The broker does not expect steel prices to give way just yet and believes these can support an iron ore price above US$90/t throughout the first half of the year.
A slowing in infrastructure projects may cut steel demand by -1-2%, which does not suggest a price collapse for either steel or iron ore to the broker, but does indicate 2018 will be weaker than 2017, says Credit Suisse.
Independence Group (IGO) Upgraded to Overweight from Equal-weight by Morgan Stanley B/H/S: 2/3/1
The company has outperformed Western Areas (WSA) over the past year, Morgan Stanley observes, and it scores better on various financial metrics. On a relative basis, Independence Group is favoured as the Nova project adds both mine life and higher production.
The broker also expects catalysts for Independence Group are more likely to occur at current commodity prices. Rating is upgraded to Overweight from Equal-weight. Target is raised to $4.50 from $3.70. Attractive sector view retained.
Nine Entertainment (NEC) Upgraded to Outperform from Neutral by Macquarie B/H/S: 2/2/1
Macquarie believes improved early-season ratings set a good platform for monetisation, offsetting headwinds in the industry.
The broker expects underlying cash conversion will be weak over the next few years but this is offset by other working capital adjustments and the sale of Willoughby.
A high percentage of earnings is still expected to be distributed to shareholders via dividends. Rating is upgraded to Outperform from Neutral. Target rises to $1.25 from $1.10.
Sandfire (SFR) Upgraded to Buy from Hold by Ord Minnett B/H/S: 5/2/1
Ord Minnett’s commodities team has raised its near-term base metal prices on the back of positive sentiment, supply disruptions and strong growth in demand.
The most meaningful changes are increases of 15% and 26% for copper prices in 2017 and 2018 respectively, as well as increases in aluminium pricing of 21% and 15% for the same respective periods.
The broker raises its rating for Sandfire Resources to Speculative Buy from Hold and the target to $7.30 from $6.80.
Western Areas (WSA) Upgraded to Hold from Lighten by Ord Minnett B/H/S: 0/5/2
Ord Minnett’s commodities team has raised its near-term base metal prices on the back of positive sentiment, supply disruptions and strong growth in demand.
The most meaningful changes are increases of 15% and 26% for copper prices in 2017 and 2018 respectively, as well as increases in aluminium pricing of 21% and 15% for the same respective periods.
The broker raises the target to Hold from Lighten. Target is $2.40.
See downgrade below.
In the not-so-good books
Austock (ACK) Downgraded to Hold from Add by Morgans B/H/S: 0/1/0
First half underlying net profit was up 7%. The main positive was the growth in life funds under management, Morgans observes.
The negatives were slowing sales growth and higher near-term costs. The broker downgrades to Hold from Add on valuation grounds, and because of some uncertainty regarding the board structure going forward.
Overall, the broker believes future growth prospects for the investment bond market are solid. The tax effective nature of the company’s products is relevant to high income earners and for estate planning. Target is reduced to $0.53 from $0.55.
AP Eagers (APE) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 0/4/0
Credit Suisse observes growth stocks tend to require constant high growth to maintain their multiple. Growth is still expected for AP Eagers, but at a slower pace than previously forecast.
The broker retains a belief that Carzoos is an excellent strategy and consolidation a long-term theme, which should benefit the company. Nevertheless, the automotive industry faces some challenges, including the slowing of new car sales and a likely end to flex commissions.
The broker does not envisage a short-term catalyst for a re-rating and downgrades to Neutral from Outperform. Target is reduced to $9.90 from $13.15.
Navitas (NVT) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 2/2/1
The company has sustained another contract loss, announcing its Adult English Migrant Program for the Department of Education & Training will not be renewed in most regions upon expiry. This will result in a permanent reduction in EBITDA of $12-14m from FY18.
Credit Suisse was surprised at the news as, although the tendering process had been flagged at the first half result, no changes were expected to be material at a group level. Growth expectations had been raised, with the rolling off of the loss of the university program contract with Macquarie University.
A return to growth now appears unlikely in FY18. Credit Suisse downgrades to Underperform from Neutral. Target is reduced to $4.00 from $4.40.
Westfield Corporation (WFD) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 3/2/1
Credit Suisse notes its recent history with the stock has been characterised by frequent disappointments as asset disposals, invasive developments, intensive retailer re-mixing and technology spending have all conspired to dampen earnings growth.
The stock may be cheap but the broker expects it to stay that way, and further asset disposals are likely to drive another year of soft growth. The broker also has concerns that the company’s small stake in Hammerson will ultimately lead to dilutive – in the case of earnings – M&A activity.
Rating is downgraded to Neutral from Outperform. Target is reduced to $9.25 from $10.25.
Western Areas (WSA) Downgraded to Underweight from Overweight by Morgan Stanley B/H/S: 0/5/2
Independence Group (IGO) scores better on various financial metrics and Morgan Stanley expects there are more catalysts for that stock.
At current prices, Independence Group’s Nova project adds both mine life and production that are higher than Western Areas’ current producing assets.
Rating is downgraded to Underweight from Overweight. Attractive sector view retained. Target is reduced to $2.15 from $2.90.
See upgrade above.
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