In the good books

A2 Milk Company (A2M) Upgraded to Neutral from Sell by Citi B/H/S: 2/2/0

Policy changes in China have caused Citi to upgrade its recommendation to Neutral from Sell. The new policy reduces the risk that the company will be exposed to a risky transition period.

Cross-border e-commerce B2C imports can now be treated as personal goods instead of merchandise from January 1, 2018. As a result, infant formula will no longer require the CFDA registration that was previously the case.

In order for Citi to turn more positive, confidence is required in the margin outlook as the company moves to a direct and sustainable model. Target is raised to $2.60 from $2.05.

Fletcher Building (FBU) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 5/0/1

The company has lowered FY17 EBIT guidance to NZ$610-650m from NZ$720-760m following a detailed review of its uncompleted contracts in construction.

Credit Suisse, while finding the downgrade unwelcome, is sufficiently comforted by the detail shared during the conference call that corrective actions are in place to ensure that losses of this magnitude are not repeated.

Premier Investments (PMV) Upgraded to Outperform from Neutral by Credit Suisse and to Buy from Hold by Deutsche Bank B/H/S: 4/2/1

First-half results continue to support the expansion of Smiggle, Credit Suisse observes. Smiggle and Peter Alexander account for 55% of forecast retail EBIT in FY17.

The poor performance of the mature clothing brands did not come as a surprise to the broker. Target is upgraded to $15.38 from $14.50 largely because of the Smiggle expansion.

The recent share price weakness means the broker upgrades to Outperform from Neutral.

Premier’s earnings result was in line with Deutsche Bank and guidance. The highlight of the result is Smiggle’s emergence as now Premier’s largest brand, overtaking Just Jeans. Throw in Peter Alexander and these two high margin brands account for some 40% of sales.

Smiggle’s store rollout in the UK has now progressed to a point of scale and firmly establishes the brand’s global credentials, Deutsche suggests. A later Easter and school holiday period locally suggests an even better second half.

Upgrade to Buy. Target rises to $15.00 from $14.25.

Praemium (PPS) Upgraded to Add from Hold by Morgans B/H/S: 1/0/0

Morgans upgrades forecasts and valuation after reviewing assumptions about the potential growth rate for the UK business.

The recent GBP11bn takeover of Aberdeen Asset Management by Standard Life has highlighted the potential strategic value of modern UK platform operators such as Praemium.

The broker has stepped up growth rate assumptions for funds on platforms on the number of self-invested personal pensions that can be added over the next five years. The company is seen offering exposure to the growth in retirement savings accounts in both Australia and the UK.

Ramsay Health Care (RHC) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 3/4/0

The analysts have taken another detailed look into what makes the inner-growth engine tick at Ramsay Health Care, as well as what goes on under the bonnet at peer Healthscope.

The end result is another confirmation that Ramsay, simply put, is the better performer, and is likely to continue doing exactly that. Ramsay’s group estimates have received a minor cut due to international headwinds.

Tariff reductions in the UK and France as well as a stronger AUD/GBP, present headwinds for FY18 earnings growth, acknowledge the analysts, but underneath it all is above industry growth in Australia. Upgrade to Outperform from Neutral. Target falls to $74.50 from $75.

Spotless (SPO) Upgraded to Hold from Lighten by Ord Minnett B/H/S: 0/2/2

Following the launch of a takeover offer from Downer EDI (DOW), the stock price closed 6% short of the $1.15 offer price. Although Ord Minnett accepts there is potential for higher bids, the current transaction is expected to have a good chance of proceeding.

Downer shareholders do not have the ability to block the deal and financing appears secure. The main threat is Spotless downgrading its $80-90m net profit guidance, the preservation of this being a condition of the deal.

Ord Minnett upgrades to Hold from Lighten and raises the target to $1.05 from $0.71.

See downgrade below.

In the not-so-good books

Ausnet Services (AST) Downgraded to Sell from Neutral by Citi B/H/S: 2/4/1

Citi believes the stock is expensive relative to its peer Spark Infrastructure (SKI). The dividend yield  is 5.2% versus 6.5% and dividend growth is limited.

The broker downgrades to Sell from Neutral given the recent share price performance. Target is $1.44.

Downer EDI (DOW) Downgraded to Neutral from Outperform by Macquarie B/H/S: 0/4/1

The company has made an opportunistic bid for Spotless (SPO) and now owns 19.99%. The all-cash offer is for 100% at $1.15 a share. This is conditional on a 90% minimum acceptance and no reduction to FY17 earnings guidance.

Macquarie believes the play is an opportunity to diversify, as the company has previously signalled, but the deal size is larger than expected.

The acquisition is consistent with a services strategy but the broker believes this needs to be balanced against the company’s higher post-deal gearing and execution risk regarding turning Spotless around.

Macquarie downgrades to Neutral from Outperform and reduces the target to $7.10 from $7.60.

Nufarm (NUF) Downgraded to Hold from Add by Morgans B/H/S: 3/3/1

The first half result was materially stronger than Morgans expected. This reflected strong results in North America, Europe and Asia. Seed technologies also witnessed a material improvement.

The broker was pleased that, for the first time in a while, the company reported no material one-off items and believes the company is on track to deliver solid earnings growth in FY17.

After strong share price appreciation, Morgans downgrades to Hold from Add. The broker will revisit its view on any material weakness in the stock, believing that accretive M&A is the next catalyst. Target is raised to $10.15 from $9.65.

REA Group (REA) Downgraded to Neutral from Buy by UBS B/H/S: 5/2/0

The company has launched a new product, “Front Page”. Financial analysis of the new product is difficult, UBS asserts, given limited disclosures. Nevertheless, pending future disclosures, the broker suspects actual upside could be much larger.

New product upside, headline price increases and continued depth penetration provide the broker with confidence that the company should at least meet FY18 consensus forecasts, which is for EBITDA growth of around 18%.

UBS downgrades to Neutral from Buy as the stock is trading in line with its revised target. Target rises to $58 from $56.

Spotless (SPO) Downgraded to Underperform from Neutral by Macquarie B/H/S: 0/2/2

Downer EDI (DOW) now owns 19.99% of the company, acquiring the latest shares at $1.15 each. An all-cash offer is made to acquire the rest of the company at $1.15 per share. This is conditional on a 90% minimum acceptance and no reduction in the company’s $80-90m earnings guidance.

Macquarie envisages revenue remaining under pressure in the second half, with FY18 to experience the benefits of business development investment.

After the share price rally, the broker downgrades to Underperform from Neutral and recommends that investors sell into a bid that is subject to conditions and with relatively low risk of another bidder emerging. Target is raised to $1.10 from $0.84.

See upgrade above.

TPG Telecom (TPM) Downgraded to Underperform from Neutral by Credit Suisse and to Lighten from Hold by Ord Minnett B/H/S: 3/2/3

The first half result was ahead of forecasts. Credit Suisse retains estimates for FY17 EBITDA at the upper end of the reiterated $820-830m guidance range.

The broker does not believe the stock is expensive but the risk around its mobile ambitions is significant. Credit Suisse believes the cost of entering the mobile market will be extremely high and visibility on returns is limited.

Rating is downgraded to Underperform from Neutral. Target is reduced to $6.20 from $6.80.

Ord Minnett found the first half results mixed and believes the FTTB opportunity is now at risk, while broadband margin should begin a decline from this point onwards, as the iiNet-induced margin improvement has run its course.

The stock is envisaged trading at a significant premium to its peers on an enterprise value/EBITDA basis, as well as on a free cash flow multiple, as the company embarks on its Singapore mobile venture.

While expecting the company will meet FY17 guidance, the broker expects FY18-19 will be tough as the NBN migration accelerates. Rating is downgraded to Lighten from Hold. Target is reduced to $6.10 from $6.65.

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