In the good books
Senex (SXY) Upgraded to Neutral from Sell by Citi B/H/S: 3/3/0
Last month, Citi downgraded to Sell because the share price was too high. Following a retreat, the analysts have decided it is time to upgrade to Neutral/High Risk.
Senex should be one of the main beneficiaries from a tight domestic gas market, over time, through its Western Surat Gas Project, predict the analysts. They also think it is too early to pay up for that prospect just yet. Target unchanged at 35c.
In the not-so-good books
Dulux (DLX) Downgraded to Sell from Neutral by UBS B/H/S: 0/4/4
There’s no doubting Dulux’ superiority and solid market share in paint, and as such the stock deserves a premium multiple, UBS suggests. But the non-paint business continues to show subdued prospects and a turnaround seems some way off.
A cooling in the housing market also suggests paint earnings may have seen a peak. On 7% outperformance against the index in the past month, UBS downgrades to Sell, retaining a $6.10 target.
Metcash (MTS) Downgraded to Lighten from Hold by Ord Minnett B/H/S: 3/1/3
Ord Minnett reviews its investment thesis and downgrades to Lighten from Hold. The broker does not believe the stock price adequately reflects the risks associated with the food and grocery division.
The broker acknowledges the benefits from cost savings and the upside from the hardware division, as well as a strongly performing liquor business.
Earnings per share forecasts are modestly raised and the target lifted to $2.10 from $2.00. Nevertheless, the broker believes the risk-reward equation is not attractive post the recent share price performance.
Suncorp (SUN) Downgraded to Neutral from Outperform by Macquarie B/H/S: 4/3/1
Macquarie assesses that premium rate increases across the insurance market are being led by claims cost inflation. As insurers get costs under control price rises should again moderate across of market, in the broker’s view.
The broker downgrades expectations for Suncorp’s gross written premium growth based on its analysis. Rating is downgraded to Neutral from Outperform. Target is reduced to $13.60 from $14.33.
Tox Free Solutions (TOX) Downgraded to Neutral from Outperform by Macquarie and to Equal-weight from Overweight by Morgan Stanley B/H/S: 0/4/0
The company’s waste services contract with Chevron will cease by the end of FY17. Macquarie notes this was the largest contract during the peak of construction. The company retains its contract with the balance of Chevron operations.
The loss of this particular part of the contract will affect FY18 EBITDA by -$1-2m. The broker downgrades to Neutral from Outperform, requiring earnings estimates to stabilise to put a floor under the share price. Target is raised to $2.45 from $2.42.
The loss of a Chevron contract suggests to Morgan Stanley margin pressure in the resources market continues. The broker envisages the trough in earnings per share will be pushed out to FY18 and, although earnings quality is improving, the valuation now appears full.
That said, the broker notes the company’s resources exposure continues to reduce and the initial performance of Daniels appears on track. Morgan Stanley downgrades to Equal-weight from Overweight and reduces the target to $2.25 from $2.75. Industry view: In-line.
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