In the good books
ERM Power (EPW) Upgraded to Buy from Sell by Citi and to Neutral from Underperform by Macquarie B/H/S: 1/2/0
The company has guided towards stronger retail margins in Australia, well above Citi’s estimate, and the analysts are now taking the view that a positive news cycle may have begun for the company.
On this basis, the stock is being doubly upgraded to Buy/High Risk from Sell. High electricity prices plus state government support are likely to translate into improved earnings. Target price jumps to $1.46 from $1.05.
The company has revised its FY17 gross margin outlook to $3.50 per megawatt-hour from $3.00/MWh. FY18Â guidance has been provided at $3.50/MWh versus Macquarie’s expectations of $2.70/MWh.
The broker finds it challenging to predict the company’s retail business as earnings visibility is low and a function of the hedge book. Rating is upgraded to Neutral from Underperform on the back of the new guidance. Target is raised to $1.20 from $1.15.
IAG (IAG) Upgraded to Neutral from Underperform by Macquarie B/H/S: 0/8/0
The company has downgraded its FY17 reported insurance margin guidance to 10.5-12.5% from 12.5-14.5% as a result of $170m in additional natural peril claims cost assumptions.
The current reinsurance structure means the company will receive a benefit in the first half of FY18.
Macquarie upgrades  to Neutral from Underperform, allowing for the improved margin outlook in FY18, with a claims environment that allows the insurer to retain a larger portion of the $250m gross cost reductions over the next three years.
Target is raised to $5.95 from $5.75.
In the not-so-good books
Downer EDI (DOW) Downgraded to Underweight from Equal-weight by Morgan Stanley B/H/S: 0/3/2
Prior to the bid for Spotless (SPO) Morgan Stanley observes the company shares had re-rated materially. Investors interpreted an upgrade of FY17 guidance as a sign of improving operations. The broker believes this re-rating is premature.
Contract roll-offs are expected to challenge earnings through to FY20. In response, the broker suspects, the company is now looking to embark on an aggressive M&A growth drive.
Morgan Stanley expects investors will progressively consider the stock a less-compelling investment proposition. Rating is downgraded to Underweight from Equal-weight and the target is raised to $4.83 from $4.01. Industry view is Cautious.
Nufarm (NUF) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/4/1
Credit Suisse believes there is limited downside to owning the stock but reasonable upside, should Nufarm find a complimentary acquisition.
Without an acquisition, the broker believes investors can expect 10% compound EBIT growth over FY17-18, principally through cost savings. Longer term, the broker believes organic growth assumptions of 2-3% ex Australia are achievable.
Credit Suisse observes FMC has moved quickly to take a key acquisition target – the DuPont herbicide/insecticide business – which had been earmarked as a possibility for Nufarm.
There are still other potential acquisitions, albeit smaller, in crop protection and also with canola seeds, the broker notes. Rating is downgraded to Neutral from Outperform. Target is reduced to $10.10 from $10.60.
REA Group (REA) Downgraded to Hold from Add by Morgans B/H/S: 4/3/0
The share price has performed strongly in recent days and Morgans downgrades to Hold from Add. The shares now trade in line with the broker’s target of $60.73.
Morgans does not yet incorporate the impact on reported profits of the recent purchase of PropTiger in India. The broker suspects that business is likely to result in ongoing losses.
Most of the broker’s valuation stems from the Australian business, where the opportunity is expected to exist for several years for strong earnings growth.
Should the Asian and/or the US business deliver substantial earnings growth over time, then the current valuation would be too conservative. Nevertheless, the broker believes it is too early to make a call on this.
Wesfarmers (WES) Downgraded to Hold from Accumulate by Ord Minnett B/H/S: 1/5/2
Ord Minnett downgrades to Hold from Accumulate following a strong share price performance recently. The target is steady at $45.50.
The broker also modestly adjusts earnings estimates, reducing EBIT estimates for Coles following the decline in the first half. Estimates for Bunnings are also reduced because of a moderation in the trajectory of growth in the UK and Ireland.
Whitehaven Coal (WHC) Downgraded to Equal-weight from Overweight by Morgan Stanley B/H/S: 3/5/0
The stock has rallied 20% in three days after the disruption to coal supplies from the cyclone in Queensland. While remaining constructive on the company’s assets, Morgan Stanley notes this is a temporary disruption and shifts to an Equal-weight rating from Overweight, while looking for the next opportunity to enter the stock.
The company predominantly supplies thermal coal, the price of which is rising on the back of what is primarily an outage for metallurgical coal, which should see a more direct uplift in prices.
The broker acknowledges the stock’s fundamental drivers remain in place and additional cash flow from higher coal prices can bring forward the date at which the company reaches a net cash position. Target is $3.30. Industry view: Attractive.
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