In the good books
AWE (AWE) Upgraded to Neutral from Underperform by Macquarie B/H/S: 2/3/1
AWEs March Q production was in line with expectation but revenues were stronger, thanks to a better performance from BassGas, helping to offset the loss from the Tui sale. Macquarie believes the company lacks any near-term revenue and production growth drivers upside potential lies in the contracting of gas volumes in the tight east coast market.
Given the recent pullback in price, Macquarie upgrades to Neutral, suggesting valuation can be improved by the development of Trefoil and longer term contracting for Waitsia. Target unchanged at 55c.
Incitec Pivot (IPL) Upgraded to Buy from Hold by Ord Minnett B/H/S: 4/3/1
Ord Minnett believes the company is entering a period of significant growth in earnings amid strong cash flow, setting the scene for a return of capital in FY18.
The broker upgrades to Buy from Hold and raises the target to $4.25 from $3.30.
RCG Corporation (RCG) Upgraded to Buy from Neutral by Citi B/H/S: 1/1/0
Citi expects the company to appear on the radar of value investors after a -47% fall in the share price since the first half result.
While retail conditions have been patchy, the broker expects the weakness to fuel the debate around the sustainability of the athletic-leisure trend.
The broker downgrades FY17-19 forecasts for earnings per share by -13-20%. Rating is upgraded to Buy from Neutral. Target is reduced to $0.88 from $1.23.
SmartGroup (SIQ) Upgraded to Buy from Neutral by Citi B/H/S: 4/1/0
The company will acquire AccessPay for $15m. Citi forecasts the acquisition to be 4% accretive in FY18.
The broker upgrades to Buy from Neutral on the back of the acquisition, finding several reasons to buy the stock as it has grown novated leases at 22% and this is expected to continue through both M&A and organic growth.
Margins have also expanded through increased scale and operating efficiencies. Target is raised to $7.33 from $6.61.
In the not-so-good books
Flexigroup (FXL) Downgraded to Neutral from Buy by Citi B/H/S: 3/3/0
The company has lowered FY17 estimates for net profit to $90-93m from $90-97m because of underperformance at Certegy. Citi reduces forecasts for FY17-19 by -5-8% and factors in increased expenditure in Ireland.
Citi has become incrementally less certain regarding Certegy as analysis reveals online competitors are being pulled in-store. Afterpay and Zipmoney are lower cost and easier to use offerings versus Certegy.
Rating is downgraded to Neutral from Buy. Target is reduced to $2.47 from $2.75.
Genworth (GMA) Downgraded to Sell from Neutral by UBS B/H/S: 1/0/1
Despite the risk of positive news emerging from the company’s scheduled update, UBS is downgrading to Sell from Neutral.
The broker believes the investment case will become a tussle between the positive capital return profile and earnings risk that is expected to arise from negative operating leverage and a normalised credit cycle.
Target is reduced to $2.60 from $2.80.
Murray Goulburn (MGC) Downgrade to Hold from Add by Morgans B/H/S: 0/1/0
The company has completed its asset and footprint review. Morgans observes unit holders, as opposed to suppliers or shareholders, will bear the brunt of the company’s announcements, which are expected to lower its cost base so that it can pay a more competitive farm-gate milk price.
This highlights to the broker a mis-alignment of interests between the two. The quantum of write-downs was also larger than expected and the board has suspended the dividend.
Therefore, unit holders are no longer paid to wait for new management to turn the business around, and with no dividend yield support, the broker believes the share price will trade sideways.
Rating is downgraded to Hold from Add. Target is reduced to $1.00 from $1.20.
Pact Group (PGH) Downgraded to Hold from Buy by Deutsche Bank and to Neutral from Outperform by Macquarie B/H/S: 1/5/0
The company has reiterated full year guidance for underlying earnings growth but warned that demand conditions are subdued and April was particularly weak in the rigid packaging business.
Deutsche Bank downgrades to Hold from Buy as the stock is trading at a 9% premium to its revised valuation. Target is lowered to $6.80 from $7.20.
The company reiterated guidance at the Macquarie Conference but highlighted that growth will come from acquisitions as the base business is flat and demand for rigid plastics was very weak in April.
Macquarie reduces FY17 and FY18 estimates for earnings per share by -6% and -4% respectively to account for this base business performance and factors in a more gradual improvement over time.
Rating is downgraded to Neutral from Outperform. Target is lowered to $6.80 from $7.00.
Platinum Asset Management (PTM) Downgraded to Sell from Hold by Ord Minnett B/H/S: 0/1/3
Platinum has cut the management fee on its management fee only Trust funds by 10%, from 150bps to 135bps from Jul-17 and Ord Minnett has responded with a downgrade to Sell from Hold.
Ord Minnett sees a defensive move aimed at stemming further outflows to lower fee managers such as Magellan (MFG) and Antipodes, but with outflows to continue. Cutting fees creates a 9% headwind and the stockbroker now anticipates a large fall (-16%) in EPS in FY18. Target price drops to $4.06 from $4.93.
ResMed (RMD) Downgraded to Neutral from Buy by Citi B/H/S: 4/3/0
The company has lowered gross margin guidance to 58.3%, versus 58-60%, for the fourth quarter. Citi believes this shows the continuing impact of manufacturing issues in masks, which may persist into the first quarter of FY18.
The broker downgrades to Neutral from Buy on valuation. Target is reduced to $10.00 from $10.32.
Seek (SEK) Downgraded to Hold from Add by Morgans B/H/S: 2/4/1
Morgans downgrades to Hold from Add after a period of outperformance. The broker likes the long-term story but would prefer to buy the stock at lower levels.
The broker believes the company is on track to deliver many more years of double-digit earnings growth. There are no changes to forecasts. Target is steady at $16.56.
Sydney Airport (SYD) Downgraded to Neutral from Buy by Citi B/H/S: 2/4/1
The company has decided not to participate in the Western Sydney Airport. Citi believes the decision is in the best interest of shareholders and highlights a disciplined approach to capital allocation.
Having analysed various multi-airport systems in the world, Citi has not seen any erosion in the pricing power of the primary airport but an improvement in the underlying passenger mix.
While earnings estimates are unchanged, the broker downgrades to Neutral from Buy and reduces the target to $7.02 from $7.14.
Stockland (SGP) Downgraded to Neutral from Buy by UBS B/H/S: 1/4/1
UBS observes the company’s residential business is in a sweet spot although retail sales were light, as expected.
The broker downgrades to Neutral from Buy on valuation and a belief that momentum and the residential operating environment is unlikely to get any better. Target is $4.76.
Select Harvests (SHV) Downgraded to Hold from Add by Morgans B/H/S: 0/1/0
Mild growing conditions in spring and summer have resulted in plenty of shells but not as many nuts, Morgans notes, forcing Select harvests to reduce its FY17 almond crop estimate by 5-10%. The broker downgrades forecasts by 11%.
Some 65% of the crop has been forward-sold and prices remain relatively stable, which is pleasing to Morgans. A cut in target to $5.60 from $6.05 nevertheless leads to a downgrade to Hold.
Ten Network Holdings (TEN) Downgraded to Equal-weight from Overweight by Morgan Stanley B/H/S: 0/4/0
Morgan Stanley acknowledges its positive view on the stock was wrong and, with the benefit of hindsight, it should have been bearish. The positive thesis was based on a forecast lift in audience and advertising revenue share. The first part has materialised but the second has not.
Morgan Stanley notes the first half results confirm a full year loss amid uncertainty over the renewal of the company’s bank facility. While the stock is trading at a substantial discount to peers, the broker observes the risks are notably much higher.
Rating is downgraded to Equal -weighted from Overweight. Target is reduced to $0.40 from $2.50. Attractive industry view retained.
Village Roadshow (VRL) Downgraded to Hold from Buy by Ord Minnett B/H/S: 0/4/0
The admission that Gold Coast theme parks are not seeing the numbers of visitors that would have been expected pre-Dreamworld disaster has triggered yet another downgrade to forecasts. On Ord Minnett’s revised numbers this translates into a debt coverage problem. Hence asset sales now have become a must, suggest the analysts.
In addition, with theme park trading weak into the all-important May/June annual pass pre-sale period, Ord Minnett analysts see significant uncertainty overhanging the division into FY18. Downgrade to Hold from Buy. Price target tumbles to $3.53 from $4.63.
Vocus Communications (VOC) Downgraded to Neutral from Buy by Citi, to Hold from Buy by Ord Minnett, to Neutral from Outperform by Macquarie, to Neutral from Buy by UBS and to Hold from Buy by Deutsche Bank B/H/S: 0/8/0
With revenue falling short of expectations Citi no longer has confidence that the company will be able to deliver on the full potential of its recently combined businesses.
The broker downgrades FY17-19 forecasts for earnings per share by -22-28%. The company has downgraded FY17 EBITDA guidance by -17%, citing multiple issues, including an accounting review of contract terms and larger than forecasts billings.
Citi downgrades to Neutral from Buy. Target is reduced to $3.40 from $6.00.
The company has reduced FY17 guidance following an accounting review of contracts. Ord Minnett believes the company’s national fibre network assets, low market share and steady consumer broadband margins position it well in an otherwise challenging sector.
Nevertheless, the continued exodus of senior managers and numerous accounting revisions force the broker to the sidelines. Rating is downgraded to Hold from Buy and the target to $3.50 from $5.25.
The company provided a disappointing update and, given the size of downgrades, over a short period of time Macquarie moves to Neutral from Outperform. This is reflecting ongoing uncertainty over the operating side of the business.
The changed accounting approach compounds the downgrade, but also highlights for the broker that the company was relying on a very significant contribution from lumpy network sales in the second half in order to meet guidance. Target is reduced to $3.00 from $5.00.
UBS has noted two additional negative aspects after the company’s update. The company has indicated free cash flow conversion will be weak in the third quarter, perhaps even weaker than the first half. The net debt to EBITDA covenant will become more onerous, although the future profile is undisclosed.
The broker is more positive about the suggestion that around $400m in EBITDA could be the base for FY18, although estimates a more conservative $360-370m.
Rating is downgraded to Neutral from Buy. Target is reduced to $2.50 from $5.00.
Deutsche Bank’s response to Vocus’ latest profit warning is perhaps best represented by a drop in target to $2.23 from $7.05. Rating downgraded to Hold from Buy.
The broker cites low earnings growth, limited earnings visibility, a weak balance sheet and minimal total shareholder return. Acquisition synergies are on track but more will need to be spent to improve service delivery, processes and technology platforms.
The FY18 outlook appears challenging, the broker suggests.
Woolworths (WOW) Downgraded to Underperform from Neutral by Macquarie B/H/S: 3/1/4
Woolworths’ strong March Q sales highlight the benefits of price reinvestment and improved store execution over the last 18 months, Macquarie suggests. A positive result in NZ should not be overlooked either. Big W nevertheless remains a drag, and the broker suggests both Big W and Target need to validate their economic viability soon.
Despite the impressive sales improvement, Macquarie believes the market is pricing in an unlikely earnings recovery in food in the face of increasing competition. Downgrade to Underperform. Target lifts to $26.20 from $25.60.
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