In the good books

ALS (ALQ) Upgraded to Buy from Sell by Citi B/H/S: 3/3/1

ALS Ltd’s financial performance proved a mild beat on Citi’s expectations. Incorporating revised commodities prices forecasts plus recent acquisitions in Life Sciences have triggered higher forecasts. As a result, the price target rises to $6.90 from $5.60.

Combine the above with share price weakness and Citi analysts have made the decision to implement a double-whammy upgrade; to Buy from Sell. The analysts like the company’s industry and geographic diversity and are now forecasting double digit growth for the years ahead.

Harvey Norman (HVN) Upgraded to Neutral from Underperform by Macquarie B/H/S: 2/1/4

Comparables sales growth of Australian franchisees for the four months to April was up 4.8%, which implies comparables sales growth of around 2.3% over March and April. Macquarie compares this with the 7.4% recorded over January and February.

The slowdown in sales momentum was expected, as the benefit from the closing of Dick Smith rolls off and housing-related indicators continue to moderate.

Macquarie upgrades to Neutral from Underperform. The broker still believes there are risks building, which will become a headwind for the company but there is enough caution factored into the share price. Target is reduced to $4.50 from $5.05.

Vicinity Centres (VCX) Upgraded to Neutral from Underperform by Macquarie B/H/S: 2/3/1

Amid low growth for second-tier retail mall products, Macquarie considers the hypothetical implications of an in-specie distribution of second-tier retail assets. The broker believes this is quicker and cleaner than further asset sales.

The stock has underperformed the A-REIT index by a material -16%, the broker observes, and as it now offers an implied double-digit total shareholder return, the rating is moved to Neutral from Underperform. Target is $2.91.

Sirtex (SRX) Upgraded to Add from Hold by Morgans B/H/S: 4/0/0

Two recent trials have both failed to show a survival advantage in primary liver and colon cancer, Morgans notes. The broker is not surprised, citing poor study designs and prior failed studies, although the lack of utility in liver-only colon cancer patients is disappointing and relegates the therapy to salvage.

Nevertheless, Morgans believes the core business is viable and unlikely to be detrimentally affected by these results. The broker lowers FY18-19 dose sales expectations and reduces the target to $13.63 from $15.60.

With more than 10% upside envisaged to the target, the rating is upgraded to Add from Hold.

Stockland (SGP) Upgraded to Buy from Neutral by Citi B/H/S: 2/3/1

Citi suggests Stockland is benefitting from a favourable residential mix shift, which is enabling earnings to grow while land sales moderate. The broker believes retail net operating income growth could exceed current expectations.

Valuation looks attractive on a 5.5% yield and modest PE, Citi suggests. Upgrade to Buy. Target rises to $5.08 from $4.91.

Worley Parsons (WOR) Upgraded to Buy from Hold by Deutsche Bank and to Outperform from Neutral by Macquarie B/H/S: 4/1/0

WorleyParsons’ investor day highlighted an energy & resources industry at an inflection point, Deutsche Bank suggests. This has prompted an upgrade to Buy.

The industry is returning to growth, the backlog is increasing, overheads are reducing, legacy contracts are being paid and new contracts are being won. The broker is forecasting 21% compound earnings growth over the next two years.

Valuation is undemanding and a full DAR takeover is always a possibility. Target rises to $13.73 from $10.20.

The company’s investor briefing signal positive operating trends in terms of the backlog, head count and working capital reductions. Macquarie upgrades to Outperform from Neutral and raises the target to $13.00 from $10.50.

The broker observes Dar Group has effectively put a floor under the share price with options to the upside, assuming the company can deliver improved earnings cash flow and debt reduction.

If the company does not deliver, it remains vulnerable to a potentially higher bid later this year. Hence, Macquarie believes the risk/reward balance is favourable.

In the not-so-good books

AP Eagers (APE) Downgraded to Underweight from Equal-weight by Morgan Stanley B/H/S: 0/3/1

Morgan Stanley believes headwinds in the short term pose a risk for AP Eagers, which is trading at a price/earnings ratio of 15.5 times FY17 estimates, particularly given the negative momentum in Queensland.

The broker still prefers AP Eagers over Automotive Holdings (AHG) because of a focus on automotive dealerships and no logistics, with an opportunity to continue industry consolidation as markets stabilise.

Nevertheless, the negative outlook and risks to the downside mean the broker downgrades to Underweight from Equal-weight. Target is reduced to $6.85 from $9.40. Sector view is In-Line.

Goodman Group (GMG) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/4/0

The stock has risen 14% over the last quarter and while the story is appealing, given tenant demand for developments underpinned by structural drivers, Credit Suisse downgrades to Neutral from Outperform. Target is $7.92.

Within the sector, the stock is considered the most obvious winner from the growth of online retail globally and, in particular, Amazon’s flagged entry into the Australian market. Yet, the broker believes both the macro and micro appeal are now priced in.

Mirvac (MGR) Downgraded to Sell from Neutral by Citi B/H/S: 4/2/1

Downside risks to near and medium term residential volume guidance leads Citi to downgrade Mirvac to Sell. The broker cites extended settlement times, tighter lending conditions, slower pre-sales and an unfavourable shift towards master planned communities.

Citi notes estimates already account for strong office conditions. Target falls to $2.11 from $2.25.

Regis Resources (RRL) Downgraded to Underweight from Equal-weight by Morgan Stanley B/H/S: 2/2/4

The stock has traded in a range since the start of the year on steady operations and a stable gold price, Morgan Stanley observes. Nevertheless, it has outperformed the gold sector, rising 9% over the past 12 months.

As other stocks offer more upside relative to the broker’s price targets, the rating is downgraded to Underweight from Equal-weight. Attractive industry view and $2.80 target retained.

Sigma Healthcare (SIG) Downgraded to Neutral from Outperform by Credit Suisse and to Sell from Buy by UBS B/H/S: 0/2/2

The company has commence legal proceedings against a key customer, My Chemist/Chemist Warehouse Group following a contract dispute. Sigma asserts that under the existing agreement the customer is not entitled to acquire products from other wholesalers.

Credit Suisse observes, should legal proceedings fail and assuming the customer acts in accordance with its stated intention, the impact on the company’s EBIT is expected to be  -$5-10m per annum.

Credit Suisse downgrades earnings estimates by -10% over the forecast period. Target is reduced to $1.20 from $1.30. Rating is downgraded to Neutral from Outperform.

The company has commenced legal action against a key customer, Chemist Warehouse, relating to the customer’s intention to use an alternate wholesaler. Sigma expects a negative impact of -$5-10m per annum in terms of EBIT.

A sluggish industry and additional sector disruption from new entrants means UBS reduces forecasts for earnings per share by -10% and cuts the target to $0.76 from $1.40 as a caution on further earnings risk. Rating is downgraded to Sell from Buy.

Suncorp (SUN) Downgraded to Hold from Accumulate by Ord Minnett B/H/S: 3/4/1

The latest disclosures on the company’s banking arm show weak lending growth in retail in the March quarter, although Ord Minnett observes this was offset by very low loan losses and a strong capital position.

The broker remains cautious about the stock and the potential divergence in general insurance margin trends between Suncorp and Insurance Australia Group (IAG). The fact that the stock is also trading around the broker’s steady target price of $14.11 leads to a lowering of the recommendation to Hold from Accumulate.

Sydney Airport (SYD) Downgraded to Neutral from Outperform by Macquarie B/H/S: 1/5/1

The company has reported traffic for April, with the boost from Easter clearly evident in the numbers as international was up 12.1% and domestic up 0.7%.

The fundamentals remain robust, in Macquarie’s view, as the near-term traffic growth outlook is strong. Nevertheless, the broker believes value is already captured in the current share price.

Rating is downgraded to Neutral from Outperform. Target is $7.15.

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