In the good books
BWP Trust (BWP) Upgraded to Hold from Lighten by Ord Minnett B/H/S: 0/1/3
Ord Minnett expects the trust to maintain its current distribution over FY18 and FY19 despite the elevated risks following the announcement that Bunnings will vacate several assets to backfill former Masters stores.
The broker believes occupancy is holding up well and there is minimal downward pressure on rents, which should be offset by underlying income growth.
These factors mean the broker believes there is minimal risk to the distribution and raises its recommendation to Hold from Lighten. Target rises to $3.10 from $2.85.
Insurance Australia Group (IAG) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 2/5/1
Credit Suisse adjusts its view around domestic premium rate increases, raising estimates to 3-5% in 2017, up from a previous increase estimate of 1-3%. This is being driven by increased confidence that commercial lines can achieve premium rate changes at the top end of this range.
Credit Suisse elevates the stock to its top pick, upgrading to Outperform from Neutral. Insurance Australia Group offers the most outer-year earnings upside risk, in the broker’s opinion, with actions being taken to correct the insurance margin and protect the balance sheet.
While the stock has outperformed the market by around 5% recently the broker does not believe all upside is factored in. Target is raised to $6.90 from $6.05.
Myer (MYR) Upgraded to Neutral from Underperform by Credit Suisse B/H/S: 1/5/1
The share price has declined significantly over the last month and Credit Suisse upgrades to Neutral from Underperform. The broker believes, in the near term, the focus is likely to be on the downside risks from weak consumer conditions and the impact of Amazon.
A more challenging structural outlook has the potential to harbour speculation regarding consolidation, the broker suspects, and potential synergies along with avoiding capital expenditure are likely to be a material component for any entity intent on acquisition. Target is $0.82.
nib (NHF) Upgraded to Outperform from Neutral by Macquarie B/H/S: 2/2/2
The ACCC has started court proceedings against the company, alleging it contravened the consumer law.
The company removed certain eye procedures as of August 2015 from the MediGap scheme, a scheme in which doctors and other in-hospital medical providers opt to receive a higher level of reimbursement subject to there being no ”out-of-pocket” expense.
The ACCC alleges the company failed to notify members in advance of the removal of this service. The company rejects the position being taken by the ACCC.
Macquarie does not expect the outcome to have a material impact on growth or profitability. Rating is upgraded to Outperform from Neutral following the recent sell down of the stock. Target is raised to $5.60 from $5.50.
Premier Investments (PMV) Upgraded to Buy from Neutral by Citi B/H/S: 5/1/0
Citi believes investors are too bearish, arguing the current weakness in sales is transitory. The analysts do acknowledge there is downside to market consensus forecasts. Citi’s advice to investors is: pick your moment.
Upgrade to Buy from Neutral. While the analysts also believe market concerns around discounting are being overplayed, their new target of $13.80 compares with $15.10 previously.
Sigma Healthcare (SIG) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 1/0/3
Credit Suisse observes the current legal proceedings with Chemist Warehouse present the company with inherent challenges based on the size of the contract.
While this risk remains, the broker believes the current share price is factoring in a worst-case scenario and this ignores any working capital release from total contract loss and the potential to re-invest this in accretive acquisitions.
As a result, Credit Suisse upgrades to Outperform from Neutral. Target is reduced to $0.90 from $1.20.
Super Retail (SUL) Upgraded to Neutral from Underperform by Credit Suisse B/H/S: 6/1/1
Credit Suisse massages its forecast to assume pre-emptive action is taken to improve price positioning ahead of Amazon entering the automotive retailing marketplace. The broker has set a long-term margin for operating earnings of 8%, compared with the 12% outlined in the company’s long-term targets.
The broker upgrades to Neutral from Underperform following a significant decline in the share price. Target is reduced to $7.56 from $8.68. The changes stem from a reduction in store growth and margin expectations for the automotive division.
Specialty Fashion (SFH) Upgraded to Buy from Neutral by Citi B/H/S: 1/0/0
Citi believes investors are too bearish, arguing the current weakness in sales is transitory. The analysts do acknowledge there is downside to market consensus forecasts. Citi’s advice to investors is: pick your moment.
Upgrade to Buy/High Risk from Neutral. While the analysts also believe market concerns around discounting are being overplayed, their new target of $0.55 compares with $0.70 previously.
In the not-so-good books
Boral (BLD) Downgrade to Hold from Accumulate by Ord Minnett B/H/S: 4/2/0
Ord Minnett envisages the company entering a period of robust earnings growth, underpinned by the consolidation of the acquisition of US-based Headwaters and the realisation of synergies from Meridian Bricks and the USG joint venture.
Nevertheless, the broker believes the growth profile is now factored into the share price. Rating is downgraded to Hold from Accumulate. Target is raised to $6.65 from $6.50.
Domino’s Pizza Enterprises (DMP) Downgraded to Hold from Add by Morgans B/H/S: 3/3/0
Bain Capital has exercised its put option to sell back its 25% stake of Domino’s Japan. Morgans estimates the sale will prove 3-4% earnings accretive.
Otherwise the broker has cut its earnings growth forecasts due to lower same-store-sales growth assumptions, higher depreciation and fx impacts. Morgans still sees solid earnings growth over the next 3-5 years but believes the stock to be fairly valued. Downgrade to Hold.
Healthscope (HSO) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 2/3/1
Credit Suisse re-bases hospital revenue growth assumptions to allow for the ongoing shift in mix to day surgery from overnight stays. In addition, with industry volume growth rates currently running below longer term averages the broker factors in a delay in the ramp up in the utilisation of capacity.
The changes result in downgrades to earnings estimates of -7%. Rating is downgraded to Underperform from Neutral. Target is reduced to $2.10 from $2.45.
Macquarie Atlas Roads Group (MQA) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 3/3/0
Macquarie Group’s (MQG) MEIF2 fund owns around 16% of the French toll road APRR and the fund is winding up. Macquarie Atlas has a pre-emptive right for 9.7ppt of the 16% stake.
Credit Suisse observes the complexity of governance makes it difficult for the fund to get attractive offers from other investors and MQA is therefore likely to get the additional 9.7% at an attractive price.
Ramsay Health Care (RHC) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/4/0
Credit Suisse revises Australian hospital revenue growth rates to allow for a shift in mix to day surgery from overnight stays. While the trend may have been evident for the past 15 years the broker believes it could be exacerbated going forward because of affordability issues with private health insurance.
The broker makes modest downgrades to earnings estimates. Rating is downgraded to Neutral from Outperform. Target drops to $73.00 from $74.50.
Seek (SEK) Downgraded to Sell from Neutral by Citi B/H/S: 2/3/2
Citi has downgraded to Sell as it takes the view the growth outlook (single digit percentages only) doesn’t sit well with the premium valuation for the shares. The analysts also believe that a downturn in housing construction is going to affect the jobs market in Australia.
Despite efforts to diversify, Seek still is very much reliant on jobs and job applications in Australia, point out Citi analysts. According to their research, some 22% of job ads in Australia are housing related. Target declines to $15.30 from $16.20.
Suncorp (SUN) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/5/1
Credit Suisse adjusts its view around domestic premium rate increases, raising estimates to 3-5% in 2017, up from a previous increase estimate of 1-3%. This is being driven by increased confidence that commercial lines can achieve premium rate changes at the top end of this range.
FY17 earnings remain well protected from unpredictable weather events, Credit Suisse believes, but uncertainty into FY18 has increased in recent months after a period of outperformance.
With the closing of the valuation gap relative to peers, the broker downgrades to Neutral from Outperform. Target is raised to $14.50 from $14.20.
Wesfarmers (WES) Downgraded to Underweight from Equal-weight by Morgan Stanley B/H/S: 1/4/3
Morgan Stanley believes the market is misconstruing the impact of Amazon’s entry into Australia by selling category killers rather than conglomerate Wesfarmers.
The broker suspects that as Amazon rolls out its 1P business in Australia, especially apparel – a huge success in the US, earnings from Kmart will fall considerably. Bunnings should be relatively insulated, in the broker’s opinion, while Kmart and Target are vulnerable.
The broker reduces valuations for the latter two and downgrades to Underweight from Equal-weight. Target is reduced to $36 from $41. Industry view is moved to Cautious from In-line.
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