In the good books
Adairs (ADH) Upgraded to Buy from Neutral by UBS B/H/S: 2/0/0
The company has responded to a large rise in the share price, stating it is not aware of any information that would lead to earnings differing materially from current guidance. UBS observes the share price increased further and closed up 47% on the day but, while the move was substantial, the share price is 30% below its closing level at the first half result.
The broker believes, if the business can stabilise, the upside could be material. Rating is upgraded to Buy from Neutral based on forecast shareholder returns.
UBS downgrades FY17 forecasts for earnings per share slightly and removes the risk discount in the price target methodology. While the company is moving away from its previous bed-linen range in-store it still has headwinds across the macro conditions as well as competitive intensity to deal with, the analysts highlight.
UBS finds it difficult to have a high degree of confidence in the sales margin profile. Target is reduced to $1.16 from $1.25.
AGL Energy (AGL) Upgraded to Accumulate from Hold by Ord Minnett B/H/S: 3/2/2
Ord Minnett has upgraded to Accumulate from Hold on the premise that there remains a risk of electricity shortages through next summer, which implies wholesale prices for electricity are to remain elevated while retail prices have to date surprised on the upside.
The stockbroker, clearly, is not convinced that any measures attempted to address the issues in the National Electricity Market (NEM) by the Federal and state governments are sufficient. All else, for the time being, is but a distraction, argue the analysts. Price target lifts by 20c to $28.20.
Altura Mining(AJM) Upgraded to Neutral from Underperform by Macquarie B/H/S: 0/1/0
Macquarie upgrades lithium price forecasts by 19% for 2020-21. The broker also upgrades cobalt forecasts.
As a result, Macquarie upgrades Altura’s rating to Neutral from Underperform. Target price is lifted by 14% to $0.16.
Amcor (AMC) Upgraded to Equal-weight from Underweight by Morgan Stanley B/H/S: 3/5/0
Innovation is expected to support stronger volumes for Amcor’s rigids business in the near term, Morgan Stanley believes. The broker believes superior capabilities in technology have created a mechanism to offset volume pressure in the Americas beverage market.
Therefore, the broker is more positive on the stock in the near term and upgrades to Equal-weight from Underweight. Increasing regulation and a growing anti-sugar movement will  present structural challenges, nonetheless, the broker adds.
Target is raised to $15.35 from $12.20. Sector view is Cautious.
Charter Hall(CLW) Upgraded to Accumulate from Hold by Ord Minnett B/H/S: 1/1/1
Ord Minnett economists (read: JP Morgan’s) have now changed their view in that there will be no more RBA rate cuts in the foreseeable future. This, they say, will translate into more interest from investors into property trusts with long weighted-average lease expiries (WALE).
Charter Hall Long WALE is one such AREIT and thus the rating has been lifted to Accumulate from Hold. Target price jumps to $4.45 from $4.15.
Galaxy Resources (GXY) Upgraded to Outperform from Neutral by Macquarie B/H/S:2/1/0
Macquarie upgrades lithium price forecasts by 19% for 2020-21. The broker also upgrades cobalt forecasts. Galaxy’s rating is upgraded to Outperform from Neutral.
Given a preference for hard rock projects over brine developments, Macquarie increases its discount for the company’s Sal De Vida project, which results in an -8% reduction in the target to $2.10.
Hotel Property (HPI) Upgraded to Accumulate from Hold by Ord Minnett B/H/S: 2/0/0
Ord Minnett economists (read: JP Morgan’s) have now changed their view in that there will be no more RBA rate cuts in the foreseeable future. This, they say, will translate into more interest from investors into property trusts with long weighted-average lease expiries (WALE).
Hotel Property Investments is one such AREIT and thus the rating has been lifted to Accumulate from Hold. Target price jumps to $3.35 from $2.90.
Pilbara Minerals (PLS) Upgraded to Outperform from Underperform by Macquarie B/H/S: 2/0/0
Macquarie upgrades lithium price forecasts by 19% for 2020-21. The broker also upgrades cobalt forecasts.
While more bullish price forecasts are a driver of improved earnings expectations, the broker observes the company has significantly de-risked funding and technical delivery of its project.
Rating is upgraded to Outperform from Underperform. Target is raised to $0.50 from $0.38.
QBE (QBE) Upgraded to Add from Hold by Morgans B/H/S: 4/2/2
Amid higher claims from emerging markets, the company has downgraded FY17 guidance. Morgans asserts the bumps on the road to recovery for the company remain annoying, although the drivers of this announcement are largely considered one-off.
The broker believes the fall in the share price is overdone and value is re-emerging for the stock. FY17 forecasts for earnings per share are downgraded by -10%. Target is reduced to $13.09 from $13.47. Rating is upgraded to Add from Hold.
See downgrade below.
Southern Cross Media (SXL) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 1/3/1
Credit Suisse does not believe the current share price is factoring in the potential upside from proposed regulatory changes. The company stands to benefit from the media reforms such as the abolition of licence fees and the removal of the 75% audience reach rule.
Meanwhile, the metro radio market has returned to positive territory in May with a five-city year-on-year growth rate of 0.5%. Credit Suisse considers the stock inexpensive and upgrades to Outperform from Neutral. Target is raised $1.35 from $1.30.
Western Areas (WSA) Upgraded to Neutral from Underperform by Macquarie B/H/S: 0/5/2
The company has upgraded the resource base at Cosmos, with massive sulphides up 311%, which Macquarie believes has materially improved the economics of the project.
The increase in the high-grade massive sulphide has caused the broker to upgrade estimates for an internal rate of return to 25% from 18%. Cosmos still needs higher nickel prices before development is likely to progress, the broker acknowledges.
As the stock has fallen over -13% this month, and incorporating the improved economics, Macquarie upgrades to Neutral from Underperform. Target rises to $2.15 from $2.00.
In the not so good books
Ainsworth Game Technology (AGI) as Downgraded to Sell from Neutral by UBS B/H/S: 1/0/1
Ainsworth has outperformed the ASX300 by 42% in the past six weeks, driven by hype around new game releases and particularly the highly anticipated Pac-Man offering, UBS notes. While the stock has been neglected and was due a bounce, the broker believes the market is factoring in a too ambitious broad game improvement.
Data and anecdotal feedback are not supporting such strength. With currency acting as a headwind and a forward PE now at 18x, UBS downgrades to Sell. Target unchanged at $1.77.
Breville Group (BRG) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/2/0
While the company is well-positioned for the current retail environment and growth opportunities are still viable offshore, Credit Suisse believes recent share price strength leaves the stock with a multiple that provides no margin for slippage.
Rating is downgraded to Neutral from Outperform. The broker has few concerns about the near-term outlook and expects growth into FY18 of around 7%. Target is raised to $10.75 from $9.30.
FlexiGroup (FXL) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/4/0
Credit Suisse previously had an Outperform rating based on cheap valuation and a view the company could start to produce growth.
However, despite valuation looking compelling, the stock is still in a downgrade cycle and the broker is increasingly cautious about Certegy, which could offset growth in other areas.
The broker has low conviction on earnings and still envisages downside risk, preferring to wait until growth concerns are alleviated. Hence the move to Neutral. Target is reduced to $1.85 from $2.70.
Fortescue Metals (FMG) Downgraded to Sell from Neutral by Citi B/H/S: 4/3/1
Citi is bearish on the iron ore price, noting Chinese port inventories have built and more low-cost supply is coming onto the market. The broker has downgraded its price forecasts, suggesting a level below US$50/t is required to close down high cost Chinese domestic production.
Discounts for lower grade ore have also widened and while the broker sees this as more cyclical than structural, the trend may remain in place for a while.
Fortescue target cut to $3.90 from $5.80, downgrade to Sell.
GPT (GPT) Downgraded to Underweight from Overweight by Morgan Stanley B/H/S: 1/4/1
In-depth research into prospects and changing dynamics for owners of shopping malls have led Morgan Stanley analysts to take a more sombre view on the outlook for Net Operating Income (NOI) for the sector in Australia.
The rating for GPTÂ has been double-whammy downgraded as a direct result; to Underweight from Overweight. Target price loses 20c to $4.80.
It is Morgan Stanley’s view that retail landlords are now facing a combination of a severe cyclical consumer slowdown and the structural pressure from e-commerce. This is expected to accelerate the pressure on retailer margins, and reduce demand for physical space. Updated forecasts assume NOI growth will halve from FY17 levels, while risk remains to the downside, in the analysts’ view.
Magellan Financial Group (MFG) Downgraded to Hold from Buy by Ord Minnett B/H/S: 4/2/0
Ord Minnett believes the market has become too excited/too optimistic about the performance of Magellan’s Global Fund. The result is that a welcome spike in performance fees is not going to stick.
Downgrade to Hold from Buy. Price target rises to $28.13 from $27.47. Part of the conviction behind the move is the observation that June is proving a softer month already. Valuation has become a problem, suggest the analysts.
QBE (QBE) Downgraded to Neutral from Buy by Citi B/H/S: 4/2/2
Guidance has been downgraded, with the company expecting its first half insurance margin to be 8.5-9.5%. The fall in the share price exceeds Citi’s estimated magnitude of the downgrade but the broker acknowledges credibility of management has taken a hit.
Of the main causes for the downgrade the rise in the frequency of medium-sized claims in Asia is of most concern to Citi as QBE has far less pricing power in Asia compared with Australia.
Citi reduces estimates for earnings per share in FY17 by -7% and FY18 by -5%. Rating is downgraded to Neutral from Buy and the target reduced to $12.75 from $14.10.
See upgrade above.
Scentre Group (SCG) Downgraded to Underweight from Overweight by Morgan Stanley B/H/S: 2/2/2
In-depth research into prospects and changing dynamics for owners of shopping malls have led Morgan Stanley analysts to take a more sombre view on the outlook for Net Operating Income (NOI) for the sector in Australia.
The rating for Scentre Group has been double-whammy downgraded as a direct result; to Underweight from Overweight. Price target dives to $3.90 from $4.70.
It is Morgan Stanley’s view that retail landlords are now facing a combination of a severe cyclical consumer slowdown and the structural pressure from e-commerce. This is expected to accelerate the pressure on retailer margins, and reduce demand for physical space. Updated forecasts assume NOI growth will halve from FY17 levels, while risk remains to the downside, in the analysts’ view.
Senex (SXY) Downgraded to Neutral from Outperform by Macquarie B/H/S: 2/4/0
Macquarie reduces oil price forecasts for 2017, 2018, and 2019 by -8%, -12%, and -13% respectively because of lingering concerns surrounding the oversupply of oil.
Hence, the broker downgrades Senex to Neutral from Outperform and reduces the target to $0.30 from $0.35, believing the stock is fairly valued at current prices.
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