In the good books

ALQ (ALQ) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 4/2/1

Gold miners have re-capitalised and exploration budgets have troughed. Credit Suisse estimates the capital raised by juniors alone could underpin a 50% increase in exploration activity over the next 2-3 years.

Despite its optimism, the broker models a recovery to around 75% of the prior peak, which leaves room for upside. Moreover, global testing peers continue to expect trend revenue growth and expansion of margins and this provides a supportive backdrop to turnaround underperforming areas within the company’s life sciences segment.

Rating is upgraded to Outperform from Neutral. Target is raised to $7.80 from $6.70.

Ausnet Services (AST) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 2/4/1

The company is now on a solid footing, having completed its metering restoration and resolving outstanding litigation, and Credit Suisse increases revenue expectations based on the anticipated acceptance of a higher rate of depreciation and lower forecast inflation.

A favourable outcome from the gas distribution determination should also be supportive. Credit Suisse upgrades to Outperform from Neutral and the target is increased to $1.80 from $1.70.

Beach Energy (BPT) Upgraded to Buy from Neutral by Citi B/H/S: 2/3/1

Citi has upgraded to Buy/High Risk from Neutral/High Risk following a -20% underperformance for the shares over the past two months. The analysts point at greater than average leverage to a falling oil price, but also to market concerns about a potential capital raising to fund the next acquisition.

Citi analysts are sympathising with the capital raising risk, while contemplating a scenario whereby a commercial partner can be found to still purchase assets but with less dilution for shareholders.

Meanwhile, point out the analysts, Beach has substantial high-returning opportunity for capital allocation in Cooper. The analysts also suggest the outlook is likely to be stronger than consensus is giving the company credit for, but management needs to provide more details.

Collins Foods (CKF) Upgraded to Buy from Neutral by UBS B/H/S: 1/1/0

The company has acquired 28 KFC restaurants from Yum! Brands for $110m. The acquisition will be funded through a $44m non-renounceable entitlement offer and $66m in debt.

Meanwhile, the company reported a strong FY17 result, beating UBS expectations. This was predominantly driven by stronger-than-expected KFC Australia performance and lower depreciation.

Rating is upgraded to Buy from Neutral and the target is raised to $6.00 from $5.60.

Dulux (DLX) Upgraded to Neutral from Underperform by Credit Suisse B/H/S: 0/4/3

In the light of a recent wave of global consolidation in the industry, Credit Suisse weighs up whether Dulux might be predator or prey. On the prey side, the broker sees the core paint business as attractive but the home improvement businesses not so. Dulux could divest these to unlock value, but a solid share price rules out a private equity bid.

On the predator side, the broker believes the company is likely targeting a UK paint acquisition. Factoring in its analysis sees Credit Suisse lift its target to $6.85 from $6.05 and upgrade to Neutral.

Insurance Australia Group (IAG) Upgraded to Hold from Reduce by Morgans B/H/S: 2/4/2

Insurance Australia Group expects reserve releases of around 5% of NEP in FY17 and has upgraded insurance margin guidance to 13.5-15.5%.

Morgans argues that elevated reserve releases are a lower-quality items and not sustainable. The broker finds the market’s view on the stock peculiar, as recent weather downgrades were ignored while the elevated reserve releases appear to be rewarded.

The broker upgrades FY17 estimates by around 20% and FY18 by 2%. Target is lifted to $6.27 from $5.56. Rating is upgraded to Hold from Reduce.

Link Administration (LNK) Upgraded to Buy from Neutral by Citi B/H/S: 3/2/0

Citi labels the acquisition of Capita Asset Services (CAS) “transformational”, destined to facilitate “significant EPS accretion” from FY19 onwards. No double guessing as to why the broker has decided to upgrade to Buy from Neutral.

No doubt, an acquisition this size represents a challenge for management, acknowledge the analysts, while the price paid seems pretty full. But Citi seems firmly of the view the upside potential outweighs the potential negatives.

EPS estimates have been lifted by 3% this year, reduced by -3% for FY18 and lifted by 13% for FY19. The accompanying trading update is seen as slightly positive. Target jumps to $9.20 from $8.25.

Medibank Private (MPL) Upgraded to Outperform from Neutral by Macquarie B/H/S: 1/2/4

Macquarie observes policy holder disputes are at the lowest level since 2000. This reduced level of disputes, amid expectations that IT system problems will diminish, increase the potential for improved customer retention and a more positive FY18, the broker believes.

Macquarie upgrades to Outperform from Neutral. Target is raised to $3.07 from $3.00.

Metcash (MTS) Upgraded to Hold from Sell by Deutsche Bank B/H/S: 2/4/1

FY17 results pleased Deutsche Bank. Food sales were not as bad as forecast, the balance sheet was better and cost reductions have lifted the margin.

While the outlook is tough and the second half revealed slowing market growth, intense discounting and the continuing spread of Aldi, sales did not come under as much pressure as the broker had feared.

Rating is upgraded to Hold from Sell. Target is raised to $2.30 from $1.60.

See downgrade below.

Seven West Media (SWM) Upgraded to Hold from Sell by Deutsche Bank B/H/S: 0/2/0

The federal government has effectively remove licence fees for free-to-air TV broadcasters in FY17. Deutsche Bank adjusts numbers to take into account the absence of licence fees and now expects the removal will be made permanent.

Offsetting this, the broker lowers advertising market forecasts for FY18 and FY19 to factor in the likely restrictions on gambling advertising.

While continuing to forecast Seven West operating earnings to fall by -12% in FY17, the broker’s changes result in upgrades to forecasts for FY18 and beyond. Target is raised to $0.80 from $0.70 and the recommendation is upgraded to Hold from Sell.

Whitehaven Coal (WHC) Upgraded to Overweight from Equal-weight by Morgan Stanley B/H/S: 4/3/1

Morgan Stanley remains positive on the mining industry but discussions with investors suggest they are cautious.

The broker finds the global outlook favourable, with a low risk of a slump in China, and commodity prices are beneficial, particularly as bulk commodities are finding support levels. While the broker acknowledges the setting is not “red-hot” it is constructive.

Morgan Stanley upgrades to Overweight from Equal-weight on the back of a more upbeat thermal coal outlook. Target is raised to $3.55 from $3.30. Industry view: Attractive.

In the not-so-good books

Insurance Australia Group (IAG) Downgraded to Sell from Neutral by Citi and to Underperform from Neutral by Macquarie B/H/S: 2/4/2

Factoring in higher reserve releases and other changes, Citi lifts forecasts for earnings per share in FY17 by 21% and FY18 by 5%. The broker now forecasts of FY17 reported insurance margin of 15.3%, towards the top end of revised guidance.

The broker raises the target to $6.30 from $6.05 but downgrades to Sell from Neutral, as the stock appears too expensive.

Citi suspects the underlying margin may still be under some pressure from elevated claims inflation in motor vehicles and the earn-through of prior commercial insurance pricing.

Insurance Australia Group has raised its FY17 insurance margin guidance range to 13.5-15.5% from 10.5-12.5%.

Despite price rises, Macquarie believes structural claim issues in motor vehicle insurance should mean the underlying margin contracts into FY18.

The broker believes the multiples are now stretched and downgrades to Underperform from Neutral. Target is raised to $6.05 from $5.95.

See upgrade above

Metcash (MTS) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/4/1

FY17 results were better than Credit Suisse expected. The broker was surprised by the re-introduction of the final dividend at 4.5c.

The broker downgrades earnings forecasts to largely reflect a refining of a 52-week EBIT estimate. Target drops to $2.38 from $2.54. The share price appreciation leads Credit Suisse to downgrade to Neutral from Outperform.

See upgrade above

Newcrest Mining (NCM) Downgraded to Underweight from Equal-weight by Morgan Stanley B/H/S: 0/3/5

Morgan Stanley remains positive on the mining industry but discussions with investors suggest they are cautious.

The broker finds the global outlook favourable, with a low risk of a slump in China, and commodity prices are beneficial, particularly as bulk commodities are finding support levels. While the broker acknowledges the setting is not “red-hot” it is constructive.

Morgan Stanley downgrades to Underweight from Equal-weight, not because there are specific downside risks, but rather because value is captured in the share price and other miners screen better. Target is reduced to $20.75 from $21.50.  Attractive industry view.

Northern Star Resources (NST) Downgraded to Underweight from Overweight by Morgan Stanley B/H/S: 1/2/3

Morgan Stanley downgrades to Underweight from Overweight, not because there are specific downside risks, but rather because value is captured in the share price and other miners screen better. Target is $4.85.  Industry view: Attractive.

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

Morgan Stanley downgrades to Underweight from Equal-weight, not because there are specific downside risks, but rather because value is captured in the share price and other miners screen better. Target is reduced to $5.90 from $6.40. Industry view is Attractive.

Seymour Whyte (SWL) Downgraded to Hold from Add by Morgans B/H/S: 0/1/0

The company has recommended the proposed acquisition by VINCI at $1.285 cash per share. The company may decide to pay one or more dividends up to 44.5c and, if paid, the cash consideration as part of the scheme will be reduced by the cash amount of the dividends.

Morgans suspects the dividend payment is highly likely given the company’s cash and franking credit balance. The broker downgrades to Hold from Add and sets the target at the offer price ($1.29).

Spark Infrastructure (SKI) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 2/3/1

The stock is now trading at a three-year high relative to AusNet ((AST)), and at or above privatisation benchmarks.

Credit Suisse estimates that the value of synergies that may be achieved by combining the company’s stake in Victorian assets with those of DUET are likely to be less than 1.4% of its discounted cash flow value.

Rating is downgraded to Underperform from Neutral. Target is $2.40.

Tabcorp Holdings (TAH) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 1/1/2

Credit Suisse downgrades FY18-20 forecasts for earnings per share by around -4% because of growth in retail commissions, as the company introduces a geo-locating system to allow venues to participate in digital turnover. While knowing this initiative was underway, the broker did not anticipate the material cost involved.

Also contributing to the downgrade is a lower FY17 wagering revenue base. Rating is downgrade to Neutral from Outperform as previously the broker believed there was enough value for investors to take on the synergy growth option, and now the stock has to fall for the risk/reward to be attractive. Target is reduced to $4.80 from $5.00.

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