In the good books
Bendigo and Adelaide Bank (BEN) Upgraded to Neutral from Sell by Citi B/H/S: 0/3/4
Citi analysts observe the share price has deflated some -16% since peaking in early 2017. This pulls the valuation back in-line with long term averages.
Citi has upgraded to Neutral from Sell. Target price remains unchanged at $11.75. The analysts note they lifted estimates by 1-2% last week. They’re not adding to that this week.
Overall, Citi analysts see a positive outlook on revenue growth combining with ongoing cost discipline and stable asset quality trends. Combined, these factors point to more stable near-term earnings, in their opinion.
Dexus Property (DXS) Upgraded to Neutral from Sell by Citi B/H/S: 2/2/2
A thorough analysis of listed property owners in Australia has led to several non-consensus views at Citi. The analysts are of the opinion the Sydney cycle for offices has a longer life ahead than most are willing to consider.
A second stand-out conclusion is that funds management appears undervalued when it happens under the wings of a property owner compared with stand-alone listed peers.
Investors should note today’s sector update does not incorporate a “back to normal” scenario for interest rates and bond yields. As a result of the sector analysis, Dexus has been elevated to Neutral from Sell. Price target jumps to $9.59 from $8.73.
Goodman Group (GMG) Upgraded to Buy from Neutral by Citi B/H/S: 3/3/1
See Citi’s analysis of the sector above in Dexus Property (DXS). As a result of the sector analysis, Goodman Group has been elevated to Buy (from Neutral) and has also been added to Citi’s Focus List Australia/NZ, joining Stockland (SGP) which already was on the broker’s list of “conviction” Buys.
Price target for Goodman Group has jumped to $8.95 from $7.74.
Investa Office Fund (IOF) Upgraded to Buy from Neutral by Citi B/H/S: 2/0/2
See Citi’s analysis of the sector above in Dexus Property (DXS). As a result of the sector analysis, Investa Office Fund has been elevated to Buy (from Neutral). Price target jumps to $5 from $4.51.
iSentia (ISD) Upgraded to Buy from Hold by Deutsche Bank B/H/S: 2/1/0
Deutsche Bank finds the investment qualities that were in evidence when the company listed in 2014 remain evident, although the last 18 months have witnessed the emergence of competitive and execution issues.
This has led to a material de-rating of the stock but it remains the leading media monitoring business in Australia and dominates market share.
The broker envisages near-term earnings momentum and news flow is supportive and upgrades to Buy from Hold. Target is raised to $2.55 from $2.10.
Newcrest Mining (NCM) Upgraded to Hold from Sell by Deutsche Bank and to Hold from Lighten by Ord Minnett B/H/S: 0/5/3
June quarter production was ahead of Deutsche Bank’s estimates because of a strong performance at Lihir. Cadia output was as expected.
Deutsche Bank notes the stock has de-rated because of recent operating issues and gold price sentiment but still generates solid free cash flow.
The broker considers the valuation undemanding relative to global peers and upgrades to Hold from Sell. Target is raised to $19 from $18.
June quarter production was a solid result and Ord Minnett observes the share price has fallen -10% over the past month, leading to its recommendation being raised to Hold from Lighten. Target is raised to $20.50 from $19.00.
Regardless, the broker maintains a preference for bulk and base metal stocks versus precious metals exposure, as there are more attractive cash flow yields and valuations in the former.
In the not-so-good books
Amadeus (AHZ) Downgraded to Reduce from Hold by Morgans B/H/S: 0/0/1
Ademus’ June Q sales result was in line with Morgans but costs remain elevated. Key achievements in the quarter include FDA approval for CardioCel 3D and additional staff appointments, while the pending opening of the Royal Adelaide Hospital is important to maintain momentum, the broker suggests.
Morgans has nevertheless taken a more cautious stance on the return to profitability, thus lowering its valuation and target price to 23c from 36c. This results in a downgrade to Reduce from Hold and the broker believes there are better opportunities elsewhere.
Carsales.com (CAR) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 4/4/0
The company has changed its private listing price structure and moved to tiered pricing based on the value of the car. Credit Suisse calculates a weighted average price increase of around 15%, which is estimated to add around $6m to revenue and operating earnings and a full year.
The broker notes the company has been very cautious, historically, in raising private listing prices and appears to be focused on driving yield across its various market segments.
Credit Suisse believes a strong market position means the company is well-positioned to continue to improve monetisation and for higher yield to be a driver of revenue growth going forward.
As the stock has sizeably re-rated over the last couple of months, the broker downgrades to Neutral from Outperform. Target is raised to $12.60 from $12.00.
Challenger (CGF) Downgraded to Underweight from Equal-weight by Morgan Stanley B/H/S: 2/3/2
Morgan Stanley cannot reconcile the bullish growth outlook and the valuation and downgrades to Underweight from Equal-weight.
The broker is cautious for a number of reasons, including the fact the overweight portfolio in short-term annuities has left the company vulnerable on margins and growth.
The market also appears too bullish on the lifetime annuity opportunity. Moreover, risks to funding costs, asset yields, credit and capital intensity have been under priced.
Target is reduced to $11.50 from $12.00. Industry view: In-line.
Data #3 (DTL) Downgraded to Hold from Add by Morgans B/H/S: 0/1/0
The company expects net operating profit to be up 10% in FY17. While this is another strong result it is slightly below Morgans forecasts.
The broker has noted a solid performance with growth in services and cloud-based business. The strong share price performance means Morgans downgrades to Hold from Add. Target is reduced to $1.87 from $1.89.
Independence Group (IGO) Downgraded to Underperform from Neutral by Macquarie B/H/S: 4/1/1
The company has reduced its resource estimate at Nova and, subsequently, downgrades to the reserve are now expected.
The completion of the Long Island study has also been delayed until the December quarter. Meanwhile production guidance for FY18 is also well below Macquarie’s expectations.
Macquarie downgrades to Underperform from Neutral as the slower ramp up at Nova is likely to keep the finances tight over the next six months without drawing down on unused debt facilities.
The broker struggles to see a positive catalyst in the short term. Target is reduced -15% to $2.80.
Perpetual (PPT) Downgraded to Lighten from Hold by Ord Minnett B/H/S: 0/4/3
June quarter funds under management revealed negative net flows. Ord Minnett lowers its rating to Lighten from Hold given the net outflows of around -$1bn and reduced leverage to markets because of the lower-growth corporate trust division and minimal performance fee opportunities in funds management.
The broker acknowledges its forecast for a fully franked dividend yield of around 5% provides some support to the share price, but with no sign of meaningful flows in the business for the near term earnings are largely in the hands of the market’s direction. Target is reduced to $46.50 from $49.50.
Regis Resources (RRL) Downgraded to Neutral from Buy by Citi B/H/S: 1/3/4
Citi analysts conclude FY17 has been a year of strong performance for Regis Resources. They expect the same from FY18.
However, it’s the share price valuation they have an issue with, hence the downgrade to Neutral from Buy. Operationally, they continue to see the risk as being skewed towards positive surprises.
The stockbroker’s Bull case valuation is $4.70, while the Bear case valuation is $3.10. Current target price sits at $3.90, up from $3.75 prior.
Santos (STO) Downgraded to Reduce from Hold by Morgans B/H/S: 6/1/1
Management may be working hard to turn the business around but Morgans still believes the company is stuck in a difficult strategic, economic and political position.
Outside of rising oil price or asset sales, the broker expects the stock to continue to underperform higher-margin peers.
Given the amount of uncertainty surrounding GLNG’s long-term operating outlook and the size of the earning/valuation sensitivity to the oil price, Morgans downgrades to Reduce from Hold. Target is lowered to $2.28 from $3.17.
Speedcast Intern (SDA) Downgraded to Hold from Add by Morgans B/H/S: 3/1/0
The company will acquire UltiSat, a provider of satellite services to the military, government and NGOs. Consideration payable over three years and assuming earn-outs is up to US$100m.
Morgans believes the acquisition makes sense as it is accretive to both earnings and valuation. Nevertheless, the broker applies a discount to valuation to reflect a view that management needs to deliver on prior acquisitions to de-gear and prove these have created equity value.
Rating is downgraded to Hold from Add. Target is reduced to $3.87 from $4.72.
Super Retail (SUL) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 6/0/2
The company will close its Amart brand and convert existing stores to Rebel. Credit Suisse observes the strategy pre-empts consolidation of a market that is moving to significant over-capacity and resulting in declining industry economics.
Hence, the broker forecasts sports division operating earnings margin of 8.4% in FY20, lower than the company’s guidance of 11%.
Credit Suisse downgrades to Underperform from Neutral because of an increase in the share price and ongoing downside risk to industry profits. Target is reduced to $7.50 from $7.56.
Wisetech (WTC) Downgraded to Neutral from Buy by Citi B/H/S: 1/3/0
Citi has downgraded to Neutral from Buy, with the analysts explaining the move is purely inspired by recent share price appreciation. “We are still big supporters”, maintain the analysts.
While the shares are now considered “fairly valued”, Citi also points out on a relative basis we’re talking a premium of 12% only vis-a-vis nearest peer Descartes. Price target lifts to $7.30 from $6.25.
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