In the good books
Air New Zealand (AIZ) Upgraded to Outperform from Neutral by Macquarie B/H/S: 1/1/2
FY17 results were in line with Macquarie’s estimates. The broker upgrades FY18 estimates for earnings per share by 6.2% and FY19 by 0.5%.
The industry is demonstrating more rational behaviour around capacity and the company has come through the period of increased competition stronger than expected.
Hence, Macquarie upgrades to Outperform from Neutral. Target is raised to NZ$3.90 from NZ$3.38.
Bapcor (BAP) Upgraded to Outperform from Neutral by Macquarie B/H/S: 4/0/0
FY17 results were in line with Macquarie’s estimates. The broker believes the result demonstrates the resilience of the company’s earnings profile and the strong competitive advantage in trade.
The broker believes the fears of Amazon are overstated. Gearing remains a key short-term overhang but the commentary implies increasing traction in the divestment process.
Rating is upgraded to Outperform from Neutral. Target is raised to $6.20 from $5.90.
Beach Energy (BPT) Upgraded to Overweight from Equal-weight by Morgan Stanley B/H/S: 2/3/1
Morgan Stanley believes it’s time to get bullish on Beach Energy and upgrades to Overweight from Equal-weight. The broker observes the business is positive on free cash flow out to the end of the decade and trades on undemanding valuation metrics.
Reserves have been upgraded across the company’s operated oil acreage and the broker believes the stock will become one of the mid-caps of choice in Australia for investors wanting exposure to energy.
Price target is raised to $0.80 from $0.68. Industry view is In-Line.
See downgrade below.
Coca-Cola (CCL) Upgraded to Outperform from Neutral by Macquarie and to Neutral from Sell by UBS B/H/S: 2/5/1
First half net profit was lower than Macquarie anticipated. The company has guided to 2017 net profit to be broadly in line with 2016.
The broker believes the combination of the recent sell-off and the strong recovery in earnings growth from Indonesia means the headwinds the company faces are now factored in.
Rating is upgraded to Outperform from Neutral. Price target is reduced to $8.82 from $9.29.
A weak result from Coke missed UBS by -3%. Full year guidance was nevertheless reiterated given management has noted improving trends. Australian earnings were weak but Indonesia/PNG outperformed.
UBS’ FY forecast sits below guidance and the broker acknowledges the structural trend of a shift away from fizzy drink, but with the share price having fallen substantially and valuation implying a -45% discount to market for beverages, the broker believes the worst is priced in.
Upgrade to Neutral. Target falls to $8.60 from $9.00.
Fortescue Metals Group (FMG) Upgraded to Neutral from Sell by Citi B/H/S: 3/5/0
Citi has responded to Fortescue’s FY17 report by upgrading to Neutral from Sell and pushing up the price target to $5.50 from $4.60.
Higher iron ore prices in combination with higher dividend guidance are both seen as very supportive for the share price, underpinning the upgrade.
The FY17 performance itself seems to have slightly beaten Citi expectations beforehand. Citi points out, at present spot iron ore/FX, the dividend yield would be 13%/15% respectively and the company would be net debt free before end-FY19.
GrainCorp (GNC) Upgraded to Buy from Hold by Deutsche Bank B/H/S: 1/4/0
Deutsche Bank believes the FY18 east coast winter crop reductions have been excessively discounted in the current share price. Hence, the rating is upgraded to Buy from Hold.
Recent rainfall has provided some reprieve for the FY18 winter crop and the broker retains current estimates. Target is reduced to $10.00 from $10.20.
The broker reduces FY18 earnings forecast by -6% and FY19 by -2% to reflect higher-than-anticipated energy costs that will affect margins in the malt and oil segments.
Greencross (GXL) Upgraded to Hold from Sell by Deutsche Bank B/H/S: 1/2/0
FY17 results were below Deutsche Bank estimates, driven by margin pressures. Lower gross margins signal an increasingly competitive environment, which is expected to weigh on the stock.
The broker believes management is doing a good job in consolidating the network and executing the co-location and online strategy, although comparable sales remain low for a retailer that has undertaken significant store expansion over the last three years.
Deutsche Bank reduces the target to $5.90 from $6.30 and, as the stock is trading closer to the revised target, upgrades to Hold from Sell.
Insurance Australia Group (IAG) Upgraded to Neutral from Sell by Citi B/H/S: 2/5/1
FY17 margin was affected by a high incidence of large commercial losses, Citi observes. FY18 is expected to benefit from recent commercial price rises.
Underlying margins are expected to improve from here and, with solid premium momentum, the outlook appears reasonable to Citi.
The significant fall in the share price results in the broker lifting its call while acknowledging the stock still looks somewhat expensive. Rating upgraded to Neutral from Sell. Target $6.30.
Link Administration (LNK) Upgraded to Add from Hold by Morgans B/H/S: 4/1/1
Link’s result was roughly in line with consensus after adjusting for an amortisation change, and featured strong performances from Corporate Markets and IDDS, Morgans notes, offset by weakness in Funds Administration.
Weakness leads to a -4% cut of FY18 forecasts but incorporating the Capita Asset Services acquisition and subsequent capital raising into forecasts results in a 10% increase for FY19. Target rises to $9.04 from $8.29 post incorporation and, on that basis, Morgans sees sufficient value to upgrade to Add.
Northern Star (NST) Upgraded to Neutral from Sell by UBS B/H/S: 1/4/1
UBS upgrades to Neutral from Sell, as concerns over mine life have been removed following a larger-than-expected reserve//resource update.
While the outlook appears balanced now, further upside may be difficult to achieve, as all of the exploration targets are likely to be needed to underpin the 10-year mine life based on the resource, the broker suggests. Target is raised to $5.00 from $4.49.
Sims Metal Management (SGM) Upgraded to Neutral from Underperform by Credit Suisse B/H/S: 1/6/0
Credit Suisse has upgraded Sims Metal Management from Underperform to Neutral, in a preview of FY17 results.
Sims earnings guidance disappointed given the best global scrap markets since 2008, and the broker points to second-half cost-out progress/regression as the culprit. The cash balance is strong at $370m.
Credit Suisse says strong scrap, iron ore and coking coal prices suggest a stronger FY18. After removing the -25% US discount and rolling the model forward, the broker’s net present value estimate rises. Target price rises to $13.50 from $11.
Sydney Airport (SYD) Upgraded to Buy from Neutral by UBS B/H/S: 2/4/1
For the six months to June aeronautical revenue grew by 9% off 3.6% growth in traffic, because of the favourable shift in mix to international versus domestic. UBS now forecasts cash flow growth of 14% in 2017 and EBITDA growth of 10%.
The broker believes the stock is looking more attractive and upgrades to Buy from Neutral. Target is raised to $7.60 from $7.30.
In the not-so-good books
APN Outdoor (APO) Downgraded to Neutral from Buy by UBS B/H/S: 3/2/0
APN Outdoor’s full-year result was in-line – much to UBS’s surprise. The market had been bracing itself for a miss given the failed oOh!media merger, churn in sales staff and the resignation of the CEO. Guidance also met consensus, albeit a touch shy of the broker.
UBS expects FY18 may be more subdued, expecting growth to be driven by smaller digital boards, and anticipating growing re-contracting risk and rising depreciation and amortisation.
The broker cuts FY18-FY19 earnings per share by -9% and -12%. UBS downgrades the stock to Neutral from Buy and cuts the target price to $5.25 from $6.
Beach Energy (BPT) Downgraded to Neutral from Buy by Citi B/H/S: 2/3/1
Beach Energy’s full-year result was in line with the broker, save for a big beat on tax that put the net profit 10% ahead of forecast.
Citi notes all the ducks are lining up for Beach: it delivered on cost cutting, and reserves growth, and the outlook is rosy.
But the broker downgrades core net profit forecasts for FY8 and FY9 by -13% to -16%, expecting higher depreciation and amortisation and higher corporate costs.
Rating is downgraded to Neutral from Buy after a 10% share-price jump post the the result. Target price eases to 76c from 80c.
See upgrade above.
Breville Group (BRG) Downgraded to Neutral from Outperform by Macquarie B/H/S: 1/3/0
FY17 net profit met expectations and Macquarie considers the outlook attractive. Nevertheless, the broker believes current multiples capture the upside and downgrades to Neutral from Outperform.
The broker downgrades earnings per share estimates by -2.9% for FY18 and by -3.6% for FY19. Target is raised to $10.70 from $9.50.
Cedar Woods Properties (CWP) Downgraded to Hold from Add by Morgans B/H/S: 1/1/0
FY17 results were in line with the broker’s forecasts. No formal FY18 guidance was forthcoming, given the heavy skew of settlements in the fourth quarter.
A weaker FY18 based on project timing presents a risk, but pre-sales are robust at $260m, up 41% on the previous corresponding period. Morgans believes the company’s development pipeline and embedded value within the WLTC project provide a visible level of earnings delivery out to FY21.
Stock is downgraded to Hold from Add and target is reduced to $5.76 from $5.80.
Corporate Travel Management (CTD) Downgraded to Hold from Add by Morgans and to Accumulate from Buy by Ord Minnett B/H/S: 2/3/0
The company’s FY17 results were slightly better than the broker had forecast. Morgans believes currency will be a headwind in FY18, but expects the company to deliver 20% to 25% EBITDA growth.
Further acquisitions, rising airfares and increasing client spend are the key upside risks in the broker’s opinion. FY18 earnings forecast has dropped -3.2%, while FY19 and FY20 forecasts rise slightly.
With the stock trading close to valuation, Morgans downgrades to Hold from Add and raises the target price to $23 from $22.
FY17 results were slightly below Ord Minnett estimates. The broker considers the margins in the Australasian business the highlight of the results and likely to prove sustainable.
Estimates are downgraded by -3% for FY18 and -4% for FY19 because of currency changes, increasing capital expenditure and higher margins in Australasia.
The broker downgrades to Accumulate from Buy and recommends buying on weakness. Target is raised to $22.98 from $18.60 as the model is rolled forward, amid higher long-term revenue and margin assumptions as well as a change of analyst.
GrowthPoint Properties (GOZ) Downgraded to Underperform from Neutral by Macquarie B/H/S: 0/0/2
Growthpoint’s result was in line with Macquarie and recent FY18 guidance was reaffirmed. The dividend is nevertheless some 4% in excess of free cash flow which is why, the broker suggests, the payout ratio declined to 84% from 89% in FY16.
A payout ratio of 85%-plus has been indicated for the medium term, but Macquarie sees limited upside to distributions. Despite being defensive and high yielding, Growthpoint’s above-sector gearing and the fact the stock is trading above net asset valuation prompts the broker to downgrade to Underperform.
Target rises to $3.19 from $3.05.
GWA Group (GWA) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 0/2/4
FY17 results were in line with Credit Suisse. The broker observes the balance sheet is in good shape and management is to be commended for its execution.
Nevertheless, most of the low hanging fruit appears to have been picked and the broker suspects it will be difficult to grow in FY18-19. Subsequently, rating is downgraded to Underperform from Neutral following a strong share price performance. Target is $2.90.
Isentia (ISD) Downgraded to Neutral from Outperform by Macquarie B/H/S: 1/2/0
FY17 net profit was slightly ahead of Macquarie’s estimates while EBITDA was pre-announced. Macquarie believes long-term value exists but it will take time to materialise.
After three successive downgrades and reduced disclosure, the broker believes it will take time to re-build investor confidence. The broker continues to believe the company should close or sell King Content if the performance does not improve soon.
Rating is downgraded to Neutral from Outperform. Target is reduced to $1.66 from $2.00.
NIB Holdings (NHF) Downgraded to Underweight from Equal-weight by Morgan Stanley B/H/S: 2/2/3
Morgan Stanley believes cyclical lows in claims inflation, sub-zero systems growth, the gradual breakdown in community ratings and the 2018 election present headwinds.
The broker believes margin risks are elevated in the form of higher costs of acquisition, rising costs for retention and upside risk to hospital and ancillary claims.
Given the risks and trading multiples, the broker downgrades to Underweight from Equal-weight. Target is raised to $4.95 from $4.85. In-Line industry view.
REA Group (REA) Downgraded to Hold from Add by Morgans B/H/S: 3/5/0
Morgans has downgraded the stock to Hold from Add. As the price has increased 6% since the Add recommendation, the stock is now near to fully valued.
There are no changes to forecasts and price target remains $68.75
Sydney Airport (SYD) Downgraded to Hold from Add by Morgans B/H/S: 2/4/1
Sydney Airport’s first half results were slightly better than the broker’s estimates. Full year dividend guidance has been upgraded by 1cps to 34.5cps.
Morgans has raised FY17 forecasts by 1%, but downgrades longer term forecasts slightly.
The broker has downgraded the stock to Hold from Add and lowered the target price to $7.0 from $7.40.
See upgrade above.
QBE (QBE) Downgraded to Sell from Hold by Deutsche Bank B/H/S: 4/1/3
Deutsche Bank downgrades to Sell from Hold. The broker believes the company has become, operationally, too complex. Returns on equity of just 7.0% have been achieved over the last five profitable years, well below the cost of capital.
The unpredictability of earnings makes the broker believe the risk/return metrics are not attractive at the current share price. Target is reduced to $10.00 from $12.70.
Qube (QUB) Downgraded to Neutral from Buy by UBS B/H/S: 2/5/1
Qube’s result fell -5% short of the broker, leading to a -12% downgrade to forecast earnings in FY18. Consolidated divisions and the Patrick JV met expectations but the broker sees lower Patrick earnings ahead, along with higher corporate costs and interest charges.
It was a consolidation year for the company, the broker notes, hampered by the cost of establishing the Patrick JV and closing on Moorebank. FY18 should see the trough in earnings before these investments underpin earnings growth thereafter. The stock has nonetheless outperformed the market, hence the broker sees valuation as fair.
Downgrade to Neutral. Target falls to $2.80 from $2.90.
St Barbara (SBM) Downgraded to Neutral from Buy by Citi B/H/S: 3/1/0
FY17 revenue was in line with Citi but underlying earnings missed estimates. The FY17 reserve/resource update increases Gwalia ounces by 18% although the grade drops to 7.8g/t from 8.3g/t.
The company has completed a turnaround both in operations and financially but Citi believes this is incorporated by the market and the stock is close to fair value.
Rating is downgraded to Neutral from Buy as a result. Target is raised to $3.00 from $2.93.
Western Areas (WSA) Downgraded to Sell from Neutral by Citi B/H/S: 0/4/3
Underlying, point out Citi analysts, hides an operational loss for FY17, below expectations. Making matters worse; guidance for FY18 is seen as soft as well.
The realised nickel price turned out weaker than expected. Citi’s nickel price forecasts do not allow for further dividend payments. Estimates have been cut. Price target loses 10c to $2.10. Downgrade to Sell from Neutral.
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