In the good books

ASALEO CARE LIMITED (AHY) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Neutral from Sell by Citi B/H/S: 1/2/0

Credit Suisse observes first half results revealed the company is on track for 2017 earnings guidance. The company is diversifying its revenue stream and its two largest customers now account for 29% of sales versus 35% at the time of the IPO in 2014.

The broker expects some accelerated momentum for sales in the second half as weaker retail business lines cycle easier comparables. Rating is upgraded to Outperform from Neutral. Target is reduced to $1.70 from $1.75.

Price target has moved to $1.55 (up 5c) and the rating to Neutral from Sell post the release of H1 financials with the analysts suggesting the share price has fallen deeply enough to adequately reflect the risk profile for this company.

Citi analysts feel encouraged by the outlook, deemed improved, and see a stable earnings outlook for the next three years, with the shares seen trading at fair value.

Increased B2B sales, such as to hospitals and offices, seem to be making the difference with the analysts lifting forecasts by 4%-5%. The company is expected to continue paying out 10c per annum to shareholders.

AIR NEW ZEALAND LIMITED (AIZ) Upgrade 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.

AUSDRILL LIMITED (ASL) Buy by Deutsche Bank B/H/S: 1/0/0

Ausdrill’s FY17 results were better than the broker had expected, highlighting improved conditions, new contract wins and strong cost discipline.

FY18 guidance for NPAT growth of 30% to 40% implies NPAT of $41m to $44m, slightly below Deutsche Bank’s estimate. The broker’s estimate assumes no new contract wins in Africa, which is a very conservative view in the broker’s opinion.

Buy rating retained and target rises to $2.40 from $2.00.

BAPCOR LIMITED (BAP) Upgrade 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.

BEACON LIGHTING GROUP LIMITED (BLX) Upgrade to Buy from Neutral by Citi B/H/S: 2/0/0

Upgrade to Buy from Neutral as Citi analysts see better times ahead, also because the business is cycling weak numbers from the year past when Masters shut down. Citi has elevated Beacon Lighting to its top pick in the small-cap discretionary retail sector.

The new year has started on “encouraging” footing. Citi analysts anticipate margin expansion. The company is planning a more gradual new stores roll-out. Estimates have been lifted. Target price jumps by 19% to $1.60.

COCA-COLA AMATIL LIMITED (CCL) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Neutral from Sell by UBSB/H/S: 2/4/1

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 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.

CROMWELL PROPERTY GROUP (CMW) Upgrade to Neutral from Underperform by Credit Suisse B/H/S: 0/2/3

Ahead of the FY17 result, Credit Suisse upgrades to Neutral from Underperform. Target is reduced to $0.94 from $0.97.

The company has not engaged with the Investa Office (IOF) independent directors since completion of due diligence, which suggests its 10% stake may soon be divested, speculates the broker.

While the implications are difficult to quantify, Credit Suisse believes the current share price implies limited value for this segment, regardless. Importantly, divestment would mean gearing reduces by around 550 basis points, with only marginal dilution to earnings per share.

INSURANCE AUSTRALIA GROUP LIMITED (IAG) Upgrade 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.

INSTITUTE OF DRUG TECHNOLOGY AUSTRALIA LIMITED (IDT) Upgrade to Hold from Reduce by Morgans B/H/S: 0/1/0

FY17 results were below the broker’s expectations. No guidance or outlook was provided.

The broker believes the recent resignation of the managing director and subsequent write-downs of generic assets does not bode well for FY18 and beyond. Morgans has reduced FY18 forecasts by -23%, FY19 by -143% and FY20 by -122% respectively.

Upgrade to Hold from Reduce and target reduced to 8c from 8.5c.

MCMILLAN SHAKESPEARE LIMITED (MMS) Upgrade to Equal-weight from Underweight by Morgan Stanley B/H/S: 2/2/0

FY17 came out below expectation, report the analysts. Divisional results are labeled as “mixed”. Retail Financial Services (RFS) profit declined in double digits, driven by lower commissions in light of the ASIC reviews.

Morgan Stanley does find the outlook has now improved, with contract wins and increased take-up in Group Remuneration Services (GRS) underwriting FY18 growth.

Target jumps to $14.65 from $9.60. Rating moves to Equal-weight from Underweight. Sector view is In-Line.

See also MMS downgrade.

PERPETUAL LIMITED (PPT) Upgrade to Outperform from Neutral by Credit Suisse B/H/S: 1/3/2

FY17 results were ahead of Credit Suisse forecasts. The broker was encouraged by the double-digit growth in Perpetual Private and Corporate Trust divisions in the second half.

The broker finds promise in these other divisions, as the Perpetual Investment strategy appears to be on the back burner and flows from new products are a couple of years away.

Ratings upgraded to Outperform from Neutral. Target is raised to $56.50 from $51.00.

SMARTGROUP CORPORATION LTD (SIQ) Upgrade to Add from Hold by Morgans B/H/S: 4/1/0

Smartgroup’s first half results were pleasing to the broker, with NPATA up 67% on the previous corresponding period. No formal guidance was given.

The company’s second half and FY18 growth outlook is supported by an improved run-rate of the Selectus synergy target, solid package growth in the first half and FY18 targeted contribution from AccessPay of $2.5m.

The broker upgrades to Add from Hold and target raised to $8.35 from $7.40.

See also SIQ downgrade.

SUNCORP GROUP LIMITED (SUN) Upgrade to Accumulate from Hold by Ord Minnett B/H/S: 3/4/1

Ord Minnett has upgraded the stock to Accumulate from Hold, with value now on offer following recent share price weakness.

The move to a more positive view is premised on a return to profitability in commercial business lines post increases in market premium rates, and the expense base normalising by FY19.

Target price remains $13.75.

TRADE ME GROUP LIMITED (TME) Upgrade to Neutral from Underperform by Credit Suisse B/H/S: 1/2/2

FY17 results were in line with expectations. The main news for Credit Suisse was that the company will invest in a range of platform–centred initiatives, and costs are expected to outgrow revenue in FY18 with a further step up in capitalised development.

The broker remains supportive of the company’s strategies but believes caution is required as to what upside to valuation they ultimately produce.

Rating is upgraded to Neutral from Underperform. Price target is reduced to NZ$4.40 from NZ$4.50.

WELLCOM GROUP LIMITED (WLL) Upgrade to Add from Hold by Morgans B/H/S: 1/0/0

FY17 results were ahead of expectations, but could have been worse given the loss of three major clients.

Morgans has revised its FY18 EPS forecast down to 29.5c from 33.5c and FY19 forecast down to 31.3c from 35.6c. The broker notes Wellcom offers investors exposure to the global advertising cycle, with revenues directly linked to customer activity levels.

With an improved outlook for media spending, and the stock trading at a significant discount to the broker’s valuation, the stock is upgraded to Add from Hold and target raised to $5.66 from $5.11.

In the not-so-good books

ALUMINA LIMITED (AWC) Downgrade to Neutral from Outperform by Macquarie B/H/S: 1/3/3

Alumina Ltd’s strong result was in line with consensus as was the dividend, albeit below Macquarie’s forecast. Higher corporate costs meant cash flow was softer.

The broker believes illegal capacity cuts in China will not impact on alumina to the same extent as they have for aluminium, removing a potential key catalyst for alumina prices. Add in a stronger A$ and rising caustic soda prices and Macquarie downgrades to Neutral, retaining a $2.10 target.

 

 

CORPORATE TRAVEL MANAGEMENT LIMITED (CTD) Downgrade to Accumulate from Buy by Ord Minnett and Downgrade to Hold from Add by Morgans B/H/S: 2/3/0

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.

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.

CLEANAWAY WASTE MANAGEMENT LIMITED (CWY) Downgrade to Hold from Accumulate by Ord Minnett B/H/S: 1/5/0

FY17 operating earnings were broadly in line with Ord Minnett forecasts. The broker expects earnings to accelerate further into FY19 on the back of contract wins and growth in free cash flow.

In order to become more positive on the stock at the current share price the broker needs to factor in additional value-accretive wins or acquisitions. This leads to a reduction in the recommendation to Hold from Accumulate. Target is $1.36.

ERM POWER LIMITED (EPW) Downgrade to Neutral from Outperform by Macquarie B/H/S: 1/2/0

ERM’s result beat Macquarie, thanks to an operational rebound in the core Aust business. The opaque nature of the hedge book makes it difficult for the broker to identify improvement in the last quarter, but rising electricity prices are assumed to have provided gains.

The US business was soft and Likewise in Aust is still three years from breakeven. Uncertainty over the US business and the headwind of a working capital unwind see the broker downgrade to Neutral. Target rises to $1.43 from $1.30.

ISENTIA GROUP LIMITED (ISD) Downgrade 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.

LOVISA HOLDINGS LIMITED (LOV) Downgrade to Hold from Add by Morgans B/H/S: 1/2/0

The broker was impressed by the company’s FY17 results, well above the top end of recent guidance. Management commented that FY18 had a ‘pleasing start’ with LFL sales tracking above target.

Lovisa has guided to 20 to 30 store openings in FY18, with a first pilot store in Spain. Morgans has raised FY18 earnings estimates by 13.2% and FY19 estimates by 10.8%.

Downgrade to Hold from Add and target increased to $4.84 from $4.48.

MCMILLAN SHAKESPEARE LIMITED (MMS) Downgrade to Neutral from Outperform by Credit Suisse B/H/S: 2/2/0

FY17 results were in line with estimates. Credit Suisse believes the results confirm that positive earnings momentum has returned. The broker considers, in the light of recent share price appreciation, that the valuation is fair at this point.

Rating downgraded to Neutral from Outperform. Target rises to $15.75 from $12.50.

See also MMS upgrade.

MORTGAGE CHOICE LIMITED (MOC) Downgrade to Underperform from Neutral by Macquarie B/H/S: 0/0/1

Mortgage Choice’s result was in line but core commissions fell short, suggesting lower quality. While Macquarie notes stabilisation of commission rates, brokers’ share of settlements is stagnating and market share of applications is falling.

Throw in an expected slowing in the housing market and the broker sees constrained earnings, and given further uncertainty around commission structures, little chance of a re-rate. Downgrade to Underperform.

Target falls to $2.30 from $2.55.

NINE ENTERTAINMENT CO. HOLDINGS LIMITED (NEC) Downgrade to Underperform from Neutral by Macquarie B/H/S: 1/2/2

It is unclear how Nine’s result stacked up against Macquarie’s forecast but the broker does note modest earnings growth thanks to cost controls and licence fee relief. Better ratings meant market share gains in TV ads but that market continues to decline.

Market share gains still remain key to FY18 performance, Macquarie suggests, but cash conversion will remain weak due to a number of factors including the timing of sports rights payments and licence fee cuts and onerous contract provisions.

While Nine’s ratings and profits are improving, the share price is up 50% this year and that’s enough for the broker to downgrade to Underperform. Target rises to $1.40 from $1.35.

OZ MINERALS LIMITED (OZL) Downgrade to Hold from Add by Morgans and Downgrade to Sell from Hold by Deutsche Bank B/H/S: 3/2/3

The company’s first half results were in line with the broker’s expectations. Production guidance for CY17 is on track.

Approval of Carrapateena was no surprise to Morgans. The broker believes the company will develop the project before considering increases to dividend policy or capital management through a buy-back.

Downgrade to Hold from Add and target raised to $8.95 from $8.30.

The company’s first half results were better than the broker had expected. The 6c dividend was well ahead of Deutsche Bank’s expectations.

Management has approved the Carrapateena project following an updated feasibility study, and management believes it can fund construction from free cash flow while maintaining some level of dividend. The broker finds this decision somewhat confusing as the project could consume most of the cash balance.

Deutsche Bank downgrades the stock to Sell from Hold and target price rises to $7.30 from $7.10.

QUBE HOLDINGS LIMITED (QUB) Downgrade to Neutral from Buy by UBS and Downgrade to Neutral from Outperform by MacquarieB/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.

FY17 results were broadly in line with expectations. Macquarie notes, while no specific guidance was provided, the FY18 outlook is consistent with a challenging operating backdrop.

The company has reached agreement with Target Australia for warehousing on initial lease term of 10 years. As well, a new five-year logistics services contract has been agreed covering freight from Port Botany to Moorebank. This supports a long-term investment view in the broker’s opinion but will not materially benefit earnings until FY19.

Macquarie downgrades to Neutral from Outperform as the stock has risen 23% over the past year and there is limited upside in the short term. Target is raised to $2.89 from $2.81.

ST BARBARA LIMITED (SBM) Downgrade to Neutral from Buy by Citi B/H/S: 2/2/0

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.

SMARTGROUP CORPORATION LTD (SIQ) Downgrade to Neutral from Outperform by Credit Suisse B/H/S: 4/1/0

First half results were well ahead of Credit Suisse expectations. The broker does not rule out the upgrade cycle continuing for a while longer.

Nevertheless, on the back of share price appreciation valuation is considered fair and the rating is downgraded to Neutral from Outperform. Target is raised to $8.00 from $7.45.

See also SIQ upgrade.

VOCUS COMMUNICATIONS LIMITED (VOC) Downgrade to Reduce from Hold by Morgans B/H/S: 0/7/1

FY17 results were no surprise to the broker, having been pre-released. The main interest for Morgans was the expectation that net debt would stay at current levels, or a touch higher, over the next twelve months, suggesting no free cash flow and most likely no dividend.

FY18 guidance suggested earnings would be flat at best and -5% lower at worse. The broker expected lower capex and increased cash flow to de-lever the balance sheet. However, with debt levels unchanged, the broker sees little reason for investors to get excited.

Morgans downgrades the stock to Reduce from Hold and cuts the target price to $2.22 from $3.50.

WORLEYPARSONS LIMITED (WOR) Downgrade to Underperform from Neutral by Credit Suisse B/H/S: 4/0/1

FY17 results were a little soft, in Credit Suisse’s view. The broker observes the cycle is turning slowly but not without risks.

While the worst may be behind the company from a macro perspective, the high level of gearing and lower quality underlying earnings mean the broker struggles to justify the price/earnings ratio at over 21x on FY18 forecasts.

Rating is downgraded to Underperform from Neutral as the broker believes the potential for a renewed bid from Dar Group is inflating the price, undeservedly. Target is raised to $9.50 from $8.50.

WISETECH GLOBAL LIMITED (WTC) Downgrade to Underperform from Neutral by Credit Suisse B/H/S: 1/2/1

FY17 results beat estimates. Credit Suisse retains a positive view on the company’s scalable business model, the large addressable market and impressive execution to date.

The broker downgrades to Underperform from Neutral on valuation grounds. Target is raised to $6.00 from $4.80.

 

 

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