In the good books
Adairs (ADH) Upgraded to Add from Hold by Morgans B/H/S: 2/0/0
FY17 results were in line with expectations following a recent upgrade to guidance. Morgans observes trading improved substantially into the end of the financial year and has continued into the start of FY18. Guidance for $33-37m in EBIT for FY18 appears conservative to Morgans. The broker upgrades to Add from Hold and raises the target to $1.67 from $1.35.
Alumina (AWC) Upgraded to Neutral from Underperform by Credit Suisse B/H/S: 1/4/2
First half numbers were solid and ahead of Credit Suisse estimates. The broker updates for commodity price forecasts and 2017 guidance, which is largely unchanged. Marginally higher cash costs are assumed. The dividend yield is attractive and there are reasonably undemanding valuation multiples. Hence, the broker upgrades to Neutral from Underperform. Target is raised to $2.30 from $1.70.
Blackmores (BKL) Upgraded to Accumulate from Hold by Ord Minnett B/H/S: 1/2/0
FY17 results were broadly in line with Ord Minnett. The broker believes a normalisation of one-offs and investment should lead to meaningful earnings growth. This view leads the broker to upgrade to Accumulate from Hold and raise the target to $115 from $110.
Ord Minnett believes the business faces near-term challenges related to distribution channels, pricing harmonisation and customer concentration which could lead to some volatility. However, the longer-term thematic of foreign consumer demand for Australian products should continue.
BT Investment Management was Upgraded to Neutral from Sell by UBS B/H/S: 2/4/0
UBS sees only 3% growth in FY18, although this is expected to improve to 8% over FY19 and FY20. JOHambro’s FY18 performance fee outlook has improved slightly over the past two months.
Caltex (CTX) Upgraded to Accumulate from Lighten by Ord Minnett B/H/S: 4/2/1
Ord Minnett upgrades to Accumulate from Lighten and raises the target to $35 from $28. The main reason for the changes includes a belief that refiner margins and transport fuel margins are likely to remain elevated. Moreover, the broker has increased confidence in the opportunities in the convenience store business.
Graincorp (GNC) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 2/3/0
Credit Suisse believes earnings risks are modestly to the downside. The broker notes seasonal conditions have not deteriorated further and it remains comfortable with the risks to an 18.1mt east coast crop forecast. While the risks are to the downside, investors are expected to be adequately rewarded by a higher pay-out ratio, and a recent decline in the share price produces a more favourable risk/reward, hence, Credit Suisse upgrades to Outperform from Neutral. Target is raised to $9.42 from $9.33.
Mantra Group (MTR) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 6/2/0
FY17 results were in line with Credit Suisse estimates. While problematic markets are likely to continue, the broker believes this is well understood and offset by strength in other areas. The broker also notes an estimated $50m of head room for internally-funded acquisitions, as the company is clearly active in a consolidating market. Accordingly, with the stock trading at a reasonable price/earnings ratio the broker upgrades to Outperform from Neutral. Target is raised to $3.15 from $3.05.
Medibank Private (MPL) Upgraded to Hold from Reduce by Morgans B/H/S: 2/3/3
FY17 net profit was ahead of Morgans, largely on higher investment income. FY18 outlook is more positive than the broker expected regarding health insurance gross profit margins and management expenses. Morgans upgrades FY18 and FY19 estimates by 6-7%. Target is raised to $2.68 from $2.40. The broker is now more comfortable with the outlook and a narrower gap to valuation, thus upgrades to Hold from Reduce.
Regis Resources (RRL) Upgraded to Neutral from Underperform by Credit Suisse B/H/S: 1/4/3
FY17 results were slightly behind the broker’s forecasts. FY18 guidance is for 335koz to 365koz, all in sustaining cost of $940-$1,010/oz and growth capital spend of $23m. The December quarter is expected to deliver McPhillamys maiden reserve and DFS. Negligible EPS changes until 2020, which is impacted by McPhillamys. Credit Suisse upgrades the stock to Neutral from Underperform and target raised to $3.70 from $3.50.
Select Harvests (SHV) Upgraded to Hold from Reduce by Morgans B/H/S: 0/2/0
The company’s weak FY17 results were in line with recently downgraded guidance. Cash flows were materially lower and gearing is too high in Morgans’ opinion. Further almond orchard sale and leaseback opportunities or capital raising to restore the balance sheet cannot be ruled out by the broker. FY18 production guidance was lower than expected prompting Morgans to lower FY18 forecasts by -31% and FY19 forecasts by -24.1%. Rating is upgraded to Hold from Reduce and target reduced to $4.00 from $4.05.
Tox Free Solutions (TOX) was upgraded to Buy from Neutral by UBS B/H/S: 1/3/0
FY17 results were broadly in line with UBS estimates. UBS says FY18 should conclude the transition away from more volatile, low quality resource construction earnings, to be replaced by the full year contribution from the health waste business.
In the not-so-good books
Ainsworth Gaming Technology (AGI) Downgrades to Neutral from Outperform by Macquarie B/H/S: 0/1/1
FY17 results were ahead of guidance. Macquarie is encouraged by the outlook for FY18, especially with the launch of the video cabinet and accompanying games in August. North America was disappointing but forward orders imply FY18 growth. The stock has recently re-rated to reflect the recent business improvement. Nevertheless, Macquarie is cautious to capitalise growth beyond FY18, given the company’s high exposure to outright sales and poor visibility in the Latin American market. Rating is downgraded to Neutral from Outperform. Target is raised to $2.22 from $2.04.
Ausdrill (ASL) was downgraded to Hold from Buy by Deutsche Bank B/H/S: 0/1/0
After posting a solid FY17 result, Ausdrill has raised new capital though both equity and debt in order to capitilise on improving conditions domestically and a strong pipeline on offer in Africa. Deutsche Bank expects new contract wins over the next year. Execution is critical, with several large projects ramping up over the next six months and contract renewals due. Deutsche sees strong earnings momentum ahead but also a full valuation, hence a downgrade to Hold.
Avita Medical (AVH) Downgraded to Hold from Add by Morgans B/H/S: 0/1/0
FY17 net loss was in line with expectations. Sales are moving in the right direction but Morgans is frustrated by the slow growth. A new CEO took the helm in May, aiming for a more clinically-focused approach, which the broker suspects will pressured near-term sales. Although clinical data and cost justification should underpin a commercial strategy, Morgans believes that to build a solid foundation will take many years and be hampered by tight capital controls. The broker no longer targets FY19 profitability and downgrades to Hold from Add. Target is reduced to 7.5c from $0.28.
Boral (BLD) was downgraded to Sell from Neutral by Citi B/H/S: 4/2/1
Boral’s FY17 results were in line with Citi’s expectations. FY18 guidance was disappointing, with the company expected to face $15m to $20m in energy headwinds and $15m less property profits. Combined with elevated D&A guidance, mainly at Headwaters, Citi downgraded core EPS forecasts by -12% in FY18, -11% in FY19 and -9% in FY20.
Caltex Australia (CTX) Downgraded to Neutral from Outperform by Macquarie and to Neutral from Buy by UBS B/H/S: 4/2/1
First half results were in line with expectations. Macquarie likes the growth in diesel volumes and marketing & supply earnings. The broker did not like the loss of non-fuel income affected by franchisee wage under-payment issues. Incremental news flow around strategy underwhelmed the broker. Rating is downgraded to Neutral from Outperform. Target rises to $33.85 from $32.65.
First half results were broadly in line with UBS forecasts. Caltex stated that the impact of losing the Woolworths ((WOW)) fuel volumes would be in the order of $150m, higher than previously expected. The broker has raised CY17 EPS forecast by 9.5%, CY18 forecast by 11.5% and CY19 by 4.4%. However, UBS sees a large earnings issue ahead associated with the loss of volumes and downgrades the stock to Neutral from Buy. Target raised to $33.40 from $33.00.
Hotel Property Investments (HPI) Downgraded to Hold from Add by Morgans B/H/S: 1/1/0
FY17 results were in line with guidance, with no revaluations announced. FY18 distribution guidance of 19.6c was provided, below the broker’s forecast and implying flat growth on the previous corresponding period. Incorporating FY18 guidance into its forecasts, Morgans cuts FY18 DPS forecast by -1.8% and FY19 DPS forecast by -1%. The broker has downgraded the stock to Hold from Add and cut the price target to $3.02 from $3.06.
McMillian Shakespeare (MMS) Downgraded to Neutral from Outperform by Macquarie B/H/S: 1/3/0
FY17 earnings were roughly in line with Macquarie. The broker notes strong organic growth in group remuneration services. The retail financial services division is unclear because of regulatory and market uncertainty. Rating is downgraded to Neutral from Outperform a valuation grounds. Target is raised to $15.46 from $13.20.
Monadelphous (MND) Downgraded to Reduce from Hold by Morgans B/H/S: 0/0/6
FY17 results were broadly in line with estimates and Morgans notes no formal guidance was provided for FY18. The outlook suggests some revenue growth is possible. EBITDA margins are expected to remain under pressure. Morgans appreciates the resource sector has stabilised, and remains bullish on the sector, but cannot justify the current valuation and downgrades to Reduce from Hold. Target is raised to $11.32 from $10.95.
Qantas (QAN) Downgraded to Sell from Hold by Ord Minnett B/H/S: 4/0/1
FY17 results were in line with guidance. Ord Minnett downgrades to Sell from Hold, noting the strong gains in 2017. The broker cannot justify any other recommendation at the current share price.
To support current valuations, the broker estimates further domestic airfare increases in the order of 10% are required and such a view appears optimistic. Target is raised to $4.55 from $4.15.
Ramsay Health Care (RHC) was downgraded to Hold from Add by Morgans B/H/S: 1/5/0
FY17 underlying profit was in line with estimates and Morgans observes the domestic business has shown resilience despite industry volatility. However regardless of the fundamentals and domestic business, headwinds are intensifying in the rest of the world and the broker expects this may handicap the near-term performance.
Servcorp (SRV) Downgraded to Neutral from Buy by UBS B/H/S: 0/1/0
Despite a beat on FY17 earnings, UBS has downgraded Servcorp to Neutral from Buy and lowered the target price to $6.15 from $6.75. The broker believes the company is well placed to increase occupancy, however a ramp up in competition leaves the broker cautious in the short to medium term.
Spark Infrastructure (SKI) Downgraded to Hold from Buy by Deutsche Bank B/H/S: 1/5/1
Spark’s result missed the Deutsche Bank on lower regulated revenue than regulation suggested, and increased costs. The dividend remains solid but cash coverage has now reduced upside risk to future dividends, the broker notes. Given the share price run of late the stock is trading in line with Deutsche’s valuation. Downgrade to Hold. Target rises to $2.60 from $2.55.
Speedcast International (SDA) Downgraded to Neutral from Outperform by Macquarie B/H/S: 2/2/0
First half results were largely in line with Macquarie’s expectations. The Harris CapRock acquisition drove revenue growth but challenging market conditions continued.
Macquarie observes positive early progress and synergies from the acquisition but awaits further developments and subsequent de-risking at the final results. Rating is downgraded to Neutral from Outperform. Target is reduced to $3.63 from $4.83.
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