In the good books
Automotive Holdings (AHG) Upgraded to Add from Hold by Morgans B/H/S: 5/1/1
Industry data has shown the Western Australia new vehicle sales grew by 4.2% in August, the second month of positive growth in four months. The company faced a number of challenges in FY17 relating to finance impacts from tightening consumer credit conditions and declining vehicle sales.
Morgans suspects the risk/reward is now to the upside. The broker likes the strong exposure to an eventual upswing in the WA economy and believes it’s only a matter of time before trading conditions improve. Rating is upgraded to Add from Hold, target is $3.60.
Baby Bunting (BBN) Upgraded to Add from Hold by Morgans B/H/S: 2/2/0
The exit of another competitor in Queensland, Bubs, is an opportunity for Baby Bunting, Morgans believes. There is the potential to take on a couple of the leases where Baby Bunting does not have a presence.
In the short term the clearance of Bubs stock may impact sales growth for Baby Bunting and, therefore, margin but the broker believes the market will look through this for the medium-long-term.
Rating is upgraded to Add from Hold, as it is a reminder of the company’s strengthening competitive position and the strong growth that is still on offer. Target rises to $1.96 from $1.80.
Senex Energy (SXY) Upgraded to Buy from Neutral by Citi and to Outperform from Neutral by Macquarie B/H/S: 4/2/0
The Queensland government has awarded the company an acreage position in the Surat Basin for nil cost and Citi analysts consider it favourably, pointing out the positioning is surrounded by Tier 1 projects.
The company expects to obtain regulatory approvals by mid-CY18, with first gas deliveries expected in CY19. This is sufficient for Citi to upgrade to Buy/High Risk from Neutral. Target price gains 5c to 35c.
The analysts explain their unrisked valuation has lifted to $0.51/shr, but in a bull-case scenario whereby the company performs better in terms of CSM costs, reserves and the gas price this valuation could well rise above $0.60/shr.
Macquarie notes that the company has been granted the Queensland government’s domestic gas acreage in the Surat Basin. The project is expected to deliver first gas by 2019. Macquarie believes this is a gift from the Queensland government and far better than any other project in the company’s portfolio. The broker believes the project has the potential to deliver around 2mmboe per year at plateau rates, double the company’s current production.
The main risk remaining regarding reserve development is limited to wells that have been drilled on the permit to date. Rating upgraded to Outperform from Neutral. Target raised to $0.35 from $0.30.
Wellard (WLD) Upgraded to Hold from Reduce by Morgans B/H/S: 0/2/0
FY17 results were extremely weak, Morgans observes, although in line with recent guidance. FY18 is expected to be another challenging year. Uncertainty remains high and the broker does not expect the company to return to profitability until FY19. Morgans suggests that further asset sales and/or new equity raisings may be necessary. The broker suspects the company is through the worst and upgrades to Hold from Reduce. Target is reduced to $0.11 from $0.15.
In the not-so-good books
Astro Japan Property Trust (AJA) Downgraded to Hold from Buy by Ord Minnett B/H/S: 0/1/0
The company has agreed with hedge fund Blackstone to acquire its $1.1bn Japanese portfolio, consisting mostly of greater Tokyo B-grade retail and office assets. Ord Minnett expects the vote to be approved by unit holders on September 13. Ord Minnett’s suspects a superior alternative proposal is highly unlikely. As the stock is now trading at the present value of the proposed transaction price, the rating is downgraded to Hold from Buy and the target raised to $7.25 from $7.20. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.
Alacer Gold (AQG) Downgraded to Hold from Buy by Ord Minnett B/H/S: 4/1/0
Ord Minnett observes the miners have had a good run, yet consensus estimates may be too low following the broad-based rally in commodities. The broker envisages room to grind higher in the short term. Nevertheless, the broker is also wary that prices sit above cost curve support and may provide incentives for incremental supply. Rating is downgraded to Hold from Speculative Buy. Target is reduced to $2.30 from $2.90. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
Iluka Resources (ILU) Downgraded to Hold from Accumulate by Ord Minnett B/H/S: 3/2/2
Applying the same reasons in relation to the broad-based rally in commodities (see Alacer Gold above), Iluka’s rating is downgraded to Hold from Accumulate. Target is $10. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
Regis Resources (RRL) Downgraded to Hold from Accumulate by Ord Minnett B/H/S: 0/4/4
Applying the same reasons in relation to the broad-based rally in commodities (see Alacer Gold above), the Regis rating is downgraded to Hold from Accumulate. Target is raised to $4.10 from $4.00. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
Suncorp (SUN) Downgraded to Underperform from Neutral by Macquarie B/H/S: 3/3/2
Macquarie has a negative outlook on the Australian general insurance sector. Macquarie believes the company’s underlying margins will take a structural step down in FY18 as reinsurance changes and Queensland CTP reform flow through the book. The broker expects a -30 basis points headwind to margins from the changes to the reinsurance allowance. Rating is downgraded to Underperform from Neutral. Target is reduced to $12.70 from $14.50.
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