The first week following the April holiday-drought provided yet more evidence that corporate Australia is facing multiple headwinds which may not be accurately reflected in today’s share prices. And so it was that when analysts and investors returned to their desks in late April/early may, their re-appraisal of freshly updated insights culminated into twelve upgrades in ratings for individual, listed ASX-stocks, vastly outnumbered by 22 downgrades.
Three companies received multiple upgrades, but the news seems less buoyant when looking into the finer details. Wealth manager Pendal Group’s market update attracted three upgrades, but only one went to Buy. Gold miner Regis Resources received two upgrades; both moved to Hold/Neutral. At least nickel, copper, gold, silver and zinc miner Independence Group received two upgrades that both pushed ratings to Buy.
No surprise, there was a lot more happening on the other side of the ledger. ANZ Bank’s interim report attracted three downgrades; only one went as low as Sell. A profit warning from Domain Holdings ((DHG)) also attracted three downgrades, but this time two moved to Sell.
In total, 10 out of the week’s 22 downgrades meant a fresh Sell rating for the stock impacted.
Among those who received a downgrade to Sell we also find Beach Energy, Dexus Group and Mirvac, Mount Gibson, REA Group, Redbubble, and Volpara Health Technologies.
The week’s top three positive changes to earnings forecast are all miners, interspersed by REA Group, then followed by more miners, before we meet Transurban and Super Retail Group.
Positive adjustments are enormous. The negative amendments are equally sizeable led by big cuts for Senex Energy, Syrah Resources and Alacer Gold and Northern Star, before we get to Flight Centre (yet another profit warning).
The week ahead sees a number of out-of-cycle profit reports, so no shortage in volatility and changes ahead. Australian banks have failed to concoct a miracle, and for once this includes Macquarie Group.
In the good books
- HANSEN TECHNOLOGIES LIMITED (HSN) was upgraded to Buy from Hold by Ord Minnett B/H/S: 1/0/0
Hansen Technologies has announced the acquisition of Sigma Systems for $166.2m. The strategic rationale centres on the high-quality asset, significantly adding scope and scale in telecommunications. It also provides cross selling opportunity into the utility vertical as well as pay-TV. Ord Minnett estimates the deal is 20% accretive and, while time will ultimately tell, Sigma Systems may represent the circuit breaker the company needs. The stock has significantly de-rated over the past year. Ord Minnett upgrades to Buy from Hold and raises the target to $3.95 from $3.36.
- PENDAL GROUP LIMITED (PDL) was upgraded to Neutral from Underperform by Credit Suisse, to Neutral from Sell by UBS and to Accumulate from Hold by Ord Minnett B/H/S: 3/4/0
First half cash net profit was down -26% and below Credit Suisse forecasts. The miss was largely caused by unexpected revenue margin compression. The broker expects management fee compression to continue in most of the product lines. Earnings estimates are downgraded by -7% for FY19 and -4-5% for FY20-21. The recent fall in the share price now provides more insulation from the risks and the broker upgrades to Neutral from Underperform. Target is reduced to $7.65 from $7.80.
Pendal’s -26% fall in March Q profit was -13% below UBS. With lower performance fees, flows and FUM all preannounced, it was lower base fees that made the difference, the broker notes. Weakness across the JOHCM funds appear to be a key factor, and the impetus for -9-10% cuts to UBS’ forecast earnings. Target falls to $7.85 from $8.70, but a 15.6x FY20 multiple and a 7% yield warrant an upgrade to Neutral, with further downside appearing more limited.
First half net profit was down -26.2% and below Ord Minnett’s forecasts. The interim dividend of $0.20 a share was slightly above expectations. The broker believes the business will face near-term headwinds and negative news around fund flows. However, the de-rating on re-based earnings is providing an attractive opportunity over the medium term and the broker’s rating is upgraded to Accumulate from Hold. Ord Minnett raises the target to $8.90 from $8.50.
- REGIS RESOURCES LIMITED (RRL) was upgraded to Hold from Sell by Deutsche Bank B/H/S: 1/4/2
March quarter production was solid and the company is on track to meet full year guidance. Regis Resources has guided to FY19 production in the mid to upper end of its range of 340-370,000 ounces. Costs are expected at the lower end of the range of $985-1055/oz. Deutsche Bank upgrades to Hold from Sell. Target is $4.40.
In the not-so-good books
- AUSTRALIA & NEW ZEALAND BANKING GROUP (ANZ) was downgraded to Hold from Accumulate by Ord Minnett, to Hold from Add by Morgans and to Underperform from Neutral by Credit Suisse B/H/S: 0/6/2
The first half result was close to Ord Minnett’s forecasts, although the composition was more skewed to the institutional business than expected. Institutional operations delivered a return on equity of just under 11% and this is expected to improve further. Nevertheless, the broker believes it will take longer to turn the retail bank around and ANZ faces greater exposure versus peers to proposed higher regulatory requirements in New Zealand. Ord Minnett downgrades to Hold from Accumulate and lowers the target to $29.50 from $31.20.
The first half result was messy, as Morgans suspected. Excluding remediation and the gain on sale from the divestment of OnePath Life, cash earnings beat forecasts by 3%. Disciplined cost performance was the highlight for the broker. Morgans is downgrading to Hold from Add because of recent strength in the share price. The broker believes the results will provide the market with reasons to focus on the potential earnings upside for the sector, as costs stay flat or decline over the next three years. Target is steady at $29.
ANZ’s underlying earnings fell short of Credit Suisse on lower revenues, leading to a lower interest margin. A strong performance from institutional banking was encouraging, as was cost control, with a specific target now set. The broker nevertheless notes the bank faces “outsized” headwinds from low asset growth, margin decline, a non-linear cost trajectory and capital and regulation uncertainty. Credit Suisse cuts its target to $26.55 from $28.00 and downgrades to Underperform.
- BHP GROUP (BHP) was downgraded to Neutral from Buy by Citi B/H/S: 1/6/1
Following updates to commodity prices forecasts, and a general re-appraisal after a strong rally in share prices, Citi analysts have decided to downgrade to Neutral from Buy. Noteworthy: iron ore price forecasts have remained unchanged. Compared to current spot commodity prices, Citi continues to prefer base metals (ex zinc) exposure over bulks. Today’s update has mainly caused price targets across the mining sector to be reduced. For BHP, the reduction is no more than -50c to $40.
- DEXUS PROPERTY GROUP (DXS) was downgraded to Underperform from Neutral by Macquarie B/H/S: 0/4/1
Dexus has confirmed the acquisition of 80 Collins Street, to be partly funded by a $950m equity raising. The acquisition is at a 5.0% passing yield and 5.3% capitalisation rate. Distribution guidance is for 5% growth in FY20. While the transaction is marginally accretive, Macquarie does not believe further capital deployed in office at this point in the cycle will be taken well by equity markets and downgrades to Underperform from Neutral. The broker considers a 5% passing yield on an 8% internal rate of return, funded with nearly $1bn of new equity, is an aggressive capital management decision. Target is steady at $11.36.
- FIRSTWAVE CLOUD TECHNOLOGY LIMITED (FCT) was downgraded to Speculative Buy from Add by Morgans B/H/S: 1/0/0
Morgans updates its valuation to reflect the recent capital raising and quarterly result. The company raised $6.5m in a placement and $1.2m via an oversubscribed shareholder purchase plan. A customer deal has also been re-negotiated to bring for 12 months of revenue which, collectively, should generate cash flow of nearly $13m in the fourth quarter. Morgans adjusts its recommendation to Speculative Buy from Add to better reflect the higher risk/reward profile. Target is raised to $0.36 from $0.22.
- MOUNT GIBSON IRON LIMITED (MGX) was downgraded to Sell from Neutral by Citi B/H/S: 0/1/1
Following updates to commodity prices forecasts, and a general re-appraisal after a strong rally in share prices, Citi analysts have decided to downgrade to Sell/High Risk from Neutral/High Risk. Noteworthy: iron ore price forecasts have remained unchanged. Compared to current spot commodity prices, Citi continues to prefer base metals (ex zinc) exposure over bulks. Today’s update has mainly caused price targets across the mining sector to be reduced. For Mount Gibson, the impact on the price target is nil. $0.80 it is.
- NATIONAL TYRE & WHEEL LIMITED (NTD) Downgrade to Hold from Add by Morgans B/H/S: 0/1/0
Sluggish demand and heightened competition has meant the company has downgraded FY19 revenue guidance to $165-167m and operating earnings (EBITDA) guidance to $11.5-12.5m. Morgans is relieved the balance sheet is net cash. The company has reiterated strategies to deal with current conditions including improved price, changes to source of manufacture and a more aggressive push into the SUV segment. Morgans believes this poses both opportunity and risk. Rating is downgraded to Hold from Add and the target lowered to 48c from 67c.
- SCENTRE GROUP (SCG) Downgrade to Neutral from Buy by UBS B/H/S: 0/3/3
After the company’s quarterly update, UBS is less confident that retail sales have stabilised or will grow materially in the short to medium term. This will put pressure on future operating income growth. The broker downgrades to Neutral from Buy and reduces the target to $3.74 from $4.18. Regional retail malls are traversing a period of price discovery, UBS believes, as expected asset sales exceed investor demand. UBS forecasts comparable net operating income growth to slow 1% in 2021/22 from 2.5% in 2019.
Earnings forecast
Listed below are the companies that have had their forecast current year earnings raised or lowered by the brokers last week. The qualification is that the stock must be covered by at least two brokers. The table shows the previous forecast on an earnings per share basis, the new forecast, and the percentage change.
The above was compiled from reports on FN Arena. The FNArena database tabulates the views of eight majorAustralian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
