In the good books
Challenger (CGF) Upgrade to Outperform from Neutral by Macquarie. Challenger’s preliminary forecasts for the first half suggest to Macquarie that, while credit risks are elevated, the valuation adequately compensates for this.
The broker upgrades to Outperform from Neutral. Earnings estimates are revised up by 2.8% for FY16 and FY17.
ResMed (RMD Upgrade to Outperform from Neutral by Credit Suisse. Underlying earnings were 6.0% ahead of Credit Suisse’s forecast in the December quarter. US mask sales growth has likely been underpinned by the Jaysec and CareTouch acquisitions, the broker believes. Rating is upgraded to Outperform from Neutral, with current valuations considered relatively undemanding.
Pacific Branks (PBG) Upgrade to Overweight from Neutral by JP Morgan. The company is seen executing on its strategy to provide greater exposure to high quality brands, such as Bonds and Sheridan. JP Morgan considers the challenges, such as currency and costs, are better able to be managed.
The stock’s multiples are at discounts to small cap Australian retailers, which the broker considers unjustified, given margins and growth are in line or better. Rating is upgraded to Overweight from Neutral.
In the not-so-good books
AP Eagers (APE) Downgrade to Hold from Add by Morgans. The company has guided to pre-tax 2015 profit of $126.4m, up 19%. Goodwill associated with the trucks business has been impaired by $5.5m.
Morgans finds plenty to like about the stock but, following a strong share price re-rating and a premium valuation, pulled back its rating to Hold from Add. Target is raised to $12.88 from $12.54.
There is a significant amount of cash coming in over the next 18 months, which the broker expects will allow the company to consolidate further and achieve its goal of controlling 10% of the domestic automotive market.
Evolution Mining (EVN) Downgrade to Neutral from Buy by UBS. December quarter production was in line but UBS questions whether the company can keep the momentum going in 2016. Management has suggested it could re-visit its dividend policy towards the end of FY16.
UBS would not be surprised if the largest shareholder, La Mancha with 31%, was interested in more dividends but believes investment in exploration still offers the greatest opportunity for share price outperformance.
Rating is downgraded to Neutral from Buy on share price performance. While the stock looks fully valued, it remains one of the broker’s key picks in the gold sector.
Fantastic Holdings (FAN) Downgrade to Neutral from Outperform by Macquarie. The first half trading update is ahead of Macquarie’s expectations. Sales momentum has continued. Still, Macquarie is unable to maintain an Outperform rating, given uncertainty created by the resignations of both the CEO and CFO.
The rating is downgraded to Neutral. The broker expects the stock to trade at a discount to valuation, until new appointments are made and confidence in the new team is established.
Lovisa Holdings (LOV) Downgrade to Hold from Add by Morgans. The first half trading update and FY16 guidance suggests the pressure on gross margins is greater than Morgans expected. The early performance of the first UK store has been in line with expectations.
Management expects FY16 earnings in the range of $23.5-25.5m versus Morgans’ previous estimate of $28.3m. The broker downgrades to Hold from Add in light of the recent strong performance in the share price.
Medibank Private (MPL) (MPL) Downgrade to Hold from Buy by Deutsche Bank. The company has upgraded its operating profit guidance by 27%, assisted by lower hospital utilisation and reserve releases. Still, Deutsche Bank believes hospital contracting and policy changes are delivering sustainable benefits.
The broker believes further efficiency gains will be recycled into growth and, while this should still support solid earnings growth, with total returns on a 12-month basis of only 5.0% and increased regulatory risk, the rating is downgraded to Hold from Buy.
Medibank Private (MPL) Downgrade to Neutral from Outperform by Macquarie. The company has upgraded FY16 operating profit guidance to $470m from $370m. Management has also re-submitted its 2016 premium rate change application.
Following the positive announcement on profit margins, Macquarie envisages the balance of risk is now more neutral. Risks come from the number of reviews being undertaken in the sector.
Orocobre (ORE) Downgrade to Hold from Buy by Deutsche Bank. Orocobre has raised $85m via an institutional placement to cover final commissioning of Olaroz. Deutsche Bank considers the raising of so much capital was opportunistic but prudent, given market concerns around cash flow.
With the cash position resolved, the share price performance is now expected to align better with the operating performance at Olaroz and industry pricing conditions.
OZ Minerals (OZL) Downgrade to Hold from Add by Morgans. Morgans is impressed by the cash flow accumulation at a cycle low and contends the company is well positioned to buy rather than build its next leg of growth.
Hence, the market is likely to be unenthused by the company confirming plans to continue pre-developing Carrapateena. The broker suspects the market will continue to discount growth until either M&A is executed or Carrapateena is further de-risked.
St Barbara (SBM) Downgrade to Hold from Buy by Deutsche Bank. Deutsche Bank observes the December quarter has rounded out a strong half. The broker considers production and cost guidance is conservative and now assumes a higher output and lower costs relative to updated FY16 guidance.
Rating is downgraded to Hold from Buy on valuation, although Deutsche Bank acknowledges a possible 30-40,000 ozs in upside over 12-18 months from improved mining practices.
St Barbara (SBM) Downgrade to Neutral from No Rating by Macquarie. St Barbara’s December quarter production was in line with prior disclosures. The company has upgraded its production guidance and Macquarie expects it to achieve the top end of forecast ranges.
As the company appears to be expecting an improved grade at Gwalia, Macquarie welcomes the potential for significant cash flow. After an astonishing run, the stock is now considered fully valued so Macquarie downgrades to Neutral from Outperform.
Trade Me Group (TME) Downgrade to Neutral from Outperform by Macquarie. The broker believes Trade Me is nearing a point of earnings acceleration as cost growth is set to moderate in 2017 and the signs look positive for revenue growth. But the market has overcooked the share price against the broker’s valuation.
Trade Me offers diverse and thus defensive exposures, hence the broker is happy to pull its rating back to Neutral rather than Underperform.
WorleyParsons (WOR) Downgrade to Sell from Hold by Deutsche Bank. The continued deterioration in commodity prices suggests to Deutsche Bank that there will be no reprieve for the engineering & contracting sector. 2016 is expected to produce significant headwinds, with a weak Australian dollar negatively impacting some balance sheets.
The broker envisages potential for M&A, given low asset prices. WorleyParsons faces a challenging year with potential for project delays and contract cancellations. Deutsche Bank envisages further share price weakness and downgrades to Sell from Hold.
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