In the good books
Goodman Group (GMG) Upgrade to Outperform by Credit Suisse B/H/S 3/3/0. Assuming benign operating conditions, the broker believes the company is well positioned to generate around 7% earnings growth to FY20.
The appeal to the broker lies more in the ability to sustain earnings in the event of an industrial market downturn. Higher earnings estimates combined with a stronger balance sheet drive an increase in valuation.
South32 (S32) Upgrade to Buy from Neutral by UBS B/H/S 4/3/1. The broker upgrades the business due to an improved earnings outlook.
Prices for two of the company’s main commodities, alumina and manganese, have rebounded 22% and 58% respectively this year, and the company has also announced a restructure of its manganese business to cut costs.
Webjet (WEB) Upgrade to Buy from Neutral by UBS B/H/S 2/3/0. The company stood out among the earnings reports this season, with revenue and earnings growing by 27% and 26% respectively.
The broker continues to envisage upside risk to current guidance and upgrades.
In the not-so-good books
Fortescue Metals Group (FMG) Downgrade to Neutral from Outperform B/H/S 2/4/1.
Fortescue’s new memorandum of understanding with Vale is ostensibly about blending opportunities, points out Credit Suisse, but the deal does open the door for Vale to take an equity stake of 5-15%. The joint venture will allow both parties to optimise operations, Fortescue suggests, and thus reduce costs.
The joint venture will likely take 6 months to finalise. However, Credit Suisse also expects the current iron ore price rally to fade away by the end of the March quarter as Chinese restocking concludes.
Freedom Foods (FNP) Downgrade to Hold from Add by Morgans B/H/S 0/2/0. First half results were weaker than Morgans expected, largely because of adverse input costs and foreign exchange impact.
Morgans upgrades forecasts to account for recent acquisitions and the proceeds from the sale of A2 Milk (A2M) as well as the capital raising.
The broker expects a much stronger second half and FY17, given Pactum Dairy will be consolidated and the recent acquisitions will make a full contribution.
QBE Insurance (QBE) Downgrade to Neutral from Outperform by Macquarie B/H/S 5/2/1. Macquarie is forecasting a further loss of market share by listed Australian general insurers to the banks and challenger brands. The broker also notes growth in Australian gross written premiums appear to have bottomed but margin decline has not stabilised.
While QBE is winning NSW CTP share, the broker notes it accounts for only 2.4% of group GWP (gross written premium). The broker downgrades the business as the stock is now trading at a premium.
Santos (STO) Downgrade to Neutral from Buy B/H/S 3/2/2. Oil stocks have rallied recently, primarily driven by an increase in oil prices. Brent is now above US$40/bbl for the first time since December.
The catalysts, UBS believes, have been large reductions to global investment, better US growth data and reduced concerns about China’s growth. Also, the news that both OPEC and non-OPEC oil producing countries will meet on March 20 has buoyed the market.
The broker downgrades the business due to the stock’s share price rally.
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