In the good books
Aconex (ACX) Upgraded to Buy from Neutral by UBS B/H/S: 5/1/0
Share price weakness is creating a buying opportunity, UBS maintains. The stock has declined 17% since the start of May, despite strong quarterly cash flow and relatively stable prices among international peers.
UBS believes the business is high quality and post the acquisition of Conject, it is the dominant player in the industry with over 40% market share.
AP Eagers (APE) Upgraded to Add from Hold Morgans B/H/S: 1/2/0
The trading update suggests to Morgans that the strong momentum continues. The broker forecasts 15.7% earnings growth in FY16, which will mark the third consecutive year of strong growth for the company.
The broker expects upside form the used car strategy should start to emerge meaningfully in FY17.
The broker believes large dealership operators are well placed to adjust to any potential changes in the finance and insurance area of their business, given the ongoing ASIC investigation. Still, there is a risk, given this area is a significant earnings contributor.
CYBG (CYB) Upgraded to Add from Hold by Morgans B/H/S: 4/1/0
First half profit beat Morgans forecasts, with lower-than-expected costs cited as the reason. Cost guidance has been revised down and the bank does not expect costs to increase over the medium term.
Morgans increases earnings forecasts by 9.0% for FY16 and 13% for FY17 and upgrades its rating to Add from Hold. The broker notes commentary around the potential IRB accreditation for regulatory capital was also positive.
Flight Centre (FLT) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 2/4/1
Credit Suisse upgrades to Outperform from Neutral following the sharp share price reaction to the profit downgrade. The broker acknowledges the call is not without risks as the company is pursuing an aggressive expansion in non-traditional business.
Although the company missed super over-ride hurdles, because of airfare deflation, the broker believes the Australian market is long on capacity and therefore these hurdles are likely to be addressed in FY17.
The broker believes the competitive position of the company depends on its success at developing a strong multi-channel offering as the historical shop front business declines.
LifeHealthcare (LHC) Upgraded to Buy from Neutral by UBS B/H/S: 1/0/0
Assuming a slower trend in surgical procedures persists, UBS factors in the potential downside risk by reducing FY16 earnings estimates by 22.5% and FY17 by 25.7%.
The broker expects the company can reliably generate 4.0% revenue growth and could accelerate this growth with positive reforms in anti-competitive prosthesis pricing as well as potential M&A.
The possible changes have been deferred and are unlikely in 2016 but the broker expects, regardless of the outcome of the federal election, the reforms will proceed.
Programmed Maintenance Services (PRG) Upgraded to Buy from Hold by Deutsche Bank B/H/S: 3/1/0
The FY16 result goes a long way to easing Deutsche Bank’s concerns. Lower net debt and the cash flow outlook provide more comfort in the investment proposition.
FY17 earnings guidance has been reiterated at $100-110m, which appears optimistic to the broker, given continuing pressure in mining, but that level of earnings is not considered necessary to justify the valuation. The company has noted that customers in retailing, tourism, transport and manufacturing are hiring and spending on assets.
Resolute Mining (RSG) Upgraded to Equal-weight from Underweight by Morgan Stanley B/H/S: 0/2/0
The stock has rallied sharply, with Morgan Stanley observing it up 235% over four months. The broker adds value for the three projects with feasibility studies due this quarter but notes the market reaction could be mixed, depending on what was assumed.
This entails an upgrade to Equal-weight from Underweight, although the broker maintains it is not prepared to chase the equity but looks for a pull back to create upside.
In-Line Industry view is retained.
Wesfarmers (WES) Upgraded to Hold from Lighten by Ord Minnett B/H/S: 1/6/1
The company has announced impairment and restructuring charges for Target and Curragh coal mine. The amounts were larger than Ord Minnett expected but not a complete surprise, given the poor performance of the two.
Earnings revisions are significant, the broker observes, with normalised profit forecasts down 8.0% in FY16. Target is expected to incur a loss of $50m.
The broker upgrades its rating to Hold from Lighten, given the challenges facing the two businesses are now factored into the results while concerns around lower earnings growth at Coles are now better appreciated.
Westpac (WBC) Upgraded to Outperform from Neutral by Macquarie B/H/S: 6/2/0
Macquarie’s economists are increasingly bearish on the macroeconomic outlook and as such expect the RBA to cut to 1.00%. Such stimulus should nevertheless support local economic growth. In a tougher environment the broker believes Westpac offers a better defensive proposition than peers.
Westpac is underweight WA and the resource sectors, has upside potential from mortgage repricing as interest rates fall and the dividend yield to support the stock in a low rate environment.
In the not-so-good books
APA Group (APA) Downgraded to Neutral from Buy by Citi B/H/S: 3/5/0
Citi has come to the view the risk for bond yields/interest rates has shifted to the upside and this should impact on bond proxies in the share market.
APA is being singled out as the most growth constrained, offering lower yield than its peers and, with only 15% of its operations regulated, more sensitive to rising interest rates.
Beach Energy (BPT) Downgraded to Sell from Neutral by Citi B/H/S: 1/3/2
Citi analysts have turned more positive on crude oil prices, now predicting a recovery to US$52/bbl by 4QCY16. As things are turning for the better, the crude oil market is anticipated to reach equilibrium by mid-year and deficits for multiple quarters thereafter.
Citi analysts see upside for oil & gas producers in Australia, but weaker oil prices remain a key risk. Beach Energy is not seen as representing value at the current share price which is seen as too high. Downgrade to Sell from Neutral.
BlueScope Steel (BSL) Downgraded to Hold from Accumulate by Ord Minnett B/H/S: 4/3/0
Ord Minnett observes, while the company has upgraded earnings guidance for the second half, steel spreads have peaked and further positive catalysts are hard to find.
Guidance has been upgraded on the back of better domestic volumes and earlier-than-expected realisation of cost savings.
Hence, while acknowledging the company has positive momentum and a history of beating guidance, the broker reduces its rating to Hold from Accumulate.
BlueScope Steel (BSL) Downgraded to Neutral from Buy by UBS B/H/S: 4/3/0
BlueScope has upgraded earnings estimates for the second half, driven largely by pulling forward cost cutting initiatives and better volumes in the domestic business. UBS retains estimates for FY17-18, as the company continues to be highly leveraged to changes in steel spreads.
The broker believes the bias to spreads is to the downside in the absence of a sustained turnaround in demand. With most of the positives now priced in the rating is downgraded to Neutral from Buy.
Commonwealth Bank (CBA) Downgraded to Underperform from Neutral by Macquarie B/H/S: 3/4/1
Macquarie’s economists are increasingly bearish on the macroeconomic outlook and as such expect the RBA to cut to 1.00%. Such stimulus should nevertheless support local economic growth. In a tougher environment the broker believes CBA will face headwinds.
CBA is overweight WA and the resources sectors and will suffer lower margins on its bigger deposit book. Solid capital generation will support dividends but on CBA’s premium valuation to peers, the yield is lower, the broker notes. On such a premium, and with limited catalysts for further outperformance, Macquarie downgrades to Underperform.
Evolution Mining (EVN) Downgraded to Neutral from Outperform by Macquarie B/H/S: 3/3/0
Macquarie analysts observe the ongoing rally in Australian gold stocks. They have decided to downgrade two stocks under coverage on the basis of their share price offering reduced potential for further upside.
Flight Centre (FLT) Downgraded to Hold from Buy by Deutsche Bank B/H/S: 2/4/1
The company has downgraded FY16 profit guidance to a decrease of 2-5.0%. Deutsche Bank notes turnover continues to grow and this suggests underlying sentiment is not that bad.
What does concern the broker is that airline competition and capacity increases mean the company’s total transaction value is split among more carriers. This is not delivering sufficient growth required to earn the super over-riders, which have underpinned margins in the past.
JB Hi-Fi (JBH) Downgraded to Sell from Neutral by Citi B/H/S: 2/5/1
Citi analysts are of the view the appliances tailwind for retailers is fading as competitive and cyclical headwinds are emerging for retailers. JB Hi-Fi is downgraded to Sell from Neutral.
To back up their view: the analysts point out Harvey Norman (HVN) already is Sell rated. Citi analysts don’t think the metrics stack up for a successful and advantageous offer regarding The Good Guys for JB Hi-Fi.
Oil Search (OSH) Downgraded to Sell from Neutral by Citi B/H/S: 3/1/2
Citi thinks Oil Search is paying dearly for InterOil. The deal is made accretive through Oil Search raising fresh capital at an elevated share price, in the analysts view.
Regis Resources (RRL) Downgraded to Neutral from Buy by Citi B/H/S: 1/2/4
A general update on commodities prices has led to a 5% lift in the forecast average gold price for 2016: to US$1,255/oz but weaker bullion is anticipated for 2017.
Regis Resources has been downgraded to Neutral from Buy on valuation.
Regis Resources (RRL) Downgraded to Underperform from Neutral by Macquarie B/H/S: 1/2/4
Macquarie analysts observe the ongoing rally in Australian gold stocks. They have decided to downgrade two stocks under coverage on the basis of their share price offering reduced potential for further upside.
South32 (S32) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/5/1
The stock has outperformed peers in the last six months by some margin and Credit Suisse believes earnings risk is to the downside given the spot commodity outlook and FX, while earnings risk is to the upside for large cap peers given their iron ore exposure.
Hence, while the broker does not have a negative view on the stock, the rating is downgraded to Neutral from Outperform.
Suncorp (SUN) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 3/4/1
Credit Suisse finds the valuation is getting tough. The broker supports the company’s new operating model but notes the stock has outperformed this year and near-term headwinds have increased.
The company has suggested that revenue growth is limited and improvement in the underlying insurance margin is likely to be small. Credit Suisse also suspects a special dividend is unlikely in FY16.
Suncorp (SUN) Downgraded to Neutral from Buy by UBS
The company has promised to deliver on strategy rather than unrealistic growth targets, UBS notes, yet suspects the message on medium term growth is softer.
UBS still believes delivery on margin in general insurance is the main issue and the company is on track. Following the outperformance since February the stock is now closer to fair value and the rating is downgraded to Neutral from Buy.
Rationalisation of the five separate businesses into a more unified structure is expected to deliver $80m in pre-tax savings by FY17.
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