In the good books
The A2 Milk Company (A2M) Upgraded to Buy from Neutral by UBS B/H/S: 1/1/1
Following the expiry of the company’s first major patent UBS suspects there may be competing product launches. These products may still breach patents and legal challenges from A2M are considered possible.
Regardless, the broker has taken a more cautious view over the long term. That said, the a2 Platinum brand is gaining traction in China and UBS observes positive early signs in the UK.
Given the more gradual expected phasing in of regulatory changes in China the broker has increased confidence in FY17 earnings growth and upgrades to Buy from Neutral.
ALS (ALQ) Upgraded to Hold from Sell by Deutsche Bank B/H/S: 0/4/3
The Advent and Bain consortium has made an indicative bid for ALS at $5.30 a share. The board has unanimously rejected the offer as opportunistic.
Deutsche Bank calculates the offer price could generate an internal rate of return (IRR) of 24% based on current forecasts and suspects it could be increased to $5.67 a share and still provide an IRR of 21%.
The broker upgrades to Hold from Sell, suspecting a higher offer price will ensue or a counter bid emerge.
Cooper Energy (COE) Upgraded to Buy from Accumulate by Ord Minnett B/H/S: 1/0/0
The company has divested its remaining interests in Indonesia, selling Tangai-Sukananti for US$4.3m. Ord Minnett observes this frees up management to concentrate on the Sole and Manta gas projects in Victoria.
The recent capital raising provides a foundation for the gas project funding and the broker expects the company will target a retention of 40% of each project.
Ord Minnett upgrades to Buy from Accumulate and increases its target to 35c from 29c on revised equity ownership and the update on exploration potential at Manta.
Fisher & Paykel (FPH) Upgraded to Neutral from Sell by UBS B/H/S: 3/2/0
UBS revises hospital revenue growth to 16% in FY17 driven by the early adoption of high-flow oxygen therapy. The broker’s analysis suggests penetration could reach 30% of a very large market. Market share gains are also expected in non-invasive ventilation.
UBS lifts earnings forecasts by 1% and 5% for FY17 and FY18 respectively.
Japara Healthcare (JHC) Upgraded to Add from Hold by Morgans B/H/S: 2/3/0
Morgans has reviewed the changes to aged care funding. The major change is effected on January 1 2017, applying to new appraisals or re-appraisals of existing residents.
The broker expects operators to be able to partially offset reduced growth in government payments by higher fees. Morgans moderates forecasts from FY18 but believes the concerns over funding pressure are overdone.
Morgans upgrades to Add from Hold, noting Japara has 906 beds in its building pipeline over the next three years together with an estimated 300 to be added via acquisition.
Orocobre (ORE) Upgraded to Hold from Reduce by Morgans B/H/S: 2/1/1
Factoring in the expansion of Olaroz by 2019 instead of 2020 and the stronger lithium carbonate pricing Morgans upgrades its valuation. Having downgraded to Reduce and suggesting investors taking profits with the share price spiking above $4.65, the broker now upgrades to Hold.
The share price below $4.30 is considered a buying opportunity, with higher lithium carbonate prices. Target is reduced to $3.38 from $3.48. The Olaroz project is expected to produce 3,000t lithium carbonate in the June quarter, on the way to nameplate of 4,375t per quarter.
Rio Tinto (RIO) Upgraded to Neutral from Sell by Citi B/H/S: 3/5/0
Citi has upgraded Rio Tinto to Neutral from Sell.
Webjet (WEB) Upgraded to Equal-weight from Underweight by Morgan Stanley B/H/S: 2/3/0
Morgan Stanley views the acquisition of NZ-based Online Republic as boosting the company’s earnings quality, as well as providing earnings accretion.
The broker upgrades FY17 earnings estimates by 13% and lifts the target to $6.50 from $4.30. As a result the rating is upgraded to Equal-weight from Underweight. Industry view: In line.
In the not-so-good books
Ardent Leisure Group (AAD) Downgraded to Neutral from Buy by Citi B/H/S: 2/5/0
Ardent Leisure’s main growth engine, Main Event, is facing increasing competition and it is hurting sales, says Citi. As the analysts see little, if any, upside from the current share price, they have pulled back their rating to Neutral from Buy.
The analysts question the company’s ability to sustain 35% EBITDA returns. Probably needless to point out but, on Citi’s estimates, Main Event is Ardent’s most important earnings driver accounting for 53% of FY17 EBIT. The analysts also believe investments will have to ramp up to stay competitive.
Carsales.com (CAR) Downgraded to Neutral from Outperform by Macquarie B/H/S: 2/4/1
Macquarie notes Carsales’ broader operating business is tracking well and expects a solid result in August thanks to higher listing prices. But new car sales momentum appears to have now stalled.
Carsales is trading on a 25x earning multiple after and at this level Macquarie believes the company’s strong growth outlook is sufficiently priced in. Downgrade to Neutral. Target rises to $12.50 from $12.05.
Eclipx Group (ECX) Downgraded to Neutral from Buy by Citi B/H/S: 5/1/0
Citi analysts walked away from the company’s Investor Day with increased optimism. Forecasts have been lifted. The company remains positioned to grow above system and the Consumer business in particular looks like a genuine growth engine, according to Citi.
Alas, all of these prospects are already reflected in the share price, say the analysts. Hence the downgrade to Neutral from Buy.
Redflow (RFX) Downgraded to Hold from Add by Morgans B/H/S: 0/1/0
Morgans reinstates coverage of the stock following its recent capital raising. The broker expects FY16 to end with a net cash level of $12.5m and sales ramping up.
The company recently received its first small commercial orders from system integrators and the broker expects these orders to generate revenue and cash. Over the medium term, Morgans envisages upside potential but achieving this comes down to execution.
The shares have almost tripled in value since the start of the year and now trade in line with the broker’s valuation.
Treasury Wine Estates (TWE) Downgraded to Sell from Neutral by Citi B/H/S: 0/4/3
Citi analysts have now come to the conclusion that Asian margins will increasingly come under pressure in the years ahead, against a background of ongoing exciting volume potential in China.
Lower margins are going to disappoint the market, is the underlying suggestion. Downgrade to Sell from Neutral. Target drops to $8.70 from $9.10. Small decreases have been implemented to forecasts.
UGL (UGL) Downgraded to Underperform from Outperform by Macquarie B/H/S: 0/3/2
Ichthys construction projects continue to experience delays. UGL is no longer confident in the timing of the resolution of outstanding claims. A formal dispute process could lead to contract loss provisions being taken of up to $200m, management has warned.
Macquarie suggests protracted uncertainty surrounding Ichthys will detract from the favourable thematic of UGL’s exposure to infrastructure. The broker thus lowers its target to $2.32 from $3.20 and downgrades to Underperform from Outperform.
Vitaco (VIT) Downgraded to Neutral from Buy by Citi B/H/S: 1/2/0
Citi analysts had already taken a more cautious approach, but they’ve gone more conservative since the last update in early April. Regulatory uncertainty & higher marketing costs are but two of the obvious catalysts for this.
Expectations regarding the Musashi acquisition have been scaled back as well as sales in Japan are seen weakening.
Woodside Petroleum (WPL) Downgraded to Underperform from Neutral Credit Suisse B/H/S: 1/6/1
Credit Suisse has re-modelled the North West Shelf equity volumes to match guidance provided at the recent investor briefing. The broker now has production declines from 2020, with LNG volumes 60% lower by 2030. This has reduced valuation by $1.65 a share.
While the stock is not that expensive the broker still envisages the majority of risks are to the downside and finds it hard to envisage a positive catalyst outside of the oil price, even if LNG markets open up.
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