In the good books
MIRVAC GROUP (MGR) Upgrade to Overweight from Underweight by Morgan StanleyB/H/S: 4/2/0
Morgan Stanley retains a positive view on residential exposure, believing the re-emergence of house price growth is an indicator for a multiple re-rating while settlement concerns are over stated.
Furthermore, volume and margin growth are supported by pre-sales, rising prices and fixed term contracts, suiting the stock and likely to deliver over 6% earnings growth in FY17, the broker maintains.
Rating is upgraded to Overweight from Underweight. Target rises to $2.00 from $1.95. Industry view is Attractive.
MOUNT GIBSON IRON LIMITED (MGX) Upgrade to Outperform from Neutral by Macquarie B/H/S: 1/2/0
Mt Gibson has received an $86m insurance settlement from Koolan Island, taking net cash to $430m. Mt Gibson has managed to avoid the pain suffered by iron ore juniors as prices fell, given it was already net cash and debt free as it iron ore operations wound down, Macquarie notes.
Unless Iron Hill is developed, the company will cease to produce iron ore next year and as such is simply a potential acquirer, unaffected by daily iron ore price movements. Macquarie thus expects the share price to move to a level representing that cash. The insurance settlement has removed uncertainty. Upgrade to Outperform. Target rises to 30c from 20c.
SANDFIRE RESOURCES NL (SFR) Upgrade to Buy from Neutral by UBS B/H/S: 2/5/1
UBS considers Monty an exceptional discovery but wonders, with 2-3 years before the asset is commercialised, whether the development is a little too late.
The remaining mine life at DeGrussa is five years and capex is set to slow significantly, yet the cash is not likely to build on the balance sheet until FY19, in the broker’s view.
The broker observes short-term investors are currently rewarding companies that screen positively quarter on quarter and a lack of cash generation could hold Sandfire back.
UBS upgrades to Buy from a Neutral rating following a pull-back in the share price. Target lifts to $6.20 from $5.90.
In the not-so-good books
3P LEARNING LIMITED (3PL) Downgrade to Neutral from Outperform by MacquarieB/H/S: 0/2/1
Macquarie has reassessed its view on 3P and in so doing has pulled back its rating to Neutral. The broker believes the strategy outlined by the new CEO to be the right one, but given revenues from the weak Fed-Mar sales cycle are recognised across 12 months, it will take time for earnings to show improvement.
3P’s debt position is manageable and latent value implies possible corporate activity potential but despite the stock trading below Macquarie’s valuation, Neutral is seen as appropriate. Target falls to $1.00 from $1.50.
GPT (GPT) Downgrade to Underweight from Overweight by Morgan StanleyB/H/S: 0/4/2
Morgan Stanley prefers office exposure over retail, driven by a tightening Sydney office market as stock is withdrawn. Office pay-out ratios are already adjusted for maintenance capex while retail pay-out ratios are questionably high as retail capex becomes more maintenance in nature, the broker observes.
While the broker still likes GPT for its defensive characteristics, better value is seen elsewhere in the sector. Rating is downgraded to Underweight from Overweight on valuation. Attractive sector view maintained. Target is raised to $5.00 from $4.70.
MINERAL RESOURCES LIMITED (MIN) Downgrade to Hold from Buy by Deutsche Bank and Downgrade to Underperform from Neutral by MacquarieB/H/S: 2/1/1
Deutsche Bank observes the company is now a major player in the lithium market with Mt Marion set to produce 400,000 tonnes of concentrate per annum, making it the second largest lithium project in the world.
The broker upgrades its valuation of the stake in Mt Marion, lifting the company’s valuation by 6%. FY17 earnings estimates are raised by 9%. Despite the upgrade, the broker downgrades to Hold from Buy, given the stock has performed strongly and is now considered fully valued. Target is raised to $8.50 from $8.00.
Macquarie incorporates the Mt Marion lithium project into earnings forecasts, lowering its rating to Underperform from Neutral after the strong share price appreciation this year. Target is raised to $8.30 from $5.35 following the inclusion.
The broker suspects the market is currently capitalising too high a long-term lithium price into the stock but notes Mt Marion could provide as much as 80% of the current shortfall in the lithium market, valuing the project at $1.10 a share.
SAI GLOBAL LIMITED (SAI) Downgrade to Neutral from Outperform by Macquarie B/H/S: 1/5/0
SAI is not alone amongst global peers in suffering from low organic growth, Macquarie notes. But the company’s transition to regional-based sales from product-focused is proving disruptive and the broker does not see any benefits accruing before the end of FY17.
There is still work to do. The potential of corporate activity should provide a valuation floor, Macquarie suggests, but a lack of catalysts over the next 12 months has the broker pulling back to Neutral. Target falls to $3.63 from $4.00.
SIMS METAL MANAGEMENT LIMITED (SGM) Downgrade to Hold from Buy by Deutsche BankB/H/S: 2/5/0
Following channel checks and a visit to the US Deutsche Bank downgrades to Hold from Buy, noting there is no obvious circuit breaker to the supply constraint. Target is reduced to $8.76 from $10.12.
The broker suspects supply constraints will remain for the near term. While some yards have closed, the broker believes there are still too many players in scrap and rationalisation is taking too long. Nevertheless, Sims is believed to be doing what it can to improve the cash position.
SURFSTITCH GROUP LIMITED (SRF) Downgrade to Sell from Buy by OrdMinnettB/H/S: 0/0/2
OrdMinnett has officially lost its patience with Surfstitch, not that long ago a much beloved market darling, but nowadays firmly in the doghouse of the Australian share market.
The stockbroker essentially admits it’s plain impossible to make any forecasts with a fair degree of confidence. Target price slashed to 20c. Downgrade to Sell.
VIRGIN AUSTRALIA HOLDINGS LIMITED (VAH) Downgrade to Hold from Buy by Deutsche BankB/H/S: 0/5/1
The company has raised over $1bn via a placement and rights issue to strengthen its balance sheet and support operational and structural initiatives. Post the equity raising the lease-adjusted net debt falls in line with Deutsche Bank’s target of four times earnings.
The broker reduces its target to 30c from 44c, after taking into account the dilution from the equity raising and downgrades to Hold from Buy, given the stock is trading close to the target.
Earnings forecast
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