Caltex (CTX) Upgraded to Buy from Hold by Ord Minnett B/H/S: 3/4/0
Ord Minnett has reviewed its investment thesis following the share price weakness over the year to date. The broker notes the business re-positioning has delivered the first round of capital management and surplus capital is expected to be deployed for growth.
Beyond strong growth in premium fuels, the broker considers the next leg of growth is less evident. Still, the risk/reward equation is attractive, with valuation support, and the broker upgrades to Buy from Hold. See also downgrade below.
Capilano Honey (CZZ) Upgraded to Add from Hold by Morgans B/H/S: 1/0/0
Morgans updates forecasts to account for the recent capital raising and new acquisitions. The broker lauds the company’s track record of buying highly accretive acquisitions at attractive multiples.
With new avenues of growth the broker expects strong double digit earnings growth in the next few years. With 15.6% in upside to the new valuation and price target of $23.10 ($21.80) Morgans upgrades to Add from Hold. Compared to peers the broker considers the stock attractively priced.
Mantra Group (MTR) Upgraded to Neutral from Sell by Citi B/H/S: 3/4/0
Citi analysts, previously firm on their assessment the share economy represented by Airbnb were too big a threat to recommend shares in Mantra Group, have done an about-face following recent share price weakness.
The analysts still believe the threat from Airbnb and the likes is real, just that whenever it starts biting, it will be further into the future, not right now. Another positive is that Mantra has been improving its ratings on Tripadvisor, seen as an unmistakably positive by the analysts.
Mayne Pharma Group (MYX) Upgraded to Buy from Neutral by UBS B/H/S: 2/0/0
The company will acquire a portfolio of 37 specialty generic products and at least five FDA-filed products as a result of the required divestiture from the Teva/Allergen merger. The acquisition price is US$652m.
UBS upgrades FY17 estimates to account for the contribution and, isolating the acquisition along, considers the deal is 17% accretive in FY17.
National Australia Bank (NAB) Upgraded to Add from Hold by Morgans B/H/S: 3/4/1
Morgans believes the Brexit related price weakness for the major banks represents a buying opportunity. The broker believes the widening of the major bank’s credit default swap spreads will be short lived.
Moreover, if credit conditions tighten further the broker suspects the globally influential central banks will take action and bank share prices will be among the beneficiaries in such a scenario. The broker upgrades National Australia Bank to Add from Hold and elevates it to second preference among the majors.
Orocobre (ORE) Upgraded to Add from Hold by Morgans B/H/S: 3/0/1
Guidance for the June quarter is 3,000 tonnes of lithium carbonate equivalent and nameplate of 4,375t in the September quarter. Morgans observes management has demonstrated the ability to meet product specifications, affirming the potential of the Olaroz plant.
Morgans also factors into its valuation a much stronger lithium price, partly offset by lifting the Australian dollar exchange rate. Given the focus on lithium stocks, Morgans lifts its target to $5.66 from $4.38.
QBE Insurance Group (QBE) Upgraded to Hold from Lighten by Ord Minnett B/H/S: 5/3/0
Ord Minnett considers the concerns for QBE over Brexit vote are overdone. The broker retains its concerns around margin expectations but believes, at this juncture, the stock is not overvalued.
Ord Minnett upgrades to Hold from Lighten. That said, the broker believes the aspiration to raise insurance margins in a soft cycle, with headwinds from a reduction in lender mortgage insurance, is fraught and the market is not recognising this in its forecasts.
Rio Tinto (RIO) Upgraded to Overweight from Equal-weight by Morgan Stanley B/H/S: 4/4/0
Morgan Stanley has updated its commodities price deck, lifting its iron ore price forecasts by 17% and 13% for 2016 and 2017 respectively. Copper prices have been downgraded by 13% for 2016. Leverage to the iron ore price results in an upgrade to Rio Tinto’s target to $55.50 from $52.00.
The broker is also more constructive on the stock, given recent equity price weakness, a favourable position on the cost curve and a sound financial position. Rating is upgraded to Overweight from Equal-weight. In-Line sector view.
In the not-so-good books
Asaleo Care (AHY) Downgraded to Neutral from Buy by Citi B/H/S: 0/3/0
Citi has lifted the price target to $2.15 (was $1.90) but downgrades its rating to Neutral from Buy. The analysts believe the shares are fairly valued. On the analysts’ observation, external factors have moved into the company’s favour in 2016 with pulp prices declining and Coles including Libra in its Every Day Low Price basket.
Citi is anticipating a pick up in Libra volumes in the months ahead, offset by unfavourable AUD strength and pressure in the Tissues segment. Ongoing support for the share price should stem from the remaining $25m share buyback program. Relatively small adjustments have been made to forecasts.
APN News & Media (APN) Downgraded to Neutral from Buy by UBS B/H/S: 3/2/0
UBS calculates its estimates for the stand alone company, ex the de-merged NZ assets. With the anticipated divestment of Australian region media assets later this year the broker observes the company will consist of the Australian radio assets, a 50% stake in AdShel and 100% of Hong Kong Outdoor.
Hence 2016 is shaping up to be messy and the broker forecasts profit of $47m and earnings per share of 24c. While management has executed well the next level of upside appears to UBS to be the potential re-rating of the Australian outdoor and radio business closer to peers.
BT Investment Management (BTT) Downgraded to Neutral from Outperform by Macquarie B/H/S: 1/4/1
BT’s UK business will be materially negatively affected by the Brexit, Macquarie believes. Costs are manageable, but a lower UK index level, net outflows, reduced performance fees and the currency impact are all significant. The broker has cut forecast BT earnings by 9% in FY16 and 32-38% in FY17-18.
Caltex (CTX) Downgrade to Neutral from Outperform by Macquarie B/H/S: 3/4/0
Caltex has provided a first half profit outlook of $245-260m, below Macquarie’s forecast. But net debt in line with forecast, suggesting cash flow remains solid.
The update showed some positive elements, particularly growth in supply and marketing, but also a bigger negative in the form of falling Lytton refining margins. See also upgrade above.
Collins Foods (CKF) Downgraded to Neutral from Buy by UBS B/H/S: 1/1/0
FY16 results were broadly in line, and UBS considers the company did well to achieve second half profit growth of 10%. While the broker likes the growth potential from the store roll out and recent acquisitions it downgrades to Neutral from Buy based on valuation. Target slips to $4.90 from $5.00.
The company expects to increase shareholder returns in FY17 and will be exploring further KFC acquisition opportunities. Management expects positive KFC revenue growth in the first half but notes the first eight weeks of trading have been marginally negative.
CYBG (CYB) Downgraded to Lighten from Hold by Ord Minnett B/H/S: 3/1/1
The British vote to leave the EU has potentially adverse effects on the company’s growth ambitions and margins, in Ord Minnett’s view. Given high operating leverage the 15% decline, or thereabouts, in the broker’s revenue forecasts, cannot be matched by a compensatory reduction in costs. With the resulting tangible return on equity stalling at 7% against a previous target of 10% the broker reduces its rating to Lighten from Hold.
CYBG (CYB) Downgrade to Hold from Add by Morgans B/H/S: 3/1/1
The UK decision to leave the EU has created uncertainty which Morgans expects will quickly translate into a reduction in both UK consumer sentiment and business confidence.
If the risks are realised this is likely to result in lower income growth for CYB as well as asset quality deterioration, in the broker’s opinion.
Morgans makes no changes to earnings forecasts but emphasises the downside risks. The broker re-bases its target on an AUD/GBP cross assumption of GBP0.560.
Decmil Group (DCG) Downgraded to Lighten from Hold by Ord Minnett B/H/S: 0/0/1
The company has not signalled any large contract wins recently and Ord Minnett believes the contractor sector, in general, has run too hard and too early. Hence, the broker downgrades to Lighten from Hold. The target is reduced to 61c from 69c. The broker believes the stock has potential to disappoint at the upcoming results.
Evolution Mining (EVN) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 3/2/1
FY16 production was 800,000 ozs at an all-in cost of $1,000/oz and the forecast is for stronger FY17 production of 800-860,000 ozs at $985-1045/oz. Credit Suisse observes the business is creating shareholder value while maintaining a disciplined development program. The broker downgrades to Underperform from Neutral purely on a valuation call rather than on sentiment.
Henderson Group (HGG) Downgraded to Neutral from Outperform by Macquarie B/H/S: 0/4/0
Henderson Group will be materially negatively affected by the Brexit, Macquarie believes. Costs are manageable, but a lower UK index level, net outflows, reduced performance fees and the currency impact are all significant. The broker has cut forecast earnings by 9% in FY16 and 30-40% in FY17-18.
Henderson Group (HGG) Downgraded to Neutral from Buy by Citi B/H/S: 0/4/0
Citi factors in the likelihood of harsher equity markets and flow conditions in a post Brexit environment, lowers 2016 earnings estimates by 9% and 2017 by 20%. Henderson is seen underperforming primarily because of its relative skew to the UK, with 60% of revenue coming from that direction.
The rating is downgraded to Neutral from Buy and the target to $4.00 from $5.55. While envisaging the Brexit market move is more likely to be a correction than the start of a major global bear market, the broker envisages downside risks in the near term.
National Storage REIT (NSR) Downgraded to Underperform from Neutral by Macquarie B/H/S: 1/2/1
The company has acquired the Southern Cross portfolio for $285m, consisting of 26 storage assets. An additional four storage centres, three in Perth and one in Cairns, have also been acquired for $16.1m. The acquisitions will be funded by debt and equity, with an equity raising of $260m announced as well. Macquarie considers the acquisition slightly accretive to FY17. The broker remains attracted to the material yield spread of a fragmented storage segment but calculates that the company’s underlying growth has been anaemic since 2013.
RCR Tomlinson (RCR) Downgraded to Hold from Buy by Ord Minnett B/H/S: 1/1/0
Given several large recent wins in terms of contracts the stock has rallied hard, Ord Minnett observes. Hence, the broker upgrades the target to $1.94 from $1.83 but downgrades its recommendation to Hold from Buy. The broker considers the stock one of the contractors which has potential to disappoint at its upcoming results.
Sydney Airport (SYD) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 3/3/1
Credit Suisse observes capacity growth from low fuel prices and new airlines is ebbing. This strong growth will be lapped in November and from then there is potential for lower growth, the broker maintains. If domestic demand remains weak airlines could cut capacity plans, and this could reduce overall capacity growth to below 5%, versus guidance of 6-8%. Credit Suisse considers the shares are more than fully valued and downgrades to Underperform from Neutral.
Syrah Resources (SYR) Downgraded to Neutral from Outperform by Macquarie B/H/S: 2/1/0
The company has completed a $194m capital raising to fund completion of the Balama project and the continuation of the study and construction of a plant to produce spherical graphite. Macquarie observes the market’s appetite for the energy storage theme remains strong and continues to envisage Syrah Resources as a leader in the sector. The strong appreciation in recent weeks leads the broker to downgrade to Neutral from Outperform.
Xenith IP Group (XIP) Downgraded to Hold from Add by Morgans B/H/S: 0/1/0
The company has upgraded guidance from prospectus forecasts, expecting earnings of $8.8-9.0m for FY16. Morgans incorporates the upgrade and does not factor acquisitions into forecasts, although anticipates the company would look to target small/middle market firms based in Australia. Yet, at current prices and without an acquisition the stock appears fair value to the broker and the rating is downgraded to Hold from Add.
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