In the good books

RAMSAY HEALTH CARE LIMITED (RHC) Upgrade to Equal-weight from Underweight by Morgan Stanley B/H/S: 3/4/1

Morgan Stanley is losing its conviction the private health insurance reform and contract re-negotiations will meaningfully impact on FY17 earnings.

Diminished regulatory risk has weakened the thesis that softer insurer profitability would instigate poorer funding outcomes for hospitals.

With earnings momentum likely to remain positive the broker now considers the valuation more reasonable and upgrades to Equal-weight from Underweight. Target is raised to $69.03 from $57.44. Industry view is In-Line.

In the not-so-good books

APN OUTDOOR GROUP LIMITED (APO) Downgrade to Hold from Add by Morgans B/H/S: 3/2/0

The company will purchase Metrospace and iOM, regional billboard operators in Victoria and Queensland, adding 240 sites to its portfolio. Morgans expects the post-merger cost synergies will be substantial.

Morgans also suspects that competition concerns may hinder the company in acquiring further share of the Australian outdoor market as it is already highly concentrated although a number of smaller bolt-ons are possible.

The broker notes the recent share price performance which has lifted it above the price target and downgrades to Hold from Add. Target is raised to $7.38 from $7.24.

CATAPULT GROUP INTERNATIONAL LTD (CAT) Downgrade to Hold from Add by Morgans B/H/S: 1/0/0

Morgans revises forecasts following an update on order volumes. The company’s orders for FY16 are now 4.4% higher than prior guidance of 8,000 units.

The broker notes a larger proportion of the new orders are subscriptions, rather than capital sales. The mix shift results in lower revenue booked in FY16 and FY17 but higher and more sustainable long-run revenue streams.

Morgans downgrades to Hold from Add as a result of the strong share price performance. Target is raised to $3.55 from $2.89.

FORTESCUE METALS GROUP LTD (FMG) Downgrade to Neutral from Outperform by Credit Suisse B/H/S: 2/3/2

Credit Suisse observes FY16 has ended strongly for the company with shipments ahead of expectations. Yet the broker believes the stock, leveraged to the spot price of iron ore, is running too high.

At the current share price Credit Suisse believes the risk/reward is no longer favourable and the rating is downgraded to Neutral from Outperform. Target rises to $4.30 from $4.00.

The broker continues to expect iron ore supply in the second half of 2017 will mean iron ore prices move lower, sufficient to squeeze out marginal tonnage. The price for that is estimated at around US$40/t.

Earnings Forecast

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