In the good books

AP Eagers (APE) Upgraded from neutral to outperform by Credit Suisse B/H/S: 2/2/0

Credit Suisse believes, in addition to a strong track record, the company through Carzoos and selected acquisitions has two engines of strong growth. Moreover, Carzoos offers potential for significant upside with little downside risk.

Hub24 (HUB) Upgraded from hold to buy by Ord Minnett B/H/S: 1/0/0

Ord Minnett observes the retracement in the share price and improved underlying flows suggest it is time to upgrade to Buy from Hold. The broker believes the company is in a solid position to sign new white label deals as it is now positive on monthly cash flow, developing its credibility in transitioning large-scale funds under administration.

QBE Insurance (QBE) Upgraded from neutral to outperform by Macquarie B/H/S: 6/2/0

Macquarie observes a discount to fundamental and peer valuation has opened up ahead of the results, following a 15% fall in the share price since the beginning of June.

The broker estimates QBE will be affected by an adverse discount rate adjustment of around $275m pretax in the first half but this is reflected in regulatory capital ratios.

In the not-so-good books

Ansell Ltd (ANN) Downgraded from neutral to sell by Citi B/H/S: 2/5/1

Citi analysts observe a glaring dichotomy between a rising share price and deteriorating operational circumstances. They have decided to downgrade to Sell from Neutral in response.

The analysts believe weaker economic conditions prevail in the company’s core markets and they likely herald a poor start to FY17. Updating for FX only further adds to the weaker outlook.

Aurizon Holdings (AZJ) Downgraded from outperform to neutral by Macquarie B/H/S: 3/5/0

Macquarie expects FY17 will provide a strong bounce in earnings with additional revenue associated with the UT4 catch up. Meanwhile, volumes in the fourth quarter are expected to be flat.

While Aurizon may surprise on the pace of cost reductions the broker observes the recent rally in the share price has captured the value.

Beadell Resources (BDR) and Evolution Mining (EVN) downgraded from outperform to neutral by Macquarie – B/H/S: 0/3/0 and 3/3/0 respectively. Doray Mining (DRM) downgraded from neutral to underperform by Macquarie B/H/S: 0/0/1

Gold equities have enjoyed a strong run up since the Brexit decision and Macquarie combines this with reductions to its Australian dollar forecasts, which removes much of the potential upside to price targets.

Bluescope Steel (BSL) Downgraded from overweight to equal-weight by Morgan Stanley B/H/S: 3/4/0

Morgan Stanley questions the sustainability of steel spreads but expects this to deliver continued strength in the first half. Although there is potential for upside to consensus expectations in FY17 the broker observes expectations now seem fairer.

Morgan Stanley awaits a more attractive entry point for the stock and pulls back to Equal-weight from Overweight.

Cimic Group (CIM) Downgraded from hold to sell by Deutsche Bank, and from neutral to underperform by Macquarie B/H/S: 0/1/4

Cimic posted a weak result which both missed most of Deutsche Bank’s forecasts and was low in quality given a revaluation of the Sedgman full acquisition. The company is net cash and boasts a strong order book but the broker is cautious on execution risk of the big contracts awarded.

Deutsche has cut earnings forecasts by 5-10% across FY16-20.

Fantastic Holdings (FAN) Downgraded from accumulate to hold by Ord Minnett B/H/S: 0/2/0

Ord Minnett downgrades to Hold from Accumulate as the stock has reached the target, which is steady at $2.40.

The July trading update was a positive catalyst but, while the broker is confident in the turnaround, recent management changes are unexplained and the risk/reward is now considered less compelling.

Independence Group (IGO) Downgraded from neutral to underperform by Macquarie B/H/S: 2/3/1

Nickel stocks have soared in recent weeks on speculation of a potential ban on nickel ore mining in the Philippines. While this is a risk, Macquarie’s forecasts already factor in higher nickel prices.

MYOB (MYO) Downgraded from buy to neutral by UBS B/H/S: 1/2/0

The broker does not expect the company to miss first half prospectus forecasts which call for earnings growth of 13% year on year. The broker observes the business is a quality enterprise with the benefit of an incumbent position.

Still, at the current share price the stock is already trading in line with the broker’s valuation.

Northern Star (NST) Downgraded from neutral to sell by Citi B/H/S: 0/2/3

Nothing wrong with Northern Star operationally, it’s just the share price that appears to have run well ahead of reality. Citi analysts do acknowledge leverage to the gold price, hence a bullish view on gold and AUD might justify an even higher share price.

Sandfire (SFR) Downgraded from outperform to neutral by Macquarie B/H/S: 2/5/1

Gold equities have enjoyed a strong run up since the Brexit decision and Macquarie combines this with reductions to its Australian dollar forecasts, which removes much of the potential upside to price targets.

Sandfire’s share price has rallied 25% in just one week, Macquarie observes. Hence, the rating is downgraded to Neutral from Underperform.

Tatts Group (TTS) Downgraded from buy to neutral by UBS B/H/S: 4/3/1

The entry of disrupters into the Australian lottery market means UBS is asking the question whether Tatts licenses should be considered “exclusive”. They may be a small part of the market at present but the advertising has increased dramatically, the broker notes.

The broker also undertakes research on the wagering market and, despite the marketing campaign following the launch of UBET last year, brand awareness is considered low in key states of Queensland and South Australia.

Westfield Corp (WFD) Downgraded from outperform to neutral by Macquarie B/H/S: 3/2/1

Macquarie reviews its investment thesis ahead of the first half results. Earnings are expected to be impacted by the completion of the asset sale program The broker’s second half forecast is more affected by the reduction in the GBP/USD post the Brexit vote.

While the broker remains attracted to the strong returns expected from the US$6.5bn development pipeline and the exposure to a high quality portfolio, the weaker US/UK retail conditions and softer GBP mean the rating is downgraded to Neutral from Outperform.

Western Areas (WSA) Downgraded from outperform to neutral by Macquarie B/H/S: 2/2/3

Nickel stocks have soared in recent weeks on speculation of a potential ban on nickel ore mining in the Philippines. While this is a risk, Macquarie’s forecasts already factor in higher nickel prices.

Whitehaven Coal (WHC) Downgraded from buy to neutral by UBS, and from add to hold by Morgans B/H/S: 1/5/2

In the wake of the June quarter production numbers UBS calculates that the company earned a margin of $13/t. The broker expects free cash flow over the June half of around $50m, reflecting the strong margin.

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