In the good books

CBYG (CYB) Upgraded to Hold from Reduce by Morgans B/H/S: 0/3/3

Morgans is forecasting a first half underlying profit of GBP83m when the company releases its first half result on May 16. The broker is forecasting an inaugural interim dividend of 1p per share.

The broker believes there is potential for significant share price weakness in the near term, if speculation around the bank bidding for The Co-operative Bank disappears.

On a 12-month view, nonetheless, the broker upgrades to Hold from Reduce, believing the potential IRB accreditation story will become the main focus and lead to positive sentiment. Target is raised to $4.83 from $4.17.

See downgrade below.

Fairfax (FXJ) Upgraded to Neutral from Sell by Citi B/H/S: 2/3/0

The TPG consortium has revised its indicative offer to $1.20 a share for 100% of the company. The revised offer removes most of the issues with the original bid such as the uncertainty surrounding the value of the residual assets such as regional newspapers, Citi observes.

The broker upgrades to Neutral from Sell. Target rises to $1.20 from $0.85.

Fortescue Metals (FMG) Upgraded to Add from Hold by Morgans B/H/S: 4/4/0

Morgans has become more positive on the stock now the factors affecting the marketability of lower grade iron ore are starting to reverse.

The broker expects steel mills will no longer seek to minimise coke usage and instead increase low-grade iron ore usage in their mills to defend margins against declining steel prices.

This should mean the company’s low price realisations normalise back towards more typical levels. Morgans upgrades to Add from Hold following the sell off in the share price and the early signs of improving fundamentals. Target is $5.95.

In the not-so-good books

The A2Milk Company (A2M) Downgraded to Neutral from Buy by UBS B/H/S: 1/3/0

Having analysed Chinese sales records, UBS finds formula prices as having stabilised since December. Yet prices for A2’s Platinum brand have risen 11%, the most of any brand. The broker expects demand growth to continue into FY18.

UBS lifts its target to NZ$.3.45 from NZ$2.95 but given a strong share price run this remains short of the trading price, hence a downgrade to Neutral.

AGL (AGL) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/4/1

Given a substantial amount of new wind and solar, either under construction or announced, plus the growing threat of intervention to relieve pressure on the gas market, Credit Suisse suspects the winter of 2017 could well represent the peak in terms of gas and electricity market tightness.

With downside risks increasing and a lack of positive catalysts, the broker downgrades the stock to Neutral from Outperform, although concedes the prospect of earnings and valuation upside remain. Target is raised to $28 from $26.

ALS (ALQ) Downgraded to Hold from Add by Morgans B/H/S: 2/3/2

ALS will report its FY17 result next week. Morgans believes the stock offers high quality exposure to the minerals recovery underway, but warns it will likely not happen as fast as the market expects. It will come down to the company’s FY18 outlook.

The market is pricing in a 33% lift in FY18 following a flat FY17, the broker calculates, which would require a resolution of the problems in Life Sciences, ongoing momentum in commodities and a clean exit from oil & gas. A sale of oil & gas at anywhere near book value would be a big positive, the broker suggests, but ALS may talk down expectations.

Ahead of the result, Morgans pulls back to Hold. Target falls to $6.95 from $7.08.

Asaleo Care (AHY) Downgraded to Neutral from Outperform by Macquarie B/H/S: 0/2/1

Headline multiples are not demanding but Macquarie observes rising input costs and the ongoing competitive retail environment means the earnings risk is increasing. The main catalyst could be capital management at the end of the year.

Guidance reiterated at the AGM earlier this month is for low single digit growth, and the broker revises its forecasts towards the lower end of commentary. Rating is downgraded to Neutral. Target is reduced to $1.65 from $1.70.

Ausnet (AST) Downgraded to Hold from Accumulate by Ord Minnett B/H/S: 1/5/1

FY17 results were in line with Ord Minnett’s estimates. The broker notes the company continues to focus on expanding unregulated businesses through additional transmission lines as well as connecting new renewable generation assets to the grid.

While comfortable with the outlook, the broker reduces its recommendation to Hold from Accumulate on valuation grounds. Target is $1.85.

CYBG (CYB) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 0/3/3

While the headline first half result disappointed Credit Suisse, estimates for outer years are upgraded by 1%.

The broker elects to reduce its rating to Neutral from Outperform to reflect a view that the valuation is relatively full amid the absence of near-term positive catalysts. Target is $5.25.

See upgrade above.

Dulux (DLX) Downgraded to Lighten from Hold by Ord Minnett B/H/S: 0/3/5

First half net profit was ahead of Ord Minnett’s estimates. The broker believes macro support for the stock is fading, because of easing activity in new construction and renovations.

As such, the broker suspects earnings growth will struggle to match the performance of recent years. However, this is not reflected in the elevated trading multiples and the broker downgrades to Lighten from Hold. Target is raised to $6.20 from $6.05.

Independence Group (IGO) as Downgrade to Neutral from Outperform by Macquarie B/H/S: 4/2/0

Macquarie has made some material reductions to nickel price forecasts, lowering 2017 estimates by -14% and 2018-20 by -8-10%.Supply in Indonesia and the Philippines is increasing now political barriers have been removed. Meanwhile, Chinese stainless steel demand is declining.

The impact on the outlook for nickel producers is significant and Independence Group earnings estimates are reduced -10-20%. Rating is downgraded to Neutral from Outperform. Target is reduced to $3.30 from $3.80.

Insurance Australia Group (IAG) Downgraded to Reduce from Hold by Morgans B/H/S: 1/6/1

While acknowledging some positive recent news flow, Morgans believes the current valuation of the stock is now extremely stretched. The stock is now trading at an 11% premium to the market, versus its historical discount of -7% to the market on average.

Morgans does not believe the current valuation reflects the inherent risk as an insurance company and downgrades to Reduce from Hold. Target is $5.56.

Medibank Private (MPL) Downgraded to Underperform from Neutral by Credit Suisse B/H/S: 0/4/3

Despite being distorted by the impact of Easter and public holidays, the quarterly private health insurance statistics from APRA highlight a 41 basis points decline in the industry net margin on premium growth, Credit Suisse observes.

The broker does not believe the share price is justified at current levels and, as a result, downgrades to Underperform from Neutral. Target is $2.80.

NIB (NHF) Downgraded to Underperform from Neutral by Credit Suisse and to Sell from Neutral by Citi  B/H/S: 1/3/2

Despite being distorted by the impact of Easter and public holidays, the quarterly private health insurance statistics from APRA highlight a 41 basis points decline in the industry net margin on premium growth, Credit Suisse observes.

The broker does not believe the share price is justified at current levels and, as a result, downgrades to Underperform from Neutral. Target is $5.50.

Citi analysts have downgraded to Sell from Neutral on the belief the share price has run ahead of fundamentals. They suggest “very low claims inflation” which helped the insurer achieving a bumper performance in H1 is reversing.

Medibank Private (MPL) is the broker’s preferred exposure to the health insurance sector.

Origin Energy (ORG) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 3/4/0

Credit Suisse believes winter 2017 is potentially the peak for gas and electricity market tightness. Hence, Origin’s rating is downgraded to Neutral from Outperform, as a substantial amount of new wind and solar is either under construction or being announced, and there is a growing threat of intervention to relieve pressure on the gas market.

The broker estimates that combined risks to the company’s gas and electricity portfolio from the recently announced domestic gas security mechanism is -11% of FY19 EBITDA and $0.67 of the DCF valuation.

The broker increases its modelled FY20 wholesale electricity prices, which drives a 4.8% increase to FY18 net profit estimates an increase in the target to $8.10 from $7.00.

Qube (QUB) Downgraded to Hold from Add by Morgans B/H/S: 4/4/0

Morgan found the company’s FY17 earnings guidance ambiguous amid expectations for underlying earnings growth in both operating divisions. The company continues to expect initial tenants for Moorebank to be announced within the 6-9 months target.

The broker observes Patrick has not followed DP World in putting an infrastructure levy increase at Botany and Melbourne, nor has its rent view at Port of Melbourne been finalised. The positive news on volumes is that Patrick has agreed contract extensions with its two largest customers.

Morgans raises the target to $2.74 from $2.65. As the share price has risen and is now trading in line with the revised target, the broker downgrades to Hold from Add.

Sonic Healthcare (SHL) Downgraded to Lighten from Hold by Ord Minnett B/H/S: 2/3/2

Ord Minnett downgrades to Lighten from Hold following a period of outperformance in the stock price. The main downside catalyst is a likely confirmation of the funding reforms planned in Germany and the US.

The broker believes these reductions are not fully reflected in consensus estimates. Nearly half of the 9% growth in EBITDA the broker forecasts in FY18 is attributable to recent acquisitions in Germany. Target is $21.

Western Areas (WSA) Downgraded to Underperform from Outperform by Macquarie and to Sell from Neutral by UBS B/H/S: 0/4/3

Macquarie has made some material reductions to nickel price forecasts, lowering 2017 estimates by -14% and 2018-20 by -8-10%. Supply in Indonesia and the Philippines is increasing now political barriers have been removed. Meanwhile, Chinese stainless steel demand is declining.

The impact on the outlook for nickel producers is significant and Western Areas earnings estimates are reduced -30-50%. Rating is downgraded to Underperform from Outperform. Target is reduced to $2.00 from $2.80.

UBS had held a positive view on the nickel price due to robust stainless steel production in China, but as China’s stainless steel inventories rise and prices fall, Indonesian nickel exports resume and the Philippines plays politics, the broker’s view has swung. Nickel price forecasts cut by -16% in 2017 and -20% in 2018.

While Western Areas’ free cash flow is weak at the spot nickel price, the balance sheet is strong, UBS notes. But the broker remains cautious given the company’s strong leverage to the nickel price. Downgrade to Sell. Target falls to $2.04 from $2.41.

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