In the good books

HUB24 (HUB) Upgraded to Buy from Accumulate by Ord Minnett B/H/S: 1/0/0

The company will acquire Agility Applications, a financial services technology provider, which will broaden broker relationships and enhance Hub24’s non-custodial reporting on offer.

Ord Minnett notes Agility counts 40% of the broking market as clients and reports on $200bn of client assets, providing a rich cross-selling opportunity with the Hub24 platform.

The broker reassesses its valuation methodology and includes Agility in its estimates.

JB Hi-Fi (JBH) Upgraded to Neutral from Underperform by Credit Suisse B/H/S: 3/3/1

The company has completed the acquisition of The Good Guys on November 28, earlier than expected. Credit Suisse consolidates profit from that date, having previously assumed it would occur on January 1 2017.

This results in a $16m increase in EBIT for the first half and a 5% upgrade to earnings per sharefor FY17. The broker’s target increases to $26.43 from $26.16 and, because of recent share price weakness, the rating is upgraded to Neutral from Underperform.

Pact Group (PGH) Upgraded to Neutral from Sell by UBS B/H/S: 2/3/0

Pact’s rigid packaging end-markets are finally showing signs of life, UBS notes, and dairy prices have recovered some 55% from their lows. This should provide for a better domestic outlook from the second half of FY17, once contract losses have been cycled through.

Acquisitions could provide further underpinning, leading UBS to consider risk/reward to now be more evenly balanced at the current valuation. Upgrade to Neutral.

Vita Group (VTG) Upgraded to Add from Hold by Morgans B/H/S: 1/0/0

The company has agreed to new commercial terms with Telstra (TLS), with changes to the remuneration structure. No specific earnings impact was provided, although the company stated it expects to see volume improvement, offset by some margin compression.

Morgans suspects, overall, the remuneration changes reflect Telstra’s cost pressures and this could see increased measures from Telstra to control the growth of the retail licensee channel.

The broker suspects the new deal reduces the medium/longer term growth opportunity in the company’s retail channel but, that said, Vita Group has multiple growth drivers.

Westfield Corporation (WFD) Upgraded to Neutral from Sell by Citi B/H/S: 5/1/0

Citi analysts still believe market consensus forecasts are too high. They also believe news flow has been largely negative since their last update on the company in late August, with both Brexit and Trump occurring in core Westfield operating markets.

But… the share price pull back that has occurred since seems to provide sufficient compensation, hence why the rating moves to Neutral from Sell. Citi analysts have reduced estimates and their valuation.

In the not-so-good books

360 Capital Office Fund (TOF) Downgraded to Hold from Add by Morgans B/H/S: 0/1/0

360 Capital Investment Management, as the responsible entity, has entered into a conditional contract to sell the majority of its funds management platform and co-investments to Centuria Capital (CNI).

As part of the transaction, Centuria will purchase all the units 360 Capital owns in TOF for around $47.4m or $2.25 per unit. Centuria is considering a merger of TOF and Centuria Metropolitan REIT (CMA), if it is in the best interest of unit holders.

360 Capital Group (TGP) Downgraded to Hold from Addby Morgans B/H/S: 0/1/0

360 Capital Group has entered into a transaction to sell 360 Capital Investment Management its responsible entity along with co-investment stakes in most of its funds, including 360 Capital Industrial (TIX) and 360 Capital Office (TOF), subject to a number of approvals from various stakeholders.

The remaining entity will be cashed up, Morgans notes, and funds will be used for a buyback and to pursue new opportunities.

Amcor (AMC) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 3/4/1

Credit Suisse downgrades to Neutral from Outperform because of changing macro conditions. The company’s defensive revenue streams suggest it will be unlikely that the stock will outperform as investors seek growth.

The US dollar appreciation against the euro has induced downgrades to earnings per share forecasts of about 5%. First half EBIT is likely to be flat, in the broker’s opinion, affected by the acquisition of Alusa.

BHP Billiton (BHP) Downgraded to Hold from Add by Morgans B/H/S: 3/4/1

Morgans downgrades to Hold from Add following the recent strength in the share price which has meant its target has been achieved. Target is raised to $25.82 from $26.54.

The broker still considers the stock a key pick in the sector but expectations have cooled amid a belief that Chinese steel consumption will ease heading into the new year.

That said, the broker has increased confidence in its long-held view that the bottom of the resources cycle was hit in early 2016.

The main risk to its call on BHP is the ongoing legal process surrounding Samarco and short-term uncertainty in commodity prices.

Investa Office Fund (IOF) Downgraded to Lighten from Hold by Ord Minnett B/H/S: 1/3/2

Ord Minnett considers the Investa Commercial Property Fund’s acquisition of Morgan Stanley’s 8.9% stake in IOF is aimed at protecting its ownership of the Investa business by reducing the potential for IOF to be acquired by a third party.

The broker believes this is a negative for the share price in that the stock is trading at a premium that reflects the increased probability of being acquired. The broker also envisages Cromwell (CMW) is now likely to exit its 9.8% stake post the December distribution ex-date, which raises the possibility of a discounted sale to third-party investors.

Metcash (MTS) Downgraded to Hold from Accumulate by Ord Minnett B/H/S: 3/2/2

First half net profit of $82.8m was ahead of Ord Minnett forecasts, but was driven by gains at the corporate line, with core EBIT for food and grocery below expectations.

The broker downgrades to Hold from Accumulate and reduces the target to $2.00 from $2.30. Ord Minnett believes the competitive environment is challenging and likely to remain so, and this will consume much of the company’s cost savings.

While the company is executing well, the position of its customers in aggregate is not strong, which weighs on the competitive position of the wholesaler, in the broker’s opinion.

RCG Corp (RCG) Downgraded to Hold from Add by Morgans B/H/S: 0/2/0

Like-for-like sales were reasonably subdued in the year to date, with the exception of Accent. The company has announced a material increase to the roll out of stores and a stronger-than-expected margin performance for Accent.

Morgans makes slight upgrades to forecasts of earnings per share and moves to a 50-50 PE/DCF weighting.

Tatts Group (TTS) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 4/3/0

Credit Suisse downgrades to Neutral from Outperform as the shares have rallied after Tabcorp (TAH) acquired a 10% equity stake via an equity swap. The broker envisages little chance of another suitor emerging.

At this stage, the broker believes Tabcorp offers a more compelling way to play the merger.

Vocus Communications (VOC) Downgraded to Equal-weight from Overweight by Morgan Stanley B/H/S: 4/2/0

Morgan Stanley observes investors have de-rated the Australian telco sector in recent months and the company shares are down 40% in the year to date.

The broker believes the stock offers the highest risk/return characteristics in the sector. While from an industry perspective there remain revenue growth opportunities for the company as a vertically integrated telco in the NBN, there are two changes in recent months that have changed Morgan Stanley’s fundamental view.

These are increased telco competition, which is negative for margins and future growth trajectory, and, specific to Vocus, disappointing early results from the just-completed acquisition of Nextgen.

Xenith IP Group (XIP) Downgraded to Hold from Add by Morgans B/H/S: 0/1/0

The company will buy Griffith Hack for $152m. Morgan flags the transformational nature of the deal, given the sheer scale of Griffith Hack compared with the company’s market capitalisation.

The broker believes Xenith has now reached its natural market share in Australia and may struggle to materially outgrow the broader market. Hence, future growth will need to be driven by offshore penetration.

Morgan Stanley downgrades to Hold from Add, until it is comfortable with how the integration is progressing.

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