Weekly Reports | Oct 04 2016
This story features AGL ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: AGL
By Rudi Filapek-Vandyck, Editor FNArena
Guide:
The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.
For the purpose of broker rating correlation, Outperform and Overweight ratings are grouped as Buy, Neutral is grouped with Hold and Underperform and Underweight are grouped as Sell to provide a Buy/Hold/Sell (B/H/S) ratio.
Ratings, consensus target price and forecast earnings tables are published at the bottom of this report.
Summary
Period: Monday September 26 to Friday September 30, 2016
Total Upgrades: 5
Total Downgrades: 3
Net Ratings Breakdown: Buy 41.00%; Hold 43.69%; Sell 15.31%
Activity levels among stockbrokers, in particular concerning upgrades and downgrades in ratings, has ground to a halt. School and public holidays are only partially to blame. For the week ending Friday, 30th September 2016, FNArena registered a total of five upgrades and three downgrades in ratings for individual ASX-listed stocks.
AGL Energy took home two upgrades, while gold digger Resolute Mining received two downgrades. In other words: the number of individual stocks involved is even smaller than the ratings numbers suggest.
Fortescue Mining received the other downgrade which means nil upgrades for miners and all the downgrades. The numbers are small, but is there a deeper message in here?
Not when it comes to target prices (and underlying valuations) where Newcrest tops the table with a 4.7% positive adjustment, followed by Beach Energy (+3.7%). The numbers are small though, both in total adjustments as in actual gains and losses. The negative side outweighs the positives for the week with Cardno suffering -21.8% and ERM Power -13.8%.
Resources stocks dominate positive adjustments to earnings estimates. Whitehaven Coal leads the pack with a gain of 21.7%, followed by South32 and Fortescue Metals. Somewhere inside the pack there's also Premier Investments and Bapcor. Resources also dominate on the negative side where the largest losses to forecasts are for Karoon Gas and Orocobre. Here we also find Programmed Maintenance (profit warning), Qube (loss of contract), Vocus Communications (analysts adjusting post sector euphoria), Japara Healthcare (still same government and margin issues) and Bank of Queensland.
The latter reports FY16 financials later this week to start off the banking reporting season in Australia. Investor attention will be focused after a rocky ride for the sector thus far in 2016.
Upgrade
AGL ENERGY LIMITED ((AGL)) Upgrade to Buy from Neutral by Citi and Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 5/0/1
Citi analysts believe the case for higher electricity prices has strengthened and this has pushed up their estimates for AGL by 14/25% for FY18/19. The analysts observe the share price has disconnected from electricity prices recently.
Target price jumps by 10% to $20.62. Upgrade to Buy from Neutral.
AGL has announced a 5% on-market buy-back and an increase in the distribution pay-out ratio to 75%. FY17 profit guidance of $720-800m is in line with Credit Suisse's expectations.
The broker estimates the company will generate $600m in free cash flow pre-growth and $400-500m per annum after growth capex in FY17-19. With the company pursuing a capital-light approach to renewables and limited other opportunities this suggests more room for buy-backs, in the broker's opinion.
Credit Suisse upgrades to Outperform from Neutral. Target is $19.90.
MEDIBANK PRIVATE LIMITED ((MPL)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/4/2
Value and affordability remain issues in health insurance, driven by increased utilisation and declining participation among young people.
This will require structural change in the sector, Macquarie believes, with stake holders needing to give ground to support the system.
The broker believes the pressure is building and moderates revenue growth assumptions ahead of government policy changes considered necessary to boost participation by the young.
Rating is upgraded to Outperform from Neutral given the recent share price performance. Target is reduced to $2.79 from $3.05.
NIB HOLDINGS LIMITED ((NHF)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/4/1
Value and affordability remain issues in health insurance, driven by increased utilisation and declining participation among young people.
This will require structural change in the sector, Macquarie believes, with stake holders needing to give ground to support the system.
The broker believes the pressure is building and moderates revenue growth assumptions ahead of government policy changes considered necessary to boost participation by the young.
The broker upgrades to Outperform from Neutral following the recent share price performance. Target price rises to $5.00 from $4.50.
VOCUS COMMUNICATIONS LIMITED ((VOC)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/2/0
The ACCC has approved the NextGen transaction and Vocus has also announced it has exceeded its first quarter corporate/wholesale new sales target. NBN subscribers have grown 21.7% since June 30.
UBS notes investors have little visibility regarding the shape of FY17/18 growth which could limit a re-rating of the stock. A lack of transparency, lacklustre organic growth in FY16 and general conservatism leads the broker to reduce FY17-18 earnings per share estimates by 10-14%.
In line with the revisions the broker's price target falls to $6.80 from $8.60. The stock looks inexpensive so UBS upgrades to Buy from Neutral.
Downgrade
FORTESCUE METALS GROUP LTD ((FMG)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 2/3/2
Morgan Stanley's quarterly update on commodity prices brings better bulks into the base case.
The most notable forecast changes are hard coking coal, up 18% for 2016 and 29% for 2017 followed by iron ore up 11% in 2016 and 27% in 2017 then thermal coal, up 13% in both years.
Morgan Stanley tosses up between the robust free cash flow with ongoing debt reduction and the potential for iron ore to drag the equity lower in the near term, and opts for the latter.
Rating is downgraded to Underweight from Equal-weight, with the broker looking to take the opportunity to turn positive again. Attractive industry view retained. Target is raised to $4.50 from $4.05.
RESOLUTE MINING LIMITED ((RSG)) Downgrade to Equal-weight from Overweight by Morgan Stanley and Downgrade to Neutral from Buy by Citi .B/H/S: 0/2/0
Confirmation of the company's mine plan in Queensland has brought value to the base case for Morgan Stanley, but the equity has had a strong run up and the metrics are looking fair, so the broker downgrades to Equal-weight from Overweight.
The stock has been a stand-out in the sector and execution is now key for the broker. Target rises to $2.40 from $2.00. Attractive industry view retained.
Resolute Mining has raised $150m to fund capex and working capital, for the Ravenswood Expansion Project. Citi analysts note the share price has gained 500% over the past twelve months.
The analysts have a positive view on the outlook, but for now the rating goes back to Neutral from Buy. Price target improves to $2.17.
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Recommendation Changes |
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Broker Recommendation Breakup |
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Recommendation |
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Positive Change Covered by > 2 Brokers
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Negative Change Covered by > 2 Brokers
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Target Price |
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Positive Change Covered by > 2 Brokers
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Negative Change Covered by > 2 Brokers
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Earning Forecast |
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Positive Change Covered by > 2 Brokers
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Negative Change Covered by > 2 Brokers
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Technical limitations
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CHARTS
For more info SHARE ANALYSIS: AGL - AGL ENERGY LIMITED
For more info SHARE ANALYSIS: FMG - FORTESCUE LIMITED
For more info SHARE ANALYSIS: MPL - MEDIBANK PRIVATE LIMITED
For more info SHARE ANALYSIS: NHF - NIB HOLDINGS LIMITED
For more info SHARE ANALYSIS: RSG - RESOLUTE MINING LIMITED