Weekly Ratings, Targets, Forecast Changes

This story features ADAIRS LIMITED, and other companies. For more info SHARE ANALYSIS: ADH

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 June 11 to Friday June 15, 2018
Total Upgrades: 12
Total Downgrades: 6
Net Ratings Breakdown: Buy 45.11%; Hold 39.42%; Sell 15.48%

The Australian share market has posted only small net gains so far year-to-date (including dividends) but June might well add some more, assuming global sentiment doesn't sour in the remaining twelve days.

Stockbroking analysts for their part are trying their best to keep sentiment positive. For the week ending Friday, 15th june 2018, FNArena counted twelve upgrades for individual ASX-listed stocks against six downgrades. Caltex Australia received two upgrades during the week and both went to Buy.

Other stocks receiving upgrades include Telstra (!), Bank of Queensland, Metcash and Webjet. Only two of the six downgrades moved to Sell with Primary Health Care and Goodman Group the recipients.

Webjet and BHP both enjoyed 3%+ increases to consensus price targets and both find themselves on top of the week's table, followed by Rio Tinto and Goodman Group. The latter indicates not everybody returned with a negative view from the company's investor day.

There were only two stocks whose consensus price targets declined during the week, and only Primary Health Care is worth mentioning.

The aforementioned Caltex Australia tops the week's table for positive revisions to forecasts, beating OceanaGold and Cleanaway Waste Management, but all increases are rather small. Much larger numbers reveal themselves on the negative side with APA Group taking the biggest hit, followed by Graincorp, Mineral Resources and Tabcorp.

Upgrade

ADAIRS LIMITED ((ADH)) Upgrade to Add from Hold by Morgans .B/H/S: 2/0/0

Morgans reviews forecasts and its investment view and believes FY18 will mark a material bounce in earnings after a difficult FY17.

Morgans also increases its FY19 like-for-like sales growth assumptions to 4%. Rating is upgraded to Add from Hold. Target is raised to $2.50 from $2.30.

APA GROUP ((APA)) Upgrade to Outperform from Underperform by Credit Suisse .B/H/S: 3/3/1

Following the news that CKI consortium is offering $11 per share to shareholders, Credit Suisse has double-whammy upgraded to Outperform from Underperform.

The analysts make it clear they think the offer is regarded as "attractive" given their view that new arbitration rules "dramatically" reduce the economic life of APA's assets.

Within the Australian context, the analysts point out CKI has a track record of paying what others won't. FIRB approval remains key. Target price lifts to $11 (was $7.45 pre-bid). Note current forecasts suggest no dividend payouts post the present financial year.

See also APA downgrade.

AUSNET SERVICES ((AST)) Upgrade to Neutral from Sell by Citi .B/H/S: 2/4/1

Following the recent underperformance of the share price Citi upgrades to Neutral from Sell and considers the stock fairly valued. The broker also updates its model for the FY18 results, which slightly missed expectations.

The broker continues to prefer Spark Infrastructure ((SKI)) in the sector. Target is $1.54.

AURIZON HOLDINGS LIMITED ((AZJ)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/1/3

UBS believes heated and protracted negotiations over the draft decision by the Queensland regulator have skewed sentiment to an extreme negative such that an improvement is now more likely.

The broker suggests the stock is approaching a realistic floor of $3.75 based on the network being worth its regulated asset base, less debt. Therefore, UBS upgrades to Buy from Neutral. Target is reduced to $4.60 from $4.90.

BANK OF QUEENSLAND LIMITED ((BOQ)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 2/2/2

Credit Suisse believes the stock is now trading below fair value and represents a good entry point.

While acknowledging a challenging macro backdrop for the sector the broker calculates Bank of Queensland is currently sitting near the trough in valuation across most metrics.

The broker upgrades to Outperform from Neutral. Target is steady at $11.40.

CLASS LIMITED ((CL1)) Upgrade to Buy from Neutral by UBS .B/H/S: 3/0/0

The company is reacting to increased competitive intensity by offering fee holidays to January 1 2019 for new accounts, which UBS estimates could add around four months to customer acquisition costs and impact FY19 EBITDA by -$2m.

That said, with improved valuation support and the possibility there may be a faster-than-expected transition to cloud-based SMSF accounting software the rating is upgraded to Buy from Neutral. Target is raised to $2.95 from $2.85.

CALTEX AUSTRALIA LIMITED ((CTX)) Upgrade to Outperform from Neutral by Macquarie and Upgrade to Buy from Hold by Ord Minnett .B/H/S: 5/1/1

Caltex has provided first half profit guidance that is in line with Macquarie's expectations. The broker observes the core business is defensive and earnings growth is expected. Future drivers are the asset review and convenience strategy.

The broker suggests meaningful infrastructure divestments following the asset review are unlikely and acknowledges the convenience roll-out has its risks.

Nevertheless, given the share price has de-rated the valuation upside is improved. Rating is upgraded to Outperform from Neutral. The broker increases the target to $37.00 from $36.60.

The company's net profit guidance for the first half of $295-315m is ahead of Ord Minnett's forecasts, as refining has fallen less than expected. Toyota Fleet Management and Ampol Singapore are boosting underlying supply & marketing earnings as well.

The broker upgrades to Buy from Hold and raises the target to $35 from $34 because of earnings revisions, confidence in refiner margins and the positive changes emerging in the asset portfolio.

METCASH LIMITED ((MTS)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/2/1

UBS upgrades to Buy from Neutral believing the company's FY19 earnings multiple for the food & grocery division is pricing in further contract losses. The broker lifts FY19-21 forecasts by 1% to reflect stronger hardware earnings.

The main catalysts in the near term will be capital management at the FY18 result, in the broker's opinion. The main risk is new price investment initiatives, although UBS considers this unlikely. Target is raised to $3.00 from $2.95.

NIB HOLDINGS LIMITED ((NHF)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/6/2

Credit Suisse lowers FY19 net profit estimates by -0.1% on the assumption that premium rate increases will be less than 3%. In FY20 and the outer years the broker allows for a 2% premium rate increase and minor margin contraction.

While the broker struggles to be positive on the stock, the share price has moved back to around fair value and the rating is upgraded to Neutral from Underperform. Target is reduced to $5.35 from $5.65.

TELSTRA CORPORATION LIMITED ((TLS)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 5/1/2

Ord Minnett expects the company to announce an additional $500m-1bn of cost savings and new product bundling initiatives at its strategy briefing on June 20.

There is also the chance of a game-changing announcement such as a structural separation. The broker upgrades to Accumulate from Hold. Target is $3.30.

WEBJET LIMITED ((WEB)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 4/1/0

As global hotel trading has provided strong tailwinds to the company's key B2B exposures, Morgan Stanley expects the market will give a free pass on key qualitative issues such as soft cash conversion and higher capital expenditure.

Nevertheless, the broker remains cautious regarding the structural challenge, although envisages little risk to FY18 results.

As the earnings risk is pushed out the broker upgrades to Equal-weight from Underweight. Target is raised to $12.60 from $10.30. Industry View is In-Line.

Downgrade

APA GROUP ((APA)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 3/3/1

After further review of the bid by CK Infrastructure for APA Group, Ord Minnett has downgraded to Hold from Buy.

The main challenge in getting a deal done, the broker suggests, is approval from the FIRB, even though the stock factors in a 58% likelihood of success. The broker raises the target to $11.00 from $9.55.

See also APA upgrade.

CENTURIA INDUSTRIAL REIT ((CIP)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

The REIT has announced new leasing deals, revaluations and an asset sale. Centuria Industrial will sell its Preston asset for $30.1m with proceeds used to reduce debt.

Morgans adjusts forecasts to allow for the news and assumes no further asset sales. Despite some near-term leasing challenges the broker backs management's ability to deliver improved occupancy over the medium term.

Target rises to $2.63 from $2.59. Following appreciation in the security the broker downgrades to Hold from Add.

GOODMAN GROUP ((GMG)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 3/3/0

Ord Minnett believes the business is in great shape but the stock is expensive versus history and its peers. The broker is also somewhat concerned about the quality of earnings growth.

While the company, at its investor briefing, highlighted the exuberance of the industrial market, Ord Minnett suggests that not all industrial assets are equal and some in the marketplace appear not to be allowing for this fact.

The broker downgrades to Lighten from Hold. Target is raised to $8.40 from $8.10.

PRIMARY HEALTH CARE LIMITED ((PRY)) Downgrade to Sell from Buy by UBS .B/H/S: 1/1/5

UBS changes lead analyst coverage for the stock and remodels earnings drivers. FY19-20 forecasts decline by -8-9% versus previous estimates. The broker also shifts to a DCF-based valuation methodology.

Target reduces to $3.50 from $4.00. Rating is downgraded to Sell from Buy. The broker does not believe the current share price is factoring in the earnings risk as several factors could have a negative impact on FY19.

RIO TINTO LIMITED ((RIO)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 7/1/0

While believing some of the bear scenarios regarding rapidly rising scrap consumption are premature, Deutsche Bank expects Chinese demand for iron ore to peak around 2020 and limit the growth potential for the major producers. The broker reduces assumptions for Rio Tinto's iron ore production from 2021.

The stock has re-rated versus its peers following a successful strategy of asset sales, de-leveraging and high cash returns. Following this significant rebound the broker downgrades to Hold from Buy. Target is steady at $89.

SINO GAS & ENERGY HOLDINGS LIMITED ((SEH)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/0

The company has negotiated an eight-year extension to the Linxing PSC until 2036 but in return has reduced its interest and relinquished some acreage.

Macquarie forecasts a -20% fall in Linxing 2P reserves because of the changes. While the outlook for domestic gas is particularly positive there is also much risk, Macquarie observes.

The broker reduces the target to $0.25 from $0.33 and downgrades to Neutral from Outperform.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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