Weekly Ratings, Targets, Forecast Changes

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 November 12 to Friday November 16, 2018
Total Upgrades: 10
Total Downgrades: 12
Net Ratings Breakdown: Buy 44.77%; Hold 41.88%; Sell 13.36%

Perhaps the most important observation is that underlying momentum for Australian companies listed on the ASX seems to have turned for the worst. Irrespective of a share market struggling to keep upward momentum going, with indices in negative territory year-to-date, stockbroking analysts are issuing more downgrades than upgrades, and this picture becomes decisively negative when we look at valuations & price targets, and at earnings forecasts.

Sticking to recommendations, for now, total tally for the week ending Friday, 16th November 2018 accumulated to ten upgrades (of which Lend Lease accounted for two) and twelve downgrades (with Lend Lease accounting for three). The good news here is that seven out of ten upgrades went to Buy (or an equivalent).

On the negative side, five out of twelve downgrades shifted to Sell with Aveo Group, Elders, Factor Therapeutics, Platinum Management and Shopping Centres Australasia all receiving one. Aveo Group, having issued yet another profit warning, also received a second downgrade to Neutral.

Very little happened during the week in terms of positive revisions to valuations and price targets, with the week's table consisting of three names only, led by QBE Insurance, followed by Corporate Travel Management and WorleyParsons.

There is, however, plenty to witness on the flipside where downward adjustments are large and plenty. Aveo Group suffered a blow of -27%, worse than Lend Lease's -25%. Others on the week's receiving side include McMillan Shakespeare, Steadfast Group, Lovisa Holdings and NextDC.

The picture looks even worse for earnings estimates. None of the positive adjustments is worth pointing out, as all really are minor adjustments in the margin, but when it comes to negative revisions…. Xero's forecasts have been adjusted by -190%. For Graincorp the adjustment was -78%. Lend Lease is only third with its forward estimates dropping by -45%. Then comes NextDC with -35%.

No second guessing as to why share prices remain under pressure from both macro-economic and micro perspectives. The out-of-season financial reports continue to drip-drop in this week. When it comes to negative news, however, it's the June-seasoned companies that are doing most of the damage, led by the likes of Lend Lease, Pact Holdings, Aveo Holdings, and numerous retailers.

Upgrade

AGL ENERGY LIMITED ((AGL)) Upgrade to Buy from Neutral by Citi .B/H/S: 3/2/3

Citi analysts had been absent since April (last rating Neutral). They made a come-back by going against the grain, upgrading to Buy on the argument that investor concerns about political intervention risks are by now well and truly priced in, and possibly with too much emphasis on potential downside.

There is one caveat, in that the reintroduction of a carbon price if Labor is reelected could still materially impact on the valuation of the business. Price target $20.27.

AUSNET SERVICES ((AST)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 1/6/0

First half results were in line with Morgan Stanley's estimates. The broker believes regulatory risks are factored into the price and this raises the defensive appeal of the stock.

The broker lifts growth estimates for the contracted asset base to around $1.2bn by FY21,  20% above the current level but considered achievable based on the large pipeline of new generation projects.

Rating is upgraded to Equal-weight from Underweight. Target is raised to $1.72 from $1.71. Industry view: Cautious.

See also AST downgrade.

CALTEX AUSTRALIA LIMITED ((CTX)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 5/1/1

While uncertainties exist, Credit Suisse believes Caltex is on an undemanding multiple and there is increasing exposure to the convenience retail segment. The broker downgrades 2018 estimates to reflect guidance on retail margins and downtime at Lytton, while outer-year upgrades are spread across fuel distribution and convenience.

An alliance with Woolworths ((WOW)) reduces sourcing complexity and participation in the rewards program adds to the company's market position. Credit Suisse upgrades to Outperform from Neutral and raises the target to $33.07 from $32.55. Without the distractions of contracts/M&A, better optimisation of fuels and infrastructure appears likely.

LEND LEASE CORPORATION LIMITED ((LLC)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/3/0

Lend Lease has announced an additional cost overrun of around $500m on NorthConnex and some other engineering construction projects. While there is heightened risk in the shares, Credit Suisse believes they are oversold and it may be attractive to buy ahead of the AGM on November 16.

Rating is upgraded to Outperform from Neutral. Target is steady at $16.20. The broker suspects there could be significant upside from a more aggressive focus on costs across the business.

Ord Minnett has assumed a worst-case scenario for Lend Lease, including another material impairment and the engineering & services business being subjected to an orderly winding down. In such a scenario the broker believes the company can return to a comfortable gearing position and avoid issuing dilutive equity.

The broker forecasts Lend Lease will release $1.65bn in capital by divesting $550m of fund co-investments at the Barangaroo International towers and bring in a joint venture partner to One Sydney Harbour, its largest development project over the next five years.

Ord Minnett upgrades to Accumulate from Hold and reduces the target to $15 from $16.

See also LLC downgrade.

NORTHERN STAR RESOURCES LTD ((NST)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/3/3

Northern Star has made a $150m cash offer to acquire the 49% interest in East Kundana it does not already own. Macquarie believes consolidating the venture is a compelling option, and the offer represents a discount to its valuation of the company's 51% stake.

The broker believes Northern Star is well-positioned to drive through a deal. Should the offer be successful, Northern Star will assume financial benefit from January 1 2019.

Rating is upgraded to Outperform from Neutral. Target is steady at $9.80.

ORIGIN ENERGY LIMITED ((ORG)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/2/0

Citi analysts have upgraded to Buy on the argument that investor concerns about political intervention risks are by now well and truly priced in, and possibly with too much emphasis on potential downside.

There is one caveat, in that the reintroduction of a carbon price if Labor is reelected could still materially impact on the valuation of the business. Excluding this scenario, Citi thinks there is enough upside potential for an upgrade to Buy from Neutral. Price target $8.52 (was $8.74).

The analysts also point out, were they to use a US$70/bbl long term oil price then the target price would increase to $/9.62shr.

SEEK LIMITED ((SEK)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/4/1

After the latest ANZ job advertising series and UBS proprietary data the broker concludes that FY19 guidance, which indicates net profit of around $200m, should be secure. This view is held despite the softening macro conditions and the slowing in domestic job growth.

The broker believes the company still has cost levers to pull even if the top line were to slow materially. Against revised estimates the broker believes the stock is fairly valued. UBS upgrades to Neutral from Sell. Target is reduced to $18.50 from $19.50.

SEVEN WEST MEDIA LIMITED ((SWM)) Upgrade to Neutral from Sell by UBS .B/H/S: 0/3/2

Seven West has underperformed the market, UBS notes, since rival Nine Entertainment's ((NEC)) October update which suggested a weaker metro TV market in which Nine was gaining share. Seven West's own update confirmed such headwinds but the broker believes this could be a low watermark, given key programming lies ahead such as the cricket and My Kitchen Rules.

Guidance has been left unchanged on the assumption cost controls can offset weak TV, but UBS appears to have a lot of faith in the cricket and MKR and flags a typical election boost next year. The broker thus upgrades to Neutral from Sell while cutting its target to 80c from 85c.

WORLEYPARSONS LIMITED ((WOR)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 5/2/0

Deutsche Bank likes the exposure to the recovery in oil & gas capital expenditure. The share price could be negatively affected by concerns regarding global growth and declines in the oil price, but the company is still expected to find significant opportunities for revenue and margin expansion.

Deutsche Bank forecasts 20% growth in earnings per share between FY18-21. Rating is upgraded to Buy from Hold and the target is raised to $20.15 from $19.10.

Downgrade

AVEO GROUP ((AOG)) Downgrade to Underperform from Neutral by Macquarie and Downgrade to Hold from Add by Morgans .B/H/S: 1/1/1

The trading update from the AGM signals to Macquarie that management is backtracking from FY19 guidance, with sales rates below expectations because of a weak residential market.

Given price deflation and lower sales across the retirement sector, the broker suspects conditions will remain tough and pressure margins in FY19.

Macquarie downgrades to Underperform from Neutral and struggles to envisage operating conditions improving. Target is reduced to $1.54 from $2.74.

The company's AGM update revealed weaker sales/settlements because of a softer housing market. The company has, prudently in Morgan's view, pulled back its FY20 development deliveries to around 200 from 500 previously.

The broker downgrades forecasts by -21% and -34% for FY19 and FY20 respectively. The broker downgrades to Hold from Add, until there is further evidence sales rates are holding at current levels. Target is reduced to $2.09 from $3.37.

AUSNET SERVICES ((AST)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/6/0

The interim result was stronger than Macquarie expected, reflecting a better customer contribution. Macquarie believes the stock has performed well but the potential for growth is now factored in.

While the yield provides a floor, it is considered unlikely to be a catalyst for re-rating. A more coordinated government policy that accelerates growth and renewables is likely to be the driver of a re-rating, in the broker's opinion. This is unlikely before May 2019.

Rating is downgraded to Neutral from Outperform. Target is lowered to $1.72 from $1.74.

See also AST upgrade.

ELDERS LIMITED ((ELD)) Downgrade to Reduce from Hold by Morgans .B/H/S: 0/0/1

Full year results beat expectations with underlying operating earnings 3.6% ahead of Morgans' forecasts. The company has proven, in the broker's view, it can still grow earnings despite the drought and a decline in cattle price.

Management remains confident of delivering 5-10% earnings growth out to FY20, organically, through acquisitions and via cost control measures.

Still, Morgans believes the stock is fully valued and downgrades to Reduce from Hold. Target is raised to $7.80 from $7.05.

FACTOR THERAPEUTICS LIMITED ((FTT)) Downgrade to Reduce from Add by Morgans .B/H/S: 0/0/1

The phase 2 trial for Factor Therapeutics' treatment for venous leg ulcers failed at all levels. Ongoing development has been halted and the company will now look for ways to reduce costs and preserve cash and intellectual property.

Morgans downgrades to Reduce from Add. Target falls to 0.6c from 0.093c

LEND LEASE CORPORATION LIMITED ((LLC)) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Neutral from Outperform by Macquarie and Downgrade to Neutral from Buy by Citi .B/H/S: 3/3/0

Lend Lease has announced additional provisions on problem projects in its engineering division. Credit Suisse believes the shares have likely been oversold but the catalysts that will restore confidence in the business are some way off.

The broker reduces FY19 estimates for operating earnings by -37%. A quick solution is likely to be a sale of the engineering business but the broker acknowledges this may not maximise shareholder value.

Credit Suisse downgrades to Neutral from Outperform and lowers the target to $16.20 from $19.30.

The company has announced a $350m post-tax provision relating to engineering projects. Macquarie is disappointed with the outcome, which proves Lend Lease has not resolved the issues at NorthConnex.

Given the uncertainty in engineering and despite the good medium-term prospects in global urban regeneration Macquarie downgrades to Neutral from Outperform. This is the third provision that has been taken for NorthConnex, the broker suspects.

The total impairment predominantly relates to projects that were previously identified, nevertheless, with major tunnelling projects still to be completed, the market will now assign a higher risk premium to these earnings, Macquarie points out. Target is reduced to $15.08 from $21.81.

Lend Lease has announced a $350m after-tax provision for engineering projects. Citi lowers forecasts for FY19 earnings per share by -40% to reflect the downgrade. FY20 estimates are lowered by -14%.

The broker is not sure the worst is behind the company, noting the engineering track record of Lend Lease is abysmal, with a loss of -$500m over the past five years.

The broker reiterates a view that engineering should be spun off and any path to a recovery in the share price is now dependent on the company divesting the division in one form or another.

Rating is downgraded to Neutral from Buy. Target is reduced to $15.06 from $22.36.

See also LLC upgrade.

PRIMARY HEALTH CARE LIMITED ((PRY)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/4/3

Citi suspects FY19 net profit will be down on the prior year. At a macro level, the broker notes Medicare statistics for the September quarter were soft and the company has also found an issue in October with its payroll system which resulted in medical centre staff being underpaid for the last seven years with a -$18m underpayment likely to be paid out in cash.

The Dorevitch Fair Work Commission determination has also indicated a post-tax impact on underlying net profit guidance of -$4.5m. The company hopes to offset this through cost reductions.

Guidance is expected to be updated at the AGM on November 22. Citi downgrades to Neutral from Buy and reduces the target to $2.90 from $3.20.

PLATINUM ASSET MANAGEMENT LIMITED ((PTM)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/2/2

The company has reported a -5.5% fall in funds under management for October. Negative market movements drove the decline despite a modest outperformance in the international fund and Asia fund.

Inflows were slightly positive and largely from the retail channel. Factoring in the weaker market movements Credit Suisse downgrades earnings by -6% for FY19 and -8% for FY20-21.

Rating is downgraded to Underperform from Neutral as the weak fund performance is likely to hamper flows. Target is reduced to $5.00 from $5.25.

SHOPPING CENTRES AUSTRALASIA PROPERTY GROUP ((SCP)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/2/3

Since the acquisition of the Vicinity Centres ((VCX)) in early October Credit Suisse observes the share price is now trading at a 13% premium to the last stated net tangible assets.

While the broker commends management on its ability to execute on its corporate strategy, the hefty premium to valuation is considered a stretch.

Rating is downgraded to Underperform from Neutral. Target is steady at $2.25.

STEADFAST GROUP LIMITED ((SDF)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/1/0

The Australian Securities and Investments Commission has submitted a recommendation to the Hayne Royal Commission recommending the removal of commissions for all insurance products.

Ord Minnett calculates, if this recommendation ultimately worked its way into legislation, it would have an adverse effect on Steadfast. The submission intends to fix problems related to products that provide little or no value to consumers such as add-on insurance products and it is still too early to know if the recommendations will be accepted or become policy.

Ord Minnett does not change earnings forecasts for Steadfast but increases its discount rate on valuation. The broker downgrades to Hold from Accumulate and reduces the target to $2.88 from $3.35.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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