Weekly Ratings, Targets, Forecast Changes – 02-10-20

This story features A2 MILK COMPANY LIMITED, and other companies. For more info SHARE ANALYSIS: A2M

By Mark Woodruff

Guide:

The FNArena database tabulates the views of seven major Australian and international stock brokers: Citi, Credit Suisse, 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 28 to Friday October 2, 2020
Total Upgrades: 13
Total Downgrades: 6
Net Ratings Breakdown: Buy 50.91%; Hold 38.63%; Sell 10.46%

For the week ending Friday October 2, there were thirteen upgrades by FNArena database stockbroking analysts for individual ASX-listed stocks. Of those thirteen, ten received an upgrade to a Buy. Six stocks received a downgrade with none going to a Sell. Corporate Travel Management featured on both sides of the ledger by receiving both an upgrade and a downgrade after an acquisition and simultaneous capital raise. Both brokers regarded the acquisition favourably. However, one broker considered that key catalysts, previously envisioned for the stock, have now taken place.

There were several material percentage increases in target price for the week, led by Australian Finance Group. The company is set to control around 40% of the mortgage broking industry, with the pending consolidation with the number one operator. One broker has initiated coverage of the company with a price target well above other brokers, thereby elevating the average price target.

With the easing of virus risk, a former valuation discount for Synlait Milk was removed by one broker. So despite a rating downgrade during the week due to a number of factors including a weak FY21 outlook, the price target actually went up. A similar dynamic occurred for Reliance Worldwide. Despite posting an exceptionally strong first quarter result and receiving a general lift in target price from brokers, the company still received a rating downgrade based on the company’s current valuation. Boral proved the stars can align with a valuation upgrade to Buy and a significant rise in target price, as housing construction begins to rebound.

The most significant reduction to price target in percentage terms befell The a2 Milk Company. This was attributable to a larger disruption from the pandemic to its corporate daigou channel over September than previously anticipated. This compounds the weakness in retail daigou and the further unwinding of pantry stockpiling. FNArena's database showed six of seven Australian and international stock brokers reducing the target price for the company. However, one of those six countered with a valuation upgrade on the assumption the virus situation normalises in Australia. If so, it’s considered the second half should see a return to double-digit sales growth.

The largest percentage earnings upgrades for the week accrued to two resources companies in Coronado Global Resources and OceanaGold Corp. The former was due to a lift in forecast metallurgical coal prices by one broker, while the latter was the result of an equity raise. The proceeds will be used by OceanaGold Corp to fund growth projects and exploration and for corporate and working capital purposes. After a challenging 2020, it’s considered the company is over the worst of it.

With lithium market conditions to remain challenging, Galaxy Resources received a large percentage downgrade to forecast earnings. The same occurred to Brickworks as concerns arose about prospects for earnings in some parts of the portfolio, including the Investments segment.

Finally, Crown Resorts featured among the highest downgrades to earnings estimates. Nervousness grows over the Independent Liquor and Gaming Authority's (ILGA) investigation into whether the company is a suitable candidate for holding a casino licence in NSW. The Authority will report its findings formally by 1 February, 2021.

Total Neutral/Hold recommendations take up 50.91% of the total, versus 38.63% on Neutral/Hold, while Sell ratings account for the remaining 10.46%.

Upgrade

THE A2 MILK COMPANY LIMITED ((A2M)) Upgrade to Add from Hold by Morgans .B/H/S: 4/0/2

a2 Milk's guidance downgrade was weaker than expected but not particularly surprising to Morgans. The impact on daigou sales given international travel restrictions and the Victorian lockdown is to blame, which the broker assumes will prove but a short term blip.

Management is of the same opinion, suggesting the first half of FY21 will be weak but assuming the virus situation normalises in Australia, the second half should see a return to double-digit sales growth.

Target falls to $18.14 from $18.45, but as this is still a long way above the current price, Morgans upgrades to Add form Hold.

ATLAS ARTERIA ((ALX)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/3/0

France has allocated EUR30bn for ecological improvement, including toll roads. The opportunities for APRR include expansion of the recharge network for electric cars and development of the hydrogen refilling network.

Macquarie observes Atlas Arteria has an attractive yield and is benefiting from an early recovery in France. Some slowdown because of a second wave of coronavirus is observed but this is not considered material.

Meanwhile, economic policy in France is likely to generate material benefits through concession extensions as APRR can better use its latent debt capacity. Rating is upgraded to Outperform from Neutral and the target is raised to $6.99 from $6.81.

ALUMINA LIMITED ((AWC)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/0/1

In the last 6 months, Citi observes Alumina Ltd's share price is down -6% while the ASX300 Metals and Mining index is up 29% and the
market (ASX200) is up 15%. AdditionalIy, over six months the US alumina price is up 2% and is now around US$270/t.

As a result, the broker upgrades the rating for the company to Buy from Neutral and the target price of $1.80 is unchanged.

Cit lowers 2021 and 2022 profit (NPAT) forecasts by -10% and – 8%, respectively. This is a result of a higher forecast for the Australian dollar and lower alumina forecasts.

BHP GROUP ((BHP)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 5/2/0

Credit Suisse increases estimates for China's steel consumption to around 1bn tonnes per year until 2022. This drives a more constructive view on iron ore and iron ore price forecasts are revised up by 30% and 18% for 2021 and 2022, respectively. The broker also has a more constructive view on coking coal.

BHP Group remains the broker's preferred pick compared with Rio Tinto ((RIO)) as the valuation premium is likely to widen, given a more balanced materials portfolio and less public focus on ESG issues.

Moreover, unlike Rio Tinto there is no uncertainty about the management team and there is less potential public pressure to limit dividends. Rating is upgraded to Outperform from Neutral and the target lifted to $39 from $37.

BORAL LIMITED ((BLD)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/2/0

Citi assesses Boral is in an earnings trough, although construction markets are rebounding. Most upside is envisaged in detached housing in Australia and the US, which is partially offset by sharp declines in commercial building.

In valuing the surplus property portfolio, the broker believes this could deliver post-tax earnings in the range of $1.4-2.9bn over the next 20 years. The main issue is whether Boral can crystallise value from Penrith Lakes and Waum Ponds which have been long-standing assets on the balance sheet.

Rating is upgraded to Buy from Neutral as the broker assesses investors are looking through to a turnaround. Target is raised to $5.30 from $4.35.

CORPORATE TRAVEL MANAGEMENT LIMITED ((CTD)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 4/2/0

Corporate Travel will acquire Travel & Transport for $275m, undertaking a $375m equity raising in the process. Macquarie considers this a strategically sound acquisition which materially increases the company's scale in the US.

The broker believes the industry is "right for consolidation" and, moreover, the balance sheet capacity is there.

While forecasting a recovery in corporate travel is difficult, the broker believes creating significant value for the medium term could cement Corporate Travel's position globally.

Rating is upgraded to Outperform from Neutral and the target raised to $16.40 from $14.40.

See also CTD downgrade.

CLEANAWAY WASTE MANAGEMENT LIMITED ((CWY)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 5/2/0

Reports of a board investigation into CEO Vik Bansal's methods and the sale by the CEO of shares for the first time after five years with the company has triggered concerns, with the resultant shakedown in the share price, Credit Suisse observes.

The broker notes the CEO has been extremely effective and there is also the retirement of respected CFO Brendon Gill looming.

However, Credit Suisse thinks it unlikely the CEO will be forced to resign and believes the board has dealt with the issues appropriately. Rating is upgraded to Outperform from Neutral and the target is steady at $2.45.

DOWNER EDI LIMITED ((DOW)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/2/0

UBS sees Downer EDI as a restructuring story that will position the company to deliver free cash flow of at least $300m.

The broker's scenario analysis envisages a plan that is consistent with Downer's plan to divest its capital-intensive mining and laundries operations and wind down its problematic construction operations.

The broker notes after the restructure, Downer will be focussed on its core urban services businesses, with its business model less cyclical and providing more predictable revenue. 

UBS thinks the divestment of mining and laundries operations will be a key catalyst. The broker upgrades its rating to Buy from Neutral. Target is raised to $5 from $4.50.

FORTESCUE METALS GROUP LTD ((FMG)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 4/2/1

Credit Suisse increases estimates for China's steel consumption to around 1bn tonnes per year until 2022. This drives a more constructive view on iron ore and iron ore price forecasts are revised up by 30% and 18% for 2021 and 2022, respectively.

Hence, the broker lifts earnings estimates 64-70% over the next two financial years and upgrades to Neutral from Underperform. Credit Suisse also assesses the yield might be enough for investors to start reconsidering entry points in the stock. Target is raised to $16.50 from $15.00.

NORTHERN STAR RESOURCES LTD ((NST)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/3/0

Looking at Northern Star Resources' Strategy Day, UBS asserts its Sell recommendation no longer holds true.

Northern Star Resources expects to see its production to increase by 40% over the next three years led by Jundee/Yandal and Pogo. Costs are expected to decline and noting its forecasts were too conservative, the broker has reduced its cost outlook.

UBS upgrades its rating to Neutral from Sell with the target price raised to $14.20 from $14.

RIO TINTO LIMITED ((RIO)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 3/4/0

Credit Suisse increases estimates for China's steel consumption to around 1bn tonnes per year until 2022. This drives a more constructive view on iron ore and iron ore price forecasts are revised up by 30% and 18% for 2021 and 2022, respectively.

This should flow to large earnings increases for Rio Tinto. The broker believes Rio Tinto will be able to generate free cash flow yields of over 10% in 2021.

Credit Suisse envisages capacity for a "fruitful" dividend in February although acknowledges there are plenty of unknowns including the next CEO and the potential changes in the aftermath of the Juukan Gorge incident.

Rating is upgraded to Neutral from Underperform and the target raised to $95 from $88.

SUNCORP GROUP LIMITED ((SUN)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/4/0

Macquarie considers the risks of business interruption are over stated and the bank provisions are fair. Hence the discount of -33% compared with the ASX100 is considered excessive.

The broker understands Suncorp has provisioned -$70-75m, post reinsurance, for Australian business interruption losses. While Macquarie's estimate is closer to -$225m, pre-reinsurance, this is considered substantially less than the discount currently encapsulated in the stock price.

Rating is upgraded to Outperform from Neutral and the target is raised to $11.00 from $10.40.

WEST AFRICAN RESOURCES LIMITED ((WAF)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/0/0

West African Resources' first round of drilling at Sanbrado’s M1S deposit produced strong results, extending known mineralisation about 400m below current underground reserves.

The results lead Macquarie to lift its M1S underground inventory to 50% above current reserves, translating to an additional circa 2-years of underground life.

Based on the improved mine life assumptions, the broker upgrades its rating to Outperform from Neutral. Target rises to $1.30 from $1.20.  

Downgrade

CORPORATE TRAVEL MANAGEMENT LIMITED ((CTD)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 4/2/0

The purchase of Travel & Transport for $275m and associated $380m capital raising highlights the difficult corporate travel industry, in Ord Minnett's view.

The target was obvious given its scale, while the price on face value represents an aggressive move in the current climate. Nevertheless, Ord Minnett considers this a once in a lifetime opportunity for Corporate Travel to build scale on reduced acquisition multiples.

The broker downgrades to Accumulate from Buy as the key catalysts that were envisaged have largely played out. Target is raised to $19.04 from $15.51.

See also CTD upgrade.

HUB24 LIMITED ((HUB)) Downgrade to Hold from Add by Morgans .B/H/S: 2/2/1

Morgans continues to be attracted to the long-term growth in Hub24 but considers the current valuation is full and is looking for a more attractive entry price. Rating is downgraded to Hold from Add.

Nevertheless, the broker continues to believe the business can deliver the expected step change in earnings over the next three years. Target is raised to $18.10 from $16.60.

JAMES HARDIE INDUSTRIES N.V. ((JHX)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 5/1/0

Ord Minnett interprets the update by Louisiana Pacific as positive for James Hardie, boding well for the exteriors business.

James Hardie was targeting 7-11% volume growth for North America exteriors in the September quarter.

Based on valuation, the broker downgrades to Accumulate from Buy. Target is steady at $34.

RELIANCE WORLDWIDE CORPORATION LIMITED ((RWC)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/4/0

Looking at Reliance Worldwide Corp's trading update, Ord Minnett thinks the company is on its way to a very strong first-half FY21 result. However, the current operating environment, though very favourable, is considered unsustainable. This has also been pointed out by management.

The broker is comfortable with its top-of-consensus FY21 net profit forecast of $160m.

Based on the company's valuation, Ord Minnett downgrades its recommendation to Hold from Accumulate with the target price rising to $4.20 from $4.

SEALINK TRAVEL GROUP LIMITED ((SLK)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/0

Macquarie believes SeaLink Travel Group's recent share price strength necessitates caution on accumulating the stock at current levels. Long term, the broker remains convinced of the group's defensiveness, especially looking at Transit Systems’ track record. 

Rating has been downgraded to Neutral from outperform although the broker clarifies its long-term thesis on SeaLink Travel remains intact. Target price is unchanged at $5.37.

SYNLAIT MILK LIMITED ((SM1)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/2/0

Credit Suisse observes a solid second half, although net profit in FY20 was slightly below expectations. The main surprise was a material downgrade to the FY21 outlook, a combination of daigou disruption and the significant cost drag from recent diversification investment.

The company has noted it is close to finalising a new global customer for packaged products. This should have a positive contribution from FY23 onwards, the broker points out, and provide some offset to the tail risk from a2 Milk ((A2M)), which was recently heightened by the potential entry of the latter into manufacturing with Mataura Valley Milk.

Rating is downgraded to Neutral from Outperform and the target is reduced to NZ$6.15 from NZ$7.70.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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