Weekly Ratings, Targets, Forecast Changes – 16-10-20

This story features ANSELL LIMITED, and other companies. For more info SHARE ANALYSIS: ANN

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 October 12 to Friday October 16, 2020
Total Upgrades: 14
Total Downgrades: 5
Net Ratings Breakdown: Buy 51.29%; Hold 38.36%; Sell 10.34%

Another positive week (ending Friday October 16) for ASX-listed stocks, resulted in fourteen upgrades and five downgrades by FNArena database stockbroking analysts.

Bank of Queensland received two upgrades and one downgrade to ratings. This may be explained in terms of two brokers having the same positive outlook and one being diametrically opposed. On most occasions, when a stock is simultaneously upgraded and downgraded it is explained by the relative starting position of the target prices in relation to the current share price.

On this occasion all three broker’s started with identical target prices or estimated valuations in 12 months time. On the one hand the bank was described as conservatively provisioned with limited downside, while on the other hand it was overvalued with a price earnings (PE) premium 25% above its five-year average relative to peers. It’s sometimes all in the eye of the beholder and happily this creates a marketplace of buyers and sellers.

In a similar vein Link Administration received one upgrade and one downgrade in rating. However, the waters are more muddied in this case due to an approach by a consortium to acquire 100% of the company’s shares. The upgrade was on the basis of the strategic interest in the company, while the downgrade was prompted by a strong uplift in the share price following interest from the consortium.

There were immaterial percentage decreases in target prices for companies in the database during the week and thus no commentary is necessary.

In the table for the highest percentage uplift in target price for the week, Bank of Queensland and Link Administration came second and fourth on the table, respectively. This change for both companies may be explained by the narrative for ratings upgrades above. Eagers Automotive topped the table and received a downgrade in rating during the week. Sales were up strongly in a quarterly update and the company’s margins are benefiting from an ongoing cost-out program. Ord Minnett downgraded the company’s rating on the basis of recent share price gains, but like three other brokers in the FNArena database raised the target price.

Given the above, it was no surprise Eagers Automotive had the second largest percentage increase in earnings upgrades by brokers in the FNArena database.

The largest percentage increase in earnings was reserved for NextDC, after a renegotiation of debt facilities. According to some brokers, this not only significantly reduces interest costs but also de-risks the company’s data centre roll-out strategy. Next in order of percentage increase in earnings was ARB Corp after reporting strong sales figures. The company is benefiting from multiple drivers including higher consumer spending and domestic tourism. Bluescope Steel also received a significant boost to earnings forecasts from US steel spreads, which have effectively doubled since their July lows. There is an expectation that the company's free cash flow yield will improve materially in coming years.

As highlighted last week, Transurban Group also suffered a large percentage decline in earnings forecasts after a first quarter traffic update. In addition, there was a rating downgrade by one broker last week, that noted covid-19 continues to ravage Citylink traffic volume by -59% and declines of between -30% to 50% for the US.

Opinions varied for six brokers casting an eye over the third quarter operational performance of Whitehaven Coal. On balance, strong production and sales were overwhelmed by weaker pricing for coking and thermal coal. As a result, the company received a large percentage downgrade to earnings estimates for the week.

Despite favourable target price moves for Audinate,  EPS estimates moderated for the company. Not far behind in the percentage earnings downgrades table were both Galaxy Resources and Viva Energy Group. Lower production and weakness in the lithium market amid elevated inventory and mothballed capacity is not a happy recipe for Galaxy Resources. Neither is lower than expected retail and commercial volumes and a worse than anticipated loss in refining for Viva Energy Group.

Brokers were generally disappointed with Iluka Resources’ production and sales of zircon and rutile in the September quarter. The immediate issue/catalyst for the stock is the demerger of Deterra, which (assuming shareholder approval) will be listed on October 23.

Total Neutral/Hold recommendations take up 51.29% of the total, versus 38.36% on Neutral/Hold, while Sell ratings account for the remaining 10.34%.

Upgrade

ANSELL LIMITED ((ANN)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/3/1

Ansell is a clear beneficiary of the coronavirus pandemic to date, observes Ord Minnett. The broker also thinks this will continue given the increased demand for hygiene and personal protective equipment (PPE) products is likely to endure well into the future.

The broker highlights higher input costs have been fully passed on to customers, unlike in the past. Earnings estimates have been raised and the broker now thinks Ansell is undervalued.

Recommendation upgraded to Accumulate from Hold with the target price increasing to $44.00 from $36.20.

AUSTRALIA & NEW ZEALAND BANKING GROUP ((ANZ)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 7/0/0

Ord Minnett's stance on the major banks has turned somewhat positive. While the fundamental revenue outlook has not improved, the broker notes the stocks are cheap and trading below book values (except Commonwealth Bank).

House prices are holding up better than feared, points out Ord Minnett, and housing finance approvals continue to improve. This is further bolstered by the federal budget aiding the households and small- to medium-sized enterprises (SME).

The broker expects a rally in value stocks into year-end and also believes all the major banks will pay dividends this year. 

Reflecting its incrementally more positive view on the sector, Ord Minnett upgrades its recommendation on ANZ Banking Group to Accumulate from Hold. The target price rises to $20 from $19.50.

BANK OF QUEENSLAND LIMITED ((BOQ)) Upgrade to Outperform from Neutral by Credit Suisse and Upgrade to Add from Hold by Morgans .B/H/S: 3/3/1

Following the FY20 result Credit Suisse upgrades cash earnings estimates by 3-4% for FY21 and FY22.

The broker now envisages the downside is limited, amid a conservatively set provision for the pandemic and good execution of the bank's strategy, which is delivering underlying profit growth.

Nevertheless, the broker acknowledges Bank of Queensland is still likely to struggle to achieve double-digit returns on equity in the near term. Target increases to $7.60 from $5.50 and given the limited downside risk the rating is upgraded to Outperform from Neutral.

Bank of Queensland has reported FY20 cash earnings of $225m, which is 4% better than Morgans expected. The beat is largely the result of net interest income being stronger than the broker expected.

The bank will pay a 12cps fully franked dividend.

Despite Morgans forecasts being above consensus, they are starting to look conservative in light of this new data, explains the broker.

Morgans adjusts EPS forecasts up by 3.5% for FY21 and reduces FY22 by -1.25%.

The rating is increased to Add from Hold and the target price is increased to $7.20 from $5.50.

See also BOQ downgrade.

G.U.D. HOLDINGS LIMITED ((GUD)) Upgrade to Buy from Neutral by Citi .B/H/S: 1/4/0

Citi upgrades GUD Holdings to Buy from Neutral with the target price rising to $14.30 from $12.75.

GUD Holdings' medium term outlook appears better placed than previously expected due to changes in consumer mobility behaviour.

The company is trading at a -21% discount to Bapcor ((BAP)), considered excessive by Citi given the strong demand for aftermarket auto parts is likely to offset a risk of customers pursuing private label strategies.

Earnings estimates upgrade for FY21-22 due to better than expected first-quarter sales in Auto and Davey.

HUB24 LIMITED ((HUB)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 2/2/1

Flows continue to meet or beat Macquarie's expectations. Platform margins are likely to remain under pressure, nevertheless, although a large step change is unlikely.

Trading volumes were elevated in the second half of FY20, because of heightened market volatility. The broker is now forecasting a normalisation of trading volumes.

The recent performance suggests the valuation is stretched but sustained flow momentum is expected to support the share price for the remainder of FY21.

Macquarie upgrades to Neutral from Underperform. Target is raised to $22.50 from $9.60, because of the compounding impact of upgrades to earnings per share in outer years, a higher terminal growth rate and lower discount rate.

JANUS HENDERSON GROUP PLC. ((JHG)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 3/1/0

Credit Suisse upgrades to Neutral from Underperform, following further analysis on the potential initiatives activist investor Trion could employ to enhance shareholder value.

Initiatives could include improving the operating margin by streamlining product and reducing the real estate footprint as well as leveraging the balance sheet and repurchasing stock. The broker raises the target to $26 from $16.

LINK ADMINISTRATION HOLDINGS LIMITED ((LNK)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 1/3/0

Link Administration Holdings received a conditional proposal from a consortium of Pacific Equity Partners and Carlyle to acquire 100% of Link's shares for an indicative cash price of $5.20 per share.

The offer puts Link Administration at circa 30% premium to the last closing price. Perpetual holds about 9.65% of Link and is in favour of the offer. 

Apart from the offer, the broker notes the company is also in the process of acquiring the PES loan management business.

Given the strategic interest in Link Administration, Morgan Stanley upgrades its rating to Equal-weight from Underweight. Target is increased to $5.20 from $3.40. Industry view: In-Line.

See also LNK downgrade.

MEDIBANK PRIVATE LIMITED ((MPL)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 2/5/0

Medibank Private's policy-holders grew 0.6% in FY20 amid the pandemic. Morgan Stanley considers this a good performance and believes the insurer's target for 1% growth in FY21 is achievable.

FY21 guidance expects claims to be broadly in line with FY20's circa 2.9% growth. Morgan Stanley lowers its claims growth forecast by -0.5-2.4% leading to upgrades in earning growth forecasts in FY21-22.

Morgan Stanley upgrades its rating to Overweight from Equal-weight with the target price increasing to $3.10 from $2.70. Industry view: In-line.

NEWCREST MINING LIMITED ((NCM)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/2/0

Newcrest Mining will move to the second stage at the Cadia expansion project. This -US$175m expansion should be completed in late FY22.

The miner will also spend -US$65m at Lihir to pick up more gold. Citi believes consensus expectations at Lihir have been reset and earnings momentum is now positive.

Newcrest Mining will also list on the Toronto Stock Exchange this week but, as there is no equity issue with this secondary listing, liquidity could be challenging, Citi asserts, noting the TSX is "crowded with gold stocks".

Citi upgrades to Buy from Neutral and maintains a $37 target.

NORTHERN STAR RESOURCES LTD ((NST)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/4/0

Ord Minnett now assesses the merger with Saracen Mineral Holdings makes for a compelling gold option for large domestic and global investors.

The portfolio offers a rare combination of well-run mines, production growth, cash flow and lower sovereign risk exposure. As a result the broker upgrades Northern Star to Hold from Lighten and raises the target to $13.90 from $11.50.

SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/2/1

Morgan Stanley believes green shoots in Sydney Airport's routes over the next 12 months should support a re-rating back towards (but not exceeding) historical valuations.

The broker considers the company could also benefit from proposed concessional corporate tax arrangements in FY21 and FY22 (100% capex write-offs), pushing out cash tax payments further in time.

Modest distributions may resume in late 2021, according to the broker.

The rating is upgraded to Overweight from Equal-weight and the target price is increased to $6.67 from $6.39. Industry View: cautious.

TREASURY WINE ESTATES LIMITED ((TWE)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 2/5/0

Ord Minnett reduces estimates for earnings per share by -2.5% in FY21 and -9.6% in FY22 because of lower expectations for EMEA, Asia and corporate earnings.

Treasury Wine has had a turbulent year, with challenges from bushfires in the Americas and Australasia and the anti-dumping investigation in China. The broker notes the share price has been volatile and is underperforming the ASX100 index.

Based on valuation, the rating is upgraded to Hold from Lighten. Target is unchanged at $10. The broker envisages the uncertainty around China's plans for tariffs is now better reflected in the target.

Also, the analysts do not think management will proceed with its demerger plans, citing "unsound economics".

WOOLWORTHS LIMITED ((WOW)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/3/0

Morgan Stanley continues to consider the Australian supermarkets well-placed over the medium term on account of covid-19 tailwinds, better industry structure outlook with Kaufland no longer entering and Aldi slowing its space roll out and an attractive sector valuation in a low yield world.

While Coles ((COL)) has been the broker's preferred major supermarkets exposure since April, Morgan Stanley has switched its preference to Woolworths given its share price underperformance and better operational momentum.

Woolworths' share price has outperformed the ASX200 by circa 1% and underperformed Coles' by circa -22% since February. The broker points out Woolworths started the year with better food momentum than Coles and appears to be growing ahead of Coles in the online and liquor segments.

Moreover, Woolworths is believed to have better leverage to a post-covid reopening via its hotels business. The broker expects earnings growth of 14% in FY21.

Rating has been upgraded to Overweight from Equal-weight with the target rising to $43.50 from $42. Industry view: Cautious.

Downgrade

AUCKLAND INTERNATIONAL AIRPORT LTD ((AIA)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 1/3/1

The Auckland Airport share price has rallied 77% from its March 2020 trough. Morgan Stanley thinks the company's leading domestic pax recovery and favourable leverage to the trans-tasman bubble are well appreciated by investors.

As a result of a survey of Chinese outbound travel intentions, Morgan Stanley tempers enthusiasm somewhat (noting Asia-NZ flights are longer haul). However, the broker hasn't changed its view on a long list of positives for the company including earnings diversity from the Mangere land bank and lack of competition.

Morgan Stanley downgrades the rating to Equal-weight from Overweight with the target price increasing to NZ$7.47 from NZ$7.07. Industry view: Cautious.

EAGERS AUTOMOTIVE LIMITED ((APE)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/3/0

Eagers Automotive's third-quarter trading update was strong, notes Ord Minnett, with the company delivering a profit of $56.3m versus $40.3m in the first half.

Ord Minnett is positive on the medium-term prospects for Eagers, especially considering the strong order bank and the government’s recent decision on responsible lending that could further help the new vehicle sales market.

Looking at the recent uplift in the share price, Ord Minnett downgrades its rating to Hold from Accumulate. The target price rises to $12 from $9.50.

BANK OF QUEENSLAND LIMITED ((BOQ)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 3/3/1

Bank of Queensland delivered an "adequate" result, Macquarie suggests, thanks to positive margin trends, although volume growth required to meet guidance appears unlikely to be achieved. Revenue growth will remain subdued given the ongoing impact of low interest rates.

The bank's recent re-rating, including yesterday, has taken its PE premium to 25% above its five-year average relative to peers. Target rises to $6.00 from $5.50 but the broker downgrades to Underperform from Neutral on valuation.

See also BOQ upgrade.

FLIGHT CENTRE LIMITED ((FLT)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/4/0

As coronavirus cases increase in the northern hemisphere, Credit Suisse extends the rate of recovery assumed for travel bookings by six months. The broker no longer expects a meaningful recovery in travel in the second half of FY21 but notes the company has ample liquidity for 2021.

As a result of the diminished potential for a recovery in the short term, the rating is downgraded to Neutral from Outperform. The target is raised to $15.31 from $14.01 because of changes to modelling of the corporate segment.

LINK ADMINISTRATION HOLDINGS LIMITED ((LNK)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/3/0

Link Administration has received a conditional proposal from a consortium at $5.20 a share. In Ord Minnett's view a higher rival bid is less than Iikely.

The offer would be by way of a scheme of arrangement at $5.20 a share, or some scrip alternative.

Ord Minnett downgrades to Hold from Accumulate because of the strong uplift in the share price following the announcement. Target is raised to $5.00 from $4.60.

See also LNK upgrade.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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