Australia | Aug 10 2015
This story features WOOLWORTHS GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: WOW
By Rudi Filapek-Vandyck, Editor FNArena
The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, Morgan Stanley, Morgans 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.
Period: Monday August 3 to Friday August 7, 2015
Total Upgrades: 14
Total Downgrades: 9
Net Ratings Breakdown: Buy 42.23%; Hold 41.75%; Sell 16.02%
Stockbrokers continue to issue more Buy (or equivalent) ratings than anything else and so it is that the total number of Buy ratings is creeping up towards 43% for the eight brokers that make up the FNArena universe. This is quite a big deal because usually Neutral ratings are the largest group and 43% is a high percentage.
Coincidentally, Sell ratings sit just above 16% which is starting to look low. Offsetting these numbers and what could be seen as a positive indicator is the observation that still, only three out of eight stockbrokers have most Buy ratings for stocks under their coverage. As reported in previous updates of this weekly report, their names all start with M.
For the week ending Friday, 7th August 2015, FNArena registered 14 upgrades versus nine downgrades and both Downer EDI and ResMed attracted multiple upgrades, partially offset by one downgrade.
Underlying all these numbers is the observation that resources stocks are making a turn for the better with Rio Tinto’s interim report well-received and responsible for a positive appearance in this week’s report. All in all, views and opinions about resources stocks and about those who provide services to them, like Downer EDI, remain sharply divided. With good reason too, as shown by Orica’s worse-than-expected market update during the week.
Changes to price targets and valuations remained rather benign during the week. Genworth Morgage Insurance Australia and Downer EDI claim top positions on the negative side with reductions of circa 6% while GUD Holdings, Aconex, ResMed and Suncorp represent the Top Four in positive revisions, but only the first two saw double digit increases. ResMed’s target gained 4%, Suncorp’s 2.5%.
The numbers grow larger when we focus on reductions to profit estimates, but most investors would have little exposure to the likes of Buru Energy or Skilled Group or Beadell Resources. Small cap resources and retailers populate this section. On the opposite side we find the likes of GUD Holdings, Suncorp and ResMed enjoying sizeable upgrades to profit estimates.
Banks are absent from this week’s update because analysts have as yet not had the opportunity to respond to Friday’s change of heart by ANZ Bank. With both National Australia Bank and Bendigo and Adelaide Bank updating on Monday and with CommBank scheduled to update later in the week, this is about to change in a rather radical manner.
ALE Property ((LEP)) upgraded to Outperform from Underperform by Macquarie. B/H/S: 1/0/1
ALE’s distributable profit result was bang on the broker’s forecast. Management flagged increased dividends in FY16 and a potential 2018 special distribution when rent reviews occur, depending on the circumstances that far out. Trading performance at pubs remains pretty soft, but with long-dated leases underpinned by a strong covenant from Woolworths ((WOW)) and strong upside on offer from 2018, the broker upgrades to Neutral. Target rises to $3.75 from $3.39.
Downer EDI ((DOW)) upgraded to Buy from Neutral by Citi, to Overweight from Neutral by JP Morgan and to Outperform from Neutral by Macquarie. B/H/S: 4/3/1
FY15 results were in line with guidance but exceeded Citi’s expectations at the EBIT line. FY16 guidance appears appropriate in Citi’s view, reflecting what management realistically expects to achieve rather than being aspirational. Increased visibility over FY16 should improve confidence in the guidance and, while share price constraint may feature in the near term, Citi upgrades to Buy from Neutral. FY16 guidance is weak but JP Morgan believes the sell-off is overdone. Acknowledging it is difficult to set guidance in the current environment, the broker points to potential catalysts such as bidding on three large projects. JP Morgan expects future years to be relatively flat in terms of growth. The rating is upgraded to Overweight from Neutral. Downer’s result came in a tick above Macquarie but it was FY16 guidance that disappointed, 2.5% below the broker’s low-end forecast. The 11% trashing of the share price ignores Downer’s strong cash flow and balance sheet optionality, the broker suggests. On a 5.9% yield and following the sell-off, Macquarie has decided that the stock is worthy of an upgrade to Outperform.
See also DOW downgrade.
Harvey Norman ((HVN)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 5/1/2
The FY15 results should show strong sales in large electrical appliances and furniture and a strong performance in NSW. Credit Suisse expects that as a consequence, sales growth should accelerate and franchise profitability will improve significantly. The broker upgrades to Outperform from Neutral and raises the target to $4.76 from $4.65.
Interoil Corp ((IOC)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 2/0/0
Macquarie believes the company’s outlook will now be determined by the improved prospects for an Elk/Antelope development and the market is attributing little value to exploration upside. The broker envisages value emerging in the stock since the end of June and upgrades to Outperform from Neutral. Macquarie maintains a target of US$52.
OceanaGold Corp ((OGC)) upgraded to Outperform from Neutral by Credit Suisse. B/H/S: 3/3/0
The company has made a scrip bid for Romarco, a Canadian miner which has the Haile project in the US. Credit Suisse believes the acquisition will address the company’s medium-term production profile and add life at low cost while diversifying risk. The broker upgrades to Outperform from Neutral on the back of share price weakness. Target is reduced to $2.80 from $3.00.
Resmed ((RMD)) upgraded to Overweight from Equal-weight by Morgan Stanley and to Neutral from Sell by Citi. B/H/S: 4/2/2
Resmed’s FY15 results were ahead of estimates and Morgan Stanley believes the underlying business remains strong and expects continuing growth in the US market in the first quarter of FY16. The broker has upgraded ResMed to Overweight from Equal-Weight and raised its price target to US$67.19 from US$55.39. The In-Line industry view is maintained. Revenue and flow generator sales were better than expected in the fourth quarter and Citi expects momentum in this category to continue in the near term. US masks growth improved. Euro weakness remains a headwind. Citi considers the stock is fair value and re-based forecasts for the results and the latest FX forecasts. Rating is upgraded to Neutral from Sell and the target to $8.59 from $7.67.
See also RMD downgrade.
Rio Tinto ((RIO)) upgraded to Outperform from Neutral by Macquarie. B/H/S: 5/3/0
Rio’s result beat the broker by 10% on stronger than expected cash flow. Cash flow, and announced reductions in capex, should relieve concerns over the company’s capacity to maintain a progressive dividend policy, the broker suggests. The broker still sees a potential shortfall in 2015 but thereafter, cash flow generation should be strong enough to support the dividend, the broker believes. Rio may start to commit to previously flagged growth projects from next year but for now, dividends are the focus. Target rises to $64 from $63, upgrade to Outperform.
Spotless Group ((SPO)) upgraded to Buy from Hold by Deutsche Bank. B/H/S: 4/0/0
While the broker is cautious on the engineers & contractors sector it concedes there is value in a number of stocks. While the company’s margins are expected to compress over the medium term, the broker expects strong cash generation will allow it to supplement this with bolt-on acquisitions. Deutsche Bank upgrades to Buy from Hold given the strong outlook for Spotless over the next 12 months. Target is raised to $2.27 from $2.14.
Super Retail ((SUL)) upgraded to Add from Hold by Morgans. B/H/S: 5/1/2
Given the sharp fall in the Australian dollar the broker believes all retailers will have to address cost inflation. Morgans sticks with those best placed to effectively pass on the costs. The broker expects FY15 forecasts to be met and FY16 looks achievable. Morgans upgrades to Add from Hold. Target is raised to $10.83 from $10.73.
Tiger Resources ((TGS)) upgraded to Outperform from Neutral. B/H/S: 2/0/0
June quarter production beat the broker’s estimates by 15%. Continued strong production is expected to provide an incremental catalyst for the company as will a reduction in the debt position. Macquarie expects free cash to improve markedly after commissioning of the enhanced plant and this should help repair the balance sheet. The broker upgrades to Outperform from Neutral and raises the target to 13c from 8c.
Wesfarmers ((WES)) upgraded to Neutral from Underperform by Credit Suisse. B/H/S: 0/7/1
The broker expects sales and earnings growth from its retail divisions will be in line. The supermarket pricing environment does present some potential for downside. Coal price guidance for the fourth quarter has been incorporated along with the broker’s coal price forecasts. Credit Suisse upgrades to Neutral from an Underperform rating and retains the $43.71 target.
Aconex ((ACX)) downgraded to Neutral from Buy by UBS. B/H/S: 3/1/0
The company has signed a partnership with Cimic (CIM)) to provide its platform to construction projects in eight countries. As part of the agreement Aconex will bolt on some process functions from Cimic’s INCITE product. UBS continues to be attracted to the business, as Aconex shifts focus to top line growth. Still, the valuation appears full and the rating is downgraded to Neutral from Buy. Target is raised to $4.45 from $3.52.
Aurizon ((AZJ)) downgraded to Neutral from Buy by UBS. B/H/S: 4/4/0
UBS is adjusting the timing of regulated network forecasts which results in a downgrade to FY16 and FY17 estimates. More clarity is expected from the final decision in October but, in the meantime, the broker downgrades to Neutral from Buy rating, reflecting the recent share price performance. Target is steady at $5.30.
Beacon Lighting ((BLX)) downgraded to Hold from Add by Morgans. B/H/S: 0/1/0
Given the sharp fall in the Australian dollar the broker believes all retailers will have to address cost inflation. Morgans sticks with those best placed to effectively pass on the costs.
Beacon Lighting remains a high quality retailer with strong advantages, but the broker believes these are priced in and downgrades to Hold from Add. Price target raised to $2.00 from $1.89.
Downer EDI ((DOW)) downgraded to Neutral from Buy by UBS. B/H/S: 4/3/1
FY15 results were slightly higher than UBS expected. FY16 guidance signals the difficulty in predicting the flow of uncontracted revenue, something the broker expected. Nevertheless, the scale of the decline in the base business is larger than UBS anticipated. The broker is attracted to the stock and related opportunities but downgrades to Neutral from Buy, assuming little or no growth in earnings over the next few years.
See also DOW upgrades.
Flight Centre ((FLT)) downgraded to Underperform from Neutral by Macquarie. B/H/S: 2/3/1
On the company’s own admission, Flight Centre is battling an increase in competitive forces. Macquarie analysts have re-opened their analysis into the matter and concluded the challenge is far from over for this former high-flyer. Online travel agents continue to grab market share, says Macquarie on the basis of credit card data analysis. In addition, the analysts now believe the bricks and mortar presence is acting as an disadvantage longer term due to higher operational costs. Reduced margin expectations have led to reduced profit forecasts. New target $34.92 (was $38.96). Note DPS estimates have been significantly reduced post the present year.
Genworth Mortgage Insurance ((GMA)) downgraded to Neutral from Buy by UBS. B/H/S: 1/2/0
First half results were weaker than expected. The broker has become cautious on the emerging trends in the mining-exposed segments of the portfolio. Capital management remains a positive aspect of the broker’s outlook but further significant returns may be dependent on no material deterioration in the economic backdrop. UBS downgrades to Neutral from Buy and lowers FY15 earnings estimates by 7.0% and FY16 by 8.0%. Target is reduced to $3.20 from $3.70.
ResMed ((RMD)) downgraded to Sell from Hold by Deutsche Bank. B/H/S: 4/2/2
After the success of the AirSense range Deutsche Bank is wary that FY16 will prove challenging with competitor lines being launched. FY15 results beat the broker’s estimates, largely because of a substantial rise in US device sales. Deutsche Bank lowers expected gross margins for FY16. A return to double digit growth in sales is still expected from FY17. Rating is downgraded to Sell from Hold given the downside to the target, revised down to US$53 from US$61.
See also RMD upgrade.
Suncorp ((SUN)) downgraded to Neutral from Outperform by Credit Suisse. B/H/S: 0/6/2
FY15 cash earnings were above the broker’s forecasts. The result was assisted by reserve releases and higher earnings on investment income. The share price performance in recent months was justified because of the upside risk to earnings but with the news now factored in the next leg up is expected to be difficult. Credit Suisse downgrades to Neutral from Outperform. Target is raised to $15.05 from $14.60.
Tap Oil ((TAP)) downgraded to Sell from Neutral by UBS. B/H/S: 0/1/1
June quarter production was up 16.5% on the prior quarter but UBS notes liquidity has again become an issue as the company has reached the end of its waiver term with debt financiers. Pressure on liquidity is coming from JV partner Northern Gulf being in default, lower oil prices and a steep repayment profile. UBS downgrades to Sell from Neutral. Target edges down to 26c from 27c.
Broker Recommendation Breakup
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
Positive Change Covered by > 2 Brokers
Negative Change Covered by > 2 Brokers
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For more info SHARE ANALYSIS: AZJ - AURIZON HOLDINGS LIMITED
For more info SHARE ANALYSIS: BLX - BEACON LIGHTING GROUP LIMITED
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For more info SHARE ANALYSIS: FLT - FLIGHT CENTRE TRAVEL GROUP LIMITED
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For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED
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For more info SHARE ANALYSIS: SUL - SUPER RETAIL GROUP LIMITED
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