Weekly Reports | May 02 2016
This story features EVOLUTION MINING LIMITED, and other companies. For more info SHARE ANALYSIS: EVN
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 April 25 to Friday April 29, 2016
Total Upgrades: 5
Total Downgrades: 11
Net Ratings Breakdown: Buy 42.93%; Hold 44.10%; Sell 12.96%
What's most notable about last week's five upgrades and eleven downgrades is there is no sector theme whatsoever. Ratings changes were applied market-wide. But the fact downgrades outweighed upgrades two to one does tell us something — analysts are beginning to see the rally from the recent lows as possibly having run its course.
Of the eleven downgrades, no less than seven were valuation calls. For most of these it was a case of "we still like the stock, but…". Downgrades that were actually based on negativity included those for milk powder maker MG Unit Trust, following a profit warning, and Macquarie Group, ahead of what may not to too flash an earnings report this week. Following its takeover offer, Pacific Brands scored both an upgrade and a downgrade as brokers assumed a fait a compli.
On the positive side, ResMed scored two upgrades following a more encouraging quarterly earnings result.
In terms of target price changes, brokers lifted their targets to account for Pacific Brands' offer while Evolution Mining ((EVN)) enjoyed the benefits of a solid production report. On the downside, Citi took a knife to Macquarie Group.
Earnings changes last week were a bit wild as brokers updated commodity price and currency forecasts but nib Holdings ((NHF)) features among the positives following a profit upgrade.
Upgrade
INDEPENDENCE GROUP NL ((IGO)) Upgrade to Neutral from Sell by Citi .B/H/S: 2/4/0
All three of Independence' operating assets posted positive cash flow in the March Q, Citi notes, despite weak metal prices and a stronger A$. The Nova project is 81% complete and the company has sold its stake in Gold Road ((GOR)).
Citi's target is unchanged at $2.99 but the broker upgrades to Neutral on recent share price weakness.
PACIFIC BRANDS LIMITED ((PBG)) Upgrade to Neutral from Sell by UBS .B/H/S: 1/3/0
The company has received an all-cash bid from HanesBrands at $1.15 a share. The board has unanimously recommended the offer.
Given the significant potential for synergies and high takeover multiple implied UBS assigns a low probability to a counter bid, although does not rule one out.
The broker aligns its target with the bid at $1.15, up from 98c. Rating is upgraded to Neutral from Sell.
See also PBG downgrade.
RESMED INC ((RMD)) Upgrade to Neutral from Underperform by Macquarie and Upgrade to Buy from Neutral by Citi .B/H/S: 6/2/0
ResMed's March Q result was in line with Macquarie. Earnings declined despite strong revenue due to the currency impact. Acquisitions provided some earnings assistance, the broker notes.
ResMed's gross margin is facing headwinds, Macquarie notes, mostly due to sales mix. But the broker believes these should fade in coming periods, allowing sales growth to flow through to earnings. The Brightree acquisition will also contribute from FY17. With risk/reward now more balanced, Macquarie upgrades to Neutral.
Target unchanged at $8.40.
ResMed's March Q featured strong sales growth but an offset on earnings from the A$, while margins declined on the sales mix, Citi notes. Acquisitions contributed and Brightree is set to kick in in FY17.
Citi believes that on a 12-month forward PE of around 18x, the stock is now looking attractive. Upgrade to Buy.
TISSUE THERAPIES LIMITED ((TIS)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0
Tissue Therapies has re-shaped its business and re-vamped its board and is now trading as Factor Therapeutics. The company is undertaking a $15m placement and rights issue which will be used for a phase II clinical trial in the US.
Morgans upgrades forecasts to include the capital raising and the fresh approach to the business. Given the company has a clear strategy and is fully funded the rating is upgraded to Add from Hold. Target slips to 5.2c from 5.3c.
Downgrade
ASALEO CARE LIMITED ((AHY)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/2/0
Asaleo maintained its guidance at the AGM. Although market conditions remain challenging the company has initiatives in place, such as product differentiation and cost reductions, Macquarie notes.
Macquarie updates earnings forecasts to account for currency forecasts and the decline in US dollar pulp prices. Earnings estimates are raised by 2.0% for FY16 and by 4.0% for FY17.
Rating is downgraded to Neutral as the stock has rallied hard since the start of the year. Target rises to $1.95 from $1.85.
AVEO GROUP ((AOG)) Downgrade to Hold from Add by Morgans .B/H/S: 2/2/0
The company recently increased its stake in the Retirement Villages Group to 73% from 42% for $101m, and is now guiding to earnings growth of at least 7.5% in FY17.
Morgans is not surprised, given the company's obvious desire to consolidate the remaining interests in RVG. The acquisition is expected to be 1.5% earnings accretive.
The broker observes Aveo Group has outperformed strongly in the past year and delivered on key valuation upside. Hence the rating is pulled back to Hold from Add. Target is raised to $3.52 from $3.35.
BEADELL RESOURCES LIMITED ((BDR)) Downgrade to Neutral from Buy by UBS .B/H/S: 1/2/0
March quarter results disappointed UBS. The company cited adverse weather in March, with record rainfall weighing on production.
The broker notes unit costs were lower and expects these to keep trending down as new management delivers on initiatives.
Rating is downgraded to Neutral from Buy following strong share price appreciation. Target is 33c.
HUB24 LIMITED ((HUB)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/1/0
Flows slowed over the seasonally soft March quarter, as Ord Minnett expected. The broker reduces forecasts and acknowledges its $150m net inflow per month forecast for FY17 appears bullish.
While the business is in a solid position the broker envisages limited valuation upside given what is known and downgrades to Hold from Buy. Target falls to $4.66 from $4.80.
IOOF HOLDINGS LIMITED ((IFL)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/4/0
IOOF suffered soft funds flows in the March quarter but it was not a bad result given market volatility, Citi suggests. With markets having improved in the meantime the broker sees better things ahead, and has lifted its target to $9.40 from $8.60.
An accretive acquisition is a possibility but otherwise Citi sees value as less apparent now than it was. On recent share price strength the broker pulls back to Neutral.
MG UNIT TRUST ((MGC)) Downgrade to Hold from Add by Morgans .B/H/S: 1/1/0
After overly aggressive forecasts, the company has downgraded its FY16 profit guidance by 36% at the mid point. Morgans is disappointed and notes unit holders are also not impressed by the need to take on additional debt to fund a milk supply support package.
Morgans suspects the stock is over sold but until a new CEO and CFO are appointed downgrades to Hold from Add. Target is reduced to $1.38 from $2.30.
MIRVAC GROUP ((MGR)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/2/1
A range of new measures aimed at slowing residential supply are likely to result in higher equity being needed to settle purchases, particularly for foreign buyers, and is a response to the sharp increases in the building of fringe CBD apartments, Ord Minnett maintains.
The broker believes the market is already pricing in some of the tightening measures but the changes will weigh on sentiment. Based on the potential impact the broker downgrades to Hold from Accumulate but maintains a $2.10 target.
MACQUARIE GROUP LIMITED ((MQG)) Downgrade to Sell from Neutral by Citi .B/H/S: 3/2/1
Ahead of Macquarie Group's result release next week, Citi has downgraded to Sell. Several of the bank's divisions have been facing less favourable conditions and given around 70% of earnings are from offshore, the stronger A$ will have proven quite a headwind, the broker notes.
Citi is expecting consensus earnings downgrades and has set its own FY17 forecast some 13% below the market. Target falls to $59 from $78.
NATIONAL STORAGE REIT ((NSR)) Downgrade to Hold from Add by Morgans .B/H/S: 1/3/0
The company has acquired two centres, boosting its total to around 97 under ownership, operation or management. Morgans believes the company offers investors exposure to a leading brand, scalable operating platform and organic growth opportunities as well as acquisitions.
Upcoming catalysts include the potential acquisition of the Southern Cross portfolio, with NSR holding pre-emptive rights. Morgans downgrades to Hold from Add following share price appreciation. Target is raised to $1.70 from $1.67.
PACIFIC BRANDS LIMITED ((PBG)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/3/0
HanesBrands has made a bid for Pacific Brands at $1.15 cash per share, unanimously recommended by the board. Ord Minnett considers the multiples implied by the acquisition price are attractive.
HanesBrands has identified significant earnings upside potential. The broker cuts its rating to Hold from Accumulate, given the takeover offer matches its target price.
See also PBG upgrade.
PREMIER INVESTMENTS LIMITED ((PMV)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/3/2
Premier Investments has re-rated materially following a strong first half from Smiggle and established brands and an upgrade to the Smiggle UK store target, Macquarie notes. The broker is a big fan of Smiggle.
But the broker also notes the warm autumn will impact on seasonal apparel sales and consumer confidence is on the wane. With Premier trading near the Macquarie's new target of $16.35, up from $16.18, the broker pulls back to Neutral.
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Negative Change Covered by > 2 Brokers
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Technical limitations
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CHARTS
For more info SHARE ANALYSIS: EVN - EVOLUTION MINING LIMITED
For more info SHARE ANALYSIS: GOR - GOLD ROAD RESOURCES LIMITED
For more info SHARE ANALYSIS: HUB - HUB24 LIMITED
For more info SHARE ANALYSIS: IFL - INSIGNIA FINANCIAL LIMITED
For more info SHARE ANALYSIS: IGO - IGO LIMITED
For more info SHARE ANALYSIS: MGR - MIRVAC GROUP
For more info SHARE ANALYSIS: MQG - MACQUARIE GROUP LIMITED
For more info SHARE ANALYSIS: NHF - NIB HOLDINGS LIMITED
For more info SHARE ANALYSIS: NSR - NATIONAL STORAGE REIT
For more info SHARE ANALYSIS: PMV - PREMIER INVESTMENTS LIMITED
For more info SHARE ANALYSIS: RMD - RESMED INC