Weekly Reports | Oct 24 2016
This story features AIR NEW ZEALAND LIMITED, and other companies. For more info SHARE ANALYSIS: AIZ
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 October 17 to Friday October 21, 2016
Total Upgrades: 11
Total Downgrades: 6
Net Ratings Breakdown: Buy 41.66%; Hold 42.91%; Sell 15.43%
There's whole lotta more going on inside the Australian share market than is suggested by the rather static performance of the major indices this month. Stockbrokers are issuing nearly twice as many upgrades for individual ASX-listed stocks and total Buy (and equivalent) ratings for the eight stockbrokers monitored dairly by FNArena is creeping ever so closer to match the total percentage of neutral ratings.
According to the latest numbers, updated as at Friday, 21st October 2016, total Buy ratings now represent 41.66% of all ratings, with Neutral ratings occupying 42.91%. Sell ratings take up the remaining 15.43%.
For the week ending on Friday, FNArena registered 11 upgrades and 6 downgrades. Both Challenger Financial and Murray Goulburn (otherwise known as MG Unit Trust) attracted two downgrades, so the number of companies downgraded is only four. The other two are Somnomed and Whitehaven Coal.
Tatts Group (renewed merger talks) was the sole recipient of two upgrades in an otherwise eclectic field of stocks enjoying better stockbroker sentiment, including Air New Zealand, Crown Resorts, Platinum Asset Management and no less than three gold producers. Seven out of 11 upgrades went to Buy. Two out of the six downgrades ended on Sell.
Tatts and Whitehaven lead the pack with 8% increases to price targets for the week, beating Challenger with 7% and Cimic with 4% increases. Negative adjustments were a lot more timid. MYOB suffered the most (-4%), with Evolution Mining (-2.5%) and Crown Resorts (-1.8%) next.
There were a few big jumps in earnings estimates with Australian Pharmaceutical enjoying an increase of 22.5%, beating South32 (+9.5%) and Whitehaven Coal (+7.7%). Western Areas saw its forecasts tumble by -279%, easily "beating" (if this is the apt term in this context) Iluka Resources (-20%) and Santos (-12%).
AGM season has provided a few nasties already (Healthscope, Sky City, The Reject Shop). From this week onwards we'll mix it up with the official bank reporting season.
Upgrade
AIR NEW ZEALAND LIMITED ((AIZ)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/3/0
Macquarie reviews the outlook for NZ capacity and, following a significant de-rating in the share price, upgrades to Outperform from Neutral. Target is reduced to NZ2.25 from NZ$2.35.
The broker believes the airline should experience an improvement in operating statistics over the peak period and this in turn could mean improved investor sentiment.
Moreover, the company has indicated it is targeting a sustainable dividend and the broker calculates that continuation of the NZ20c per share from FY16 gives the stock an 11.4% net dividend yield.
ALS LIMITED ((ALQ)) Upgrade to Add from Hold by Morgans .B/H/S: 2/2/2
Morgans assesses that the leading indicators on exploration spending and capital raising by juniors imply the outlook for the mineral business should materially improve in FY18-19.
There are a number of catalysts expected over the coming months including potential acquisitions in the life sciences division. The company will also report its first half result in November and the broker hopes for more clarity around the longevity of the energy division.
Morgans upgrades to Add from Hold. Target is raised to $7.05 from $5.32.
CIMIC GROUP LIMITED ((CIM)) Upgrade to Hold from Sell by Deutsche Bank .B/H/S: 0/1/2
Cimic has reported a much improved set of Sep Q numbers, Deustche Bank notes, featuring 10% profit growth, strong cash flow and an increase in net cash. The broker remains cautious over lingering receivables issues and the ever present risks surrounding future mega-contracts.
But Cimic's current trading price appropriately reflects those risks, Deutsche believes. Target rises to $25.76 from $23.20. Upgrade to Hold.
CROWN RESORTS LIMITED ((CWN)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 3/3/0
Deutsche Bank upgrades to Buy from Hold as the stock is now trading at a 19% discount to its revised valuation. This follows the detention of 18 employees from Crown by Chinese authorities.
The broker calculates the market is now pricing in a 70% reduction in VIP turnover and a 100% reduction in Chinese VIP turnover for Crown, which is considered excessive.
Deutsche Bank notes a similar situation occurred in Korea in 2015 which resulted in a 17% decline in VIP turnover and a 31.5% decline in Chinese VIP turnover over the subsequent 12 months.
The broker suspects junket operators and players will be less inclined to travel to Australia while these investigations are ongoing and estimates Crown's VIP turnover will decline 20% in FY17 and Chinese VIP turnover by 30%.
Target price falls to $13.75 from $14.35.
EVOLUTION MINING LIMITED ((EVN)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 6/1/0
The company's September quarter production was in line with Deutsche Bank's estimates but cost were higher because of lower grades at a number of assets.
The company is guiding to cost improvements in the December quarter as Ernest Henry will start contributing this month. The stock remains the broker's preferred gold exposure. Rating is upgraded to Buy from Hold. Target is steady at $2.40.
OCEANAGOLD CORPORATION ((OGC)) Upgrade to Outperform from Underperform by Credit Suisse .B/H/S: 1/1/1
Credit Suisse implements revised gold and FX forecasts. Gold prices of US$1,200 oz are expected to hold in 2016 and US$1,400 oz is expected in 2017. The September quarter is expected to be a sequentially weaker quarter, consistent with guidance for a softer second half.
The broker observes the company's conservative guidance rarely disappoints. Rating is upgraded to Outperform from Underperform as a valuation call, reflecting assumptions that Didipio is cleared to continue operating. Target is lowered to $4.10 from $4.40.
PLATINUM ASSET MANAGEMENT LIMITED ((PTM)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 0/3/1
Ord Minnett estimates a $700-750m outflow over the September quarter and increases outflow assumptions for FY17 to $2.2bn.
The company's 10% buy-back is expected to result in a 5% reduction in shares on issue, given cash and price constraints.
Following a 15% retracement in the stock since the broker downgraded to Lighten, and with the downside likely capped thanks to the buy-back, the rating is upgraded back to Hold. Target slips to $5.09 from $5.20.
REGIS RESOURCES LIMITED ((RRL)) Upgrade to Neutral from Sell by Citi .B/H/S: 0/4/4
Citi has upgraded its rating to Neutral from Sell following recent pull back in share prices for gold producers. Price target has declined, a little, to $3.22 from $3.31.
The analysts are of the belief the company is on track to meet FY17 guidance. Regis Resources should have "healthy" FY17 yields on FCF and dividends, they argue, predicting 8% and 5.5% respectively.
Citi thinks the next challenge for company management will be integrating satellites deposits into the ore stream.
SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 4/3/0
Credit Suisse had originally expected international capacity growth to decline significantly from the 10%+ level of the past year but a new 6.3% growth forecast represents an upgrade to expectations, with new routes to China featuring.
The broker is also upbeat on Sydney Airport's retail growth and interest rate hedging following the company's investor day. Target rises to $6.60 from $6.40 and given the stock's 16% share price fall since its August peak, Credit Suisse upgrades to Neutral.
TATTS GROUP LIMITED ((TTS)) Upgrade to Buy from Hold by Deutsche Bank and Upgrade to Outperform from Underperform by Credit Suisse .B/H/S: 5/2/0
Deutsche Bank upgrades to Buy from Hold as the stock is trading at an 11% discount to its revised valuation, that is implied from the Tabcorp ((TAH)) valuation of $5.30 a share.
The broker believes the proposed scheme of arrangement is reasonable for Tatts, which would account for 59% of the combined entity. Price target is raised to $4.67 from $3.90.
Credit Suisse believes the offer from Tabcorp ((TAH)) is excellent and non-acceptance by shareholders or a competing bid are highly unlikely.
Tatts is upgraded to Outperform from Underperform and the broker raises the target to $4.85 from $3.50.
The broker believes Tabcorp has paid away nearly all the synergy value and that Tatts was at the least fully valued prior to the deal.
Downgrade
CHALLENGER LIMITED ((CGF)) Downgrade to Hold from Add by Morgans and Downgrade to Sell from Neutral by Citi .B/H/S: 3/3/1
First quarter retail annuity sales were up 46% and impressed Morgans. Importantly, sales mix continues to improve.
The broker remains cautious regarding the margin contraction implied in FY17 guidance and, while liking the longer-term story, believes valuation metrics are becoming more stretched.
Rating is downgraded to Hold from Add and the broker awaits a more attractive entry point for the stock. Target rises to $11.02 from $10.14.
Citi observes Challenger is continuing to enjoy strong momentum, both operationally and in the share market. The latter has now triggered a downgrade to Sell from Neutral.
The analysts find revenue strength "impressive" but warn investors the translation into bottom line growth is "less obvious". EPS estimates have been increased: FY17 +1%; FY18 and FY19 +3%. Price target lifts to $10.00 from $9.55.
The analysts do note, despite strong apparent momentum, management did not change guidance for this year.
MG UNIT TRUST ((MGC)) Downgrade to Neutral from Outperform by Macquarie and Downgrade to Hold from Add by Morgans .B/H/S: 0/2/0
The weather has swung from dry to wet, meaning milk collection volumes are expected to be down in FY17. There's not much MG Unit Trust can do about the weather but it does create problems around market share if other processors target MG's suppliers to make up shortfalls, Macquarie notes.
Lower volumes also mean the benefit of a rebound in milk prices is lost. Macquarie has cut forecast earnings and dropped its target to $1.25 from $1.55. Downgrade to Neutral.
Following adverse weather conditions in Victoria over the past month, the milk intake will be materially lower than expected. Market share has also deteriorated further.
The company has downgraded FY17 farmgate milk prices and will also defer the recovery of the milk supply support package in FY17.
Morgans revises FY17 estimates down accordingly and, while the uncertainties around the current season exist, downgrades to Hold from Add. Target is reduced to $1.25 from $1.45.
SOMNOMED LIMITED ((SOM)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0
Morgans observes a seasonally weak North American summer has been offset by strong growth in unit sales and revenue across the business in the September quarter.
While maintaining a positive stance on the stock for the medium to longer term the broker believes the strong share price performance in recent months along with start-up costs associated with the SCA roll out will weigh in the short term.
Rating is downgraded to Hold from Add. The target price rises to $4.11 from $3.84.
WHITEHAVEN COAL LIMITED ((WHC)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 1/3/4
Credit Suisse believes metallurgical coal prices have peaked and the high prices will trigger the re-start of shuttered capacity. Thermal coal also appears likely to have peaked as China seems set to loosen restrictions which caught the market unawares.
The broker notes the shares are up 300% in the last six months and have run through its target. FY17 earnings are expected to be the peak for this coal price cycle, with FY19 earnings per share forecast to be 60% lower.
The broker finds it harder to envisage much upside from here and downgrades to Underperform from Neutral. Target is lifted to $2.80 from $2.45.
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Technical limitations
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CHARTS
For more info SHARE ANALYSIS: AIZ - AIR NEW ZEALAND LIMITED
For more info SHARE ANALYSIS: ALQ - ALS LIMITED
For more info SHARE ANALYSIS: CGF - CHALLENGER LIMITED
For more info SHARE ANALYSIS: EVN - EVOLUTION MINING LIMITED
For more info SHARE ANALYSIS: PTM - PLATINUM ASSET MANAGEMENT LIMITED
For more info SHARE ANALYSIS: RRL - REGIS RESOURCES LIMITED
For more info SHARE ANALYSIS: SOM - SOMNOMED LIMITED
For more info SHARE ANALYSIS: TAH - TABCORP HOLDINGS LIMITED
For more info SHARE ANALYSIS: WHC - WHITEHAVEN COAL LIMITED