Weekly Reports | Apr 10 2017
This story features AGL ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: AGL
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 3 to Friday April 7, 2017
Total Upgrades: 5
Total Downgrades: 6
Net Ratings Breakdown: Buy 43.80%; Hold 42.45%; Sell 13.75%
It is relatively quiet in terms of stockbroking analysts issuing updates and research reports. With the share market predominantly taking guidance from overseas macro developments, and the ASX200 hesitant to make a move towards 6000, broker downgrades and upgrades for individual ASX-listed stocks came in few and far between for the week ending Friday, 7th April 2017.
FNArena counted five upgrades and six upgrades but since ERM Power attracted two upgrades, it's probably fair to conclude the bias is slightly tilted towards more downgrades. To Neutral, because that's where most downgrades end up.
No particular themes are apparent. AGL Energy continues to benefit from multi-level failed government policy and St Barbara is enjoying the come-back for safe haven gold. On the flipside we find REA Group and Wesfarmers deemed too expensive, while Downer EDI's move on Spotless still has very few friends. Downgrades for South32 and Whitehaven Coal illustrate general division about how long and how far this resources resurgence can possibly stretch.
ERM Power also steals the show for positive adjustments to valuations and price targets. Outside a positive gain for AGL Energy, there's otherwise very little to report. Changes to earnings estimates became a resources affair, since not much was happening otherwise. Except, again, ERM Power, stepping into the limelight, this time on the negative side.
Perseus Mining, St Barbara and Oil Search lead the table for positive revisions to estimates. Beadell Resources, South32 and Aurizon follow in ERM Power's slipstream for negative revisions.
The week ahead will see investors' attention gradually shift to quarterly production reports, ahead of the next banking reporting season.
Upgrade
AGL ENERGY LIMITED ((AGL)) Upgrade to Buy from Neutral by UBS .B/H/S: 6/1/0
Low-cost thermal generators are the biggest winners in the current electricity environment, UBS believes.
The broker's research concludes that the closure of Hazelwood will increase the National Electricity Market's reliance on an ageing coal fleet and gas-fired generation to meet demand.
UBS believes the market is over estimating the risk of regulatory intervention and ignoring empirical evidence. The broker believes $80/MWh prices are sustainable, a 50% increase versus FY16.
Rating is upgraded to Buy from Neutral. Target is raised to $29.50 from $25.00.
ERM POWER LIMITED ((EPW)) Upgrade to Buy from Sell by Citi and Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/2/0
The company has guided towards stronger retail margins in Australia, well above Citi's estimate, and the analysts are now taking the view that a positive news cycle may have begun for the company.
On this basis, the stock is being doubly upgraded to Buy/High Risk from Sell. High electricity prices plus state government support are likely to translate into move renewables projects forward, the analysts predict. Target price jumps to $1.46 from $1.05.
The company has revised its FY17 gross margin outlook to $3.50 per megawatt-hour from $3.00/MWh. FY18 guidance has been provided at $3.50/MWh versus Macquarie's expectations of $2.70/MWh.
The broker finds it challenging to predict the company's retail business as earnings visibility is low and a function of the hedge book. Rating is upgraded to Neutral from Underperform on the back of the new guidance. Target is raised to $1.20 from $1.15.
INSURANCE AUSTRALIA GROUP LIMITED ((IAG)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/8/0
The company has downgraded its FY17 reported insurance margin guidance to 10.5-12.5% from 12.5-14.5% as a result of $170m in additional natural peril claims cost assumptions.
The current reinsurance structure means the company will receive a benefit in the first half of FY18.
Macquarie upgrades to Neutral from Underperform, allowing for the improved margin outlook in FY18, with a claims environment that allows the insurer to retain a larger portion of the $250m gross cost reductions over the next three years.
Target is raised to $5.95 from $5.75.
ST BARBARA LIMITED ((SBM)) Re-initiation with Buy by Citi .B/H/S: 4/0/0
It's almost exactly three years ago since we last heard from Citi about this company. Back then, this was a different kettle of fish as witnessed by Citi's price target at that time: 17c and a Sell rating.
Today, Citi has officially re-initiated coverage with a Buy rating and $2.93 price target. The short term outlook is based upon compelling short-term cash flow and potential for a beat on consensus FY17 earnings, explain the analysts.
St Barbara, highlights Citi, has the luxury of being one of the gold industry’s lowest cost producers (estimated AISC at A$896/oz in FY17). Further out, the analysts expect a steady fall in Gwalia gold grades, while company management expects Simberi to close in 2-3 years.
Citi thinks it likely management is looking around to purchase assets. Alternatively, St Barbara itself might become a prey too, suggest the analysts.
Downgrade
DOWNER EDI LIMITED ((DOW)) Downgrade to Underweight from Equal-weight by Morgan Stanley .B/H/S: 0/3/2
Prior to the bid for Spotless ((SPO)) Morgan Stanley observes the company's shares had re-rated materially. Investors interpreted an upgrade of FY17 guidance as a sign of improving operations. The broker believes this re-rating is premature.
Contract roll-offs are expected to challenge earnings through to FY20. In response, the broker suspects, the company is now looking to embark on an aggressive M&A growth drive.
Morgan Stanley expects investors will progressively consider the stock a less-compelling investment proposition. Rating is downgraded to Underweight from Equal-weight and the target is raised to $4.83 from $4.01. Industry view is Cautious.
NUFARM LIMITED ((NUF)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/4/1
Credit Suisse believes there is limited downside to owning the stock but reasonable upside, should Nufarm find a complimentary acquisition.
Without an acquisition, the broker believes investors can expect 10% compound EBIT growth over FY17-18, principally through cost savings. Longer term, the broker believes organic growth assumptions of 2-3% ex Australia are achievable.
Credit Suisse observes FMC has moved quickly to take a key acquisition target – the DuPont herbicide/insecticide business – which had been earmarked as a possibility for Nufarm.
There are still other potential acquisitions, albeit smaller, in crop protection and also with canola seeds, the broker notes. Rating is downgraded to Neutral from Outperform. Target is reduced to $10.10 from $10.60.
REA GROUP LIMITED ((REA)) Downgrade to Hold from Add by Morgans .B/H/S: 4/3/0
The share price has performed strongly in recent days and Morgans downgrades to Hold from Add. The shares now trade in line with the broker's target of $60.73.
Morgans does not yet incorporate the impact on reported profits of the recent purchase of PropTiger in India. The broker suspects that business is likely to result in ongoing losses.
Most of the broker's valuation stems from the Australian business, where the opportunity is expected to exist for several years for strong earnings growth.
Should the Asian and/or the US business deliver substantial earnings growth over time than the current valuation would be too conservative. Nevertheless, the broker believes it is too early to make a call on this.
SOUTH32 LIMITED ((S32)) Downgrade to Hold from Add by Morgans .B/H/S: 5/2/0
Morgans downgrades to Hold from Add following the recent share price performance. Morgans also updates its model for revised commodity price forecasts, which means a marginal decline in valuation and target to $3.14 from $3.17.
Following the recent performance the broker now believes the stock is trading close to fair value.
The company has downgraded its production guidance for FY17 following an underground fire at Cannington. Silver production is downgraded -13%, lead -17% and zinc -13%. The underground fire has created only minor damage and it will take up to 4 weeks to import some of the required parts.
WESFARMERS LIMITED ((WES)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/5/2
Ord Minnett downgrades to Hold from Accumulate following a strong share price performance recently. The target is steady at $45.50.
The broker also modestly adjusts earnings estimates, reducing EBIT estimates for Coles following the decline in the first half. Estimates for Bunnings are also reduced because of a moderation in the trajectory of growth in the UK and Ireland.
WHITEHAVEN COAL LIMITED ((WHC)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 3/5/0
The stock has rallied 20% in three days after the disruption to coal supplies from the cyclone in Queensland. While remaining constructive on the company's assets, Morgan Stanley notes this is a temporary disruption and shifts to an Equal-weight rating from Overweight, while looking for the next opportunity to enter the stock.
The company predominantly supplies thermal coal, the price of which is rising on the back of what is primarily an outage for metallurgical coal, which should see a more direct uplift in prices.
The broker acknowledges the stock's fundamental drivers remain in place and additional cash flow from higher coal prices can bring forward the date at which the company reaches a net cash position. Target is $3.30. Industry view: Attractive.
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CHARTS
For more info SHARE ANALYSIS: AGL - AGL ENERGY LIMITED
For more info SHARE ANALYSIS: DOW - DOWNER EDI LIMITED
For more info SHARE ANALYSIS: IAG - INSURANCE AUSTRALIA GROUP LIMITED
For more info SHARE ANALYSIS: NUF - NUFARM LIMITED
For more info SHARE ANALYSIS: REA - REA GROUP LIMITED
For more info SHARE ANALYSIS: S32 - SOUTH32 LIMITED
For more info SHARE ANALYSIS: SBM - ST. BARBARA LIMITED
For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED
For more info SHARE ANALYSIS: WHC - WHITEHAVEN COAL LIMITED