Weekly Ratings, Targets, Forecast Changes

This story features KELLY PARTNERS GROUP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: KPG

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 August 27 to Friday August 31, 2018
Total Upgrades: 16
Total Downgrades: 24
Net Ratings Breakdown: Buy 40.93%; Hold 43.41%; Sell 15.67%

Securities analysts in Australia are still issuing more recommendation downgrades than upgrades, but at least the gap between the two is narrowing noticeably. In contrast to prior weeks, both tables for the week ending Friday, 31st August 2018, are populated by stocks receiving multiple switches in stockbroker ratings.

FNArena counted 16 upgrades and 24 downgrades pulling the ratio for the four weeks of August just below 1:2. Receiving multiple upgrades were ambitious gold miner Northern Star Resources (2x) and Regis Resources (gold and nickel) and Sims Metal Management (scrap) with the latter two enjoying three upgrades post results releases.

Only six of the 16 upgrades involves a Buy rating.

On the flipside, nutritional supplements provider Blackmores was downgraded three times during the week, of which two downgrades moved to Sell, while fruit and veggies grower Costa Group was downgraded twice, both to Neutral/Hold; troubled contractor RCR Tomlinson was also downgraded twice (one Sell only), while fresh Sell ratings fell upon the likes of Bega Cheese, WiseTech Global, Qube Holdings, Virgin Australia and Reliance Worldwide.

Consensus price targets experienced wild swings, as they tend to do in the midst of reporting season. The good news is that positive swings have been larger, on average, than the negative adjustments, although individual swings have been either cathartic or gut-wrenching at times.

Topping the week's table for large positive revisions is Webjet, enjoying a gain of no less than 28%, followed by TPG Telecom, APN Outdoor, Blackmores, Smartgroup, others. On the flipside, Speedcast International (-26.6%) stands out, at arm's length followeed by Sims Metal Management, Orocobre, Caltex Australia, and Japara Healthcare.

But if you thought those numbers were eye-catching, you aint seen nothin' yet until you glanced over the table for positive adjustments to earnings forecasts. African gold miner Perseus Mining tops the week's table with a gain in excess of 1000% (not a typo), beating Virgin Australia, Independence Group, Infigen Energy, and others.

Among the stocks whose updates triggered significant reductions to forecasts, we find Speedcast International on top, followed by Air New Zealand, Galaxy Resources, G8 Education, and Atlas Arteria.

Local reporting season is being replaced with large numbers of stocks going ex-dividend this week and month.

Upgrade

CABCHARGE AUSTRALIA LIMITED ((CAB)) Upgrade to Neutral from Sell by UBS .B/H/S: 0/2/0

In the wake of the FY18 results UBS upgrades to Neutral from Sell. Target is raised to $2.20 from $2.15. The result itself is labeled "good" and "in line", albeit with the admission that it missed consensus by -6%.

UBS analysts have lifted estimates and are anticipating a return to growth, forecasting a three-year EPS CAGR of 11%.

ERM POWER LIMITED ((EPW)) Upgrade to Add from Hold by Morgans .B/H/S: 2/1/0

Morgans is pleased the sale process is underway for the US business. The broker assumes this will mean the distribution doubles from the minimum $0.07 per share. The US business produced an underlying loss of -$19.3m in FY18.

The broker suggests cash that was being used to support the US operations can now be paid to shareholders. Operating earnings in FY18 increased 25% on a continuing business basis and beat forecasts. Morgans upgrades to Add from Hold. Target is raised $1.95 from $1.64.

KELLY PARTNERS GROUP HOLDINGS LIMITED ((KPG)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

FY18 net profit was slightly ahead of prospectus. The company has commenced FY19 with two network acquisitions and will focus on acquisitions through to FY23. The target is 5% organic revenue growth and 5% acquired revenue growth.

Morgans believes the company's targets are supported by a relatively defensive earnings base and upgrades to Add from Hold. Target is reduced to $1.65 from $1.74.

NORTHERN STAR RESOURCES LTD ((NST)) Upgrade to Buy from Neutral by Citi and Upgrade to Accumulate from Lighten by Ord Minnett .B/H/S: 3/1/2

The company has announced it will acquire the 250kozpa Pogo underground gold mine in Alaska from Sumitomo for US$260m/A$347m and Citi analysts are supportive of the deal, also because Northern Star is turning into a global gold producer, expanding in low-risk jurisdiction.

Target price moves to $8.25 from $7.15. Rating upgraded to Buy from Neutral.

Northern Star will acquire the Pogo gold mine in Alaska from Sumitomo for US$260m in cash. The transaction will be funded from existing cash and and a $175m placement at $6.70 per share.

Ord Minnett's believes the asset is genuinely worth more in the bidders hands, valuing Pogo at $576m, or 90cps.

The broker's FY19 group operating earnings forecast has increased 26% and EBITDA per share is 21% higher. Rating is upgraded to Accumulate from Lighten and target rises to $7.50 from $6.40.

NEWS CORPORATION ((NWS)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/3/1

News Corp has confirmed the potential IPO of Foxtel at its FY18 result. While Foxtel has experienced significant pressure, UBS forecasts FY19 to be an earnings trough. Further out, the broker envisages cost reduction opportunities arising from the Foxtel/Fox Sports merger that are not yet factored in.

The broker remains cautious for the long term, nevertheless, as competition may limit Foxtel's returns.

UBS upgrades News Corp to Neutral from Sell following the recent underperformance in the share price. Target is reduced to $20.10 from $20.75.

PLATINUM ASSET MANAGEMENT LIMITED ((PTM)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/3/1

FY18 results were slightly better than Credit Suisse had expected due to some lower quality supporting items.

Fund performance has deteriorated in recent months and this will impact Platinum's ability to earn performance fees in FY19, the broker observes. The broker has cut fee forecasts by -50%. The broker has made minor changes to EPS forecasts with  FY19 unchanged and FY20 upgraded by 2%.

Credit Suisse upgrades to Neutral from Underperform, believing the stock offers better value than sector peers. Target is raised to $5.25 from $5.15.

REGIS RESOURCES LIMITED ((RRL)) Upgrade to Neutral from Sell by UBS and Upgrade to Hold from Sell by Deutsche Bank and Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/5/2

FY18 results were slightly ahead of expectations. UBS attributes share price weakness to the FY19 guidance issued in the quarterly report in July. Higher cost estimates are based on pre-stripping activity at new satellite ore bodies that are to be opened up in FY19 as well as inflation in oil prices.

The broker believes the higher costs have now been more than priced into the stock and value is starting to emerge. Rating is upgraded to Neutral from Sell. Target rises to $4.20 from $3.18.

FY18 results were ahead of estimates because of higher revenue and lower depreciation. Deutsche Bank upgrades to Hold from Sell on valuation.

Target is $4.00. The broker notes for the next two years the cash balance will go backward because of capital expenditure and dividends.

FY18 results were ahead of Ord Minnett's expectations, and 5% above consensus, driven by lower than expected operating costs.

The company remains in a strong position to fund growth options but the key is the timing of that growth, in the broker's view. First gold from McPhillamys in FY20 may be optimistic, Ord Minnett believes, and assumes an investment decision by the end of FY19 and first gold in 2H21.

The broker upgrades to Hold from Lighten and retains the $4.00 target price.

SANDFIRE RESOURCES NL ((SFR)) Upgrade to Neutral from Sell by Citi .B/H/S: 0/4/3

Citi notes the FY18 performance missed market consensus by some -5%, even though it marked a big improvement on FY17. The broker has upgraded to Neutral from Sell inspired by "valuation".

Price target gains 10c to $7.70. Equally noteworthy, the analysts retain the High Risk rating due to the short mine life at DeGrussa plus, the need remains for cash to be reinvested in a new project.

SIMS METAL MANAGEMENT LIMITED ((SGM)) Upgrade to Neutral from Sell by UBS and Upgrade to Neutral from Underperform by Credit Suisse and Upgrade to Buy from Hold by Ord Minnett .B/H/S: 2/4/0

Sims reported in line with UBS. The stock has been hit hard in the past fortnight due to headwinds in the end markets of China and Turkey, the broker notes, being scrap tariffs in the former and economic collapse in the latter. The key for the company is to redirect volumes to other markets while maintaining margins.

UBS has cut earnings forecasts by -5% and warns earnings visibility is very low. But with market expectations re-based lower, the broker sees the headwinds priced in. Upgrade to Neutral from Sell. Target rises to $13.85 from $13.70.

Sims Metal Management's FY18 results were broadly in line with the broker's estimates. Guidance was limited to "on track to exceed 10% ROIC target" although management remains cautious over global trade war escalation.

Credit Suisse upgrades the stock to Neutral from Underperform on share price correction and makes modest EPS changes to reflect management's guidance for internal initiatives and macro considerations.

Target price steady at $14.80.

FY18 results were in line with Ord Minnett's expectations but net profit was slightly below the broker's forecast. The result demonstrated to the broker that the company can adapt to an ever changing trade landscape.

The weak outlook is a material risk to the stock, in the broker's view, and while risks associated with Turkey and China are real Sims has been able to find alternative markets.

Ord Minnett believes the sell-off following the result presents a buying opportunity and upgrades to Buy from Hold. Target is reduced to $16.70 from $17.00.

SPARK INFRASTRUCTURE GROUP ((SKI)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 1/5/1

Morgan Stanley believes the relative appeal of the stock is increasing in view of its asset efficiency and the investment pipeline. The broker considers the main question for investors is whether the proposed rate of return discourages future efficient investment.

The broker holds a view that grids will continue to play an important role in energy supply and investment rates will not slow in the 2020s. The broker upgrades to Equal-weight from Underweight and reduces the target to $2.44 from $2.51. Industry view is Cautious.

See also SKI downgrade.

TPG TELECOM LIMITED ((TPM)) Upgrade to Add from Hold by Morgans .B/H/S: 2/2/3

The company has announced a merger with Vodafone Australia. Morgans observes both businesses service the cost conscious end of the market with around 20% share. While pro forma numbers have been offered, the broker finds few details regarding the medium-term prospects, such as cost and capital expenditure savings.

Hence, Morgans finds it difficult to value the combined group and has not changed forecasts. The broker continues to be disappointed by management's unwillingness to answer fundamental investment questions such as potential synergies.

Morgans upgrades to Add from Hold purely on backing David Teoh, who will become non-executive chairman of the merged group. Morgans raises the target to $10.40 from $5.41.

Downgrade

BEGA CHEESE LIMITED ((BGA)) Downgrade to Reduce from Hold by Morgans .B/H/S: 1/0/1

FY18 results were in line with guidance. Morgans believes the results could have been stronger had the company elected to increase its farmgate milk prices to secure greater future supply. The broker found the outlook comments vague.

The company has increased its milk supply to help fill its new Koroit facility. To fund the acquisition Morgans believes Bega Cheese will require an equity raising as gearing ratios would otherwise increase to uncomfortable levels.

Rating is downgraded to Reduce from Hold. Target is raised to $7.00 from $6.50.

BLACKMORES LIMITED ((BKL)) Downgrade to Underperform from Neutral by Credit Suisse and Downgrade to Hold from Accumulate by Ord Minnett and Downgrade to Reduce from Hold by Morgans .B/H/S: 0/1/2

FY18 results were in line with estimates. Credit Suisse calculates the stock is trading on a PE rating that is higher than either that of a2 Milk ((A2M)) or Treasury Wine ((TWE)), both of which offer higher near-term growth.

The broker maintains a target of $130 but downgrades to Underperform from Neutral. Credit Suisse also notes sales have not kept pace with rival Swisse in Australia. The company is budgeting for growth in FY19 in Australia and intends to increase marketing.

FY18 results were in line with Ord Minnett's forecasts although the $1.55 dividend, representing a 75% payout of net profit, was below the broker's estimate. The company has reinstated its DRP.

Management highlighted that it is comfortable with inventory positions in the market and exited the period with rebates as a percentage of gross sales of 19.2%. The company expects to ramp up selling and marketing expenses, particularly in China, as it embarks on an adjusted strategy to capture more sales.

With the stock trading now trading on more than 30x Ord Minnett's forecast earnings the rating is downgraded to Hold from Accumulate. Target rises to $160 from $145.

FY18 results were slightly weaker than Morgans expected. Management expects continued growth in sales and profit in FY19 and is targeting growth across all regions and brands.

Management has highlighted a subdued Australian retail market, which Morgans believes illustrates the lower growth outlook for the domestic vitamin category and also reflects the prevalence of discounting. The broker downgrades to Reduce from Hold. Target is raised to $130 from $115.

BRAMBLES LIMITED ((BXB)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/5/1

FY18 results were slightly ahead of estimates. Credit Suisse notes a timing delay on price increases and efficiency gains versus cost pressures, and this may provide a more attractive entry point to the stock.

The broker downgrades to Neutral from Outperform. Target is raised to $10.90 from $10.40.

COSTA GROUP HOLDINGS LIMITED ((CGC)) Downgrade to Neutral from Outperform by Macquarie and Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 0/4/0

Macquarie expects low double-digit earnings growth in FY19. The company is changing its full year end to December from June, which means it will bank a large percentage of profits in its new first half to the June 30 year end.

Macquarie downgrades to Neutral from Outperform and raises the target to $8.15 from $7.90. The broker considers the valuation relatively full and forecasts first half net profit to be down -31% because of the seasonality from additional costs and 86% ownership of the Moroccan business. FY19 profit outcome will not be evident until much later in the year, the broker suggests.

FY18 net profit was -7.6% below Ord Minnett's forecasts. On the positive side, the broker notes the earnings miss was a one-off issue – a poor harvest at the Moroccan African Blue unit. The broker lowers net profit forecasts by -9% for FY19 and by -16% for FY20.

Ord Minnett projects free cash flow to turn negative in FY19 after accounting for a large increase in capital expenditure. Rating is downgraded to Hold from Accumulate and the target is trimmed to $7.43 from $7.52.

CALTEX AUSTRALIA LIMITED ((CTX)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 4/1/1

Credit Suisse introduces new retail assumptions for Caltex, which set a lower underlying EBIT for stores transitioning to corporate ownership. Wholesale earnings estimates are reduced, with a lower margin from a new Woolworths ((WOW)) wholesale agreement commencing August 1.

The broker believes the pre-existing franchise profitability base has been unsustainably high. Credit Suisse changes analysts and downgrades to Neutral from Outperform. Target is reduced to $32.55 from $40.80.

ISENTIA GROUP LIMITED ((ISD)) Downgrade to Neutral from Buy by UBS .B/H/S: 0/2/1

UBS had assumed a major repricing of iSentia's A&NZ SaaS product would lead to increased customers. The company's guidance downgrade suggests either discounts have served only to keep customers, or customers are leaving anyway.

Competition is increasing, which is a major headwind as iSentia loses customers. UBS still believes a major re-basing of the product suite could enable growth beyond FY19, but prefers to wait for some indication momentum has turned. Downgrade to Neutral from Buy. Target falls to 45c from $1.00.

MACQUARIE GROUP LIMITED ((MQG)) Downgrade to Neutral from Buy by UBS .B/H/S: 3/4/0

Over the past five years, Macquarie has successfully diversified away from traditional investment banking towards asset management, lending and leasing, UBS notes. Earnings have tripled. The broker expects momentum to continue under the new CEO.

But after a solid rally, UBS now pulls back to Neutral from Buy. Target rises to $122 from $117.

MYOB GROUP LIMITED ((MYO)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/5/1

Citi had gone quiet on this stock and now reports a new analysts has been put in charge. Direct result is a downgrade to Neutral from Buy post Friday's interim report release.

The failed acquisition of Reckon ((RKN)) assets has now been pulled out of modeling, triggering significant reductions in forecasts and a big drop in price target; to $3.32 from $4.25.

OROCOBRE LIMITED ((ORE)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 6/1/1

With an uncertain outlook on all key metrics as well as downside risk for prices, Macquarie believes the job will become harder for Orocobre before it gets better. The company was upbeat about lithium markets but peers are reporting a more pessimistic outlook and 2019 is not yet contracted.

As no guidance was provided the broker downgrades to Neutral from Outperform. Target is reduced to $5.00 from $6.20.

QUBE HOLDINGS LIMITED ((QUB)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 1/4/1

Qube Holding's FY18 result was below Credit Suisse and consensus with soft EBIT offset by improvements at Patrick.

Guidance for FY19 was less upbeat than Credit Suisse had expected. The broker struggles to see value at the current share price and downgrades the stock to Underperform from Neutral.

Logistics and the Ports&Bulks segments are expected to see only modest growth due to weakness in grain harvest volumes. FY19 EPS estimates are cut -9% to reflect this. Target is raised to $2.40 from $2.35.

RCR TOMLINSON LIMITED ((RCR)) Downgrade to Lighten from Buy by Ord Minnett and Downgrade to Neutral from Buy by Citi .B/H/S: 0/1/0

Ord Minnett has cut its recommendation to Lighten from Buy and reduced the price target to $1.38 from $5.19 due to uncertainties in the company's business following material cost overruns at its Daydream and Hayman Island solar farm projects.

The projects swung the company's FY18 results to a loss and necessitated a $100m capital raising at $1 per share.

Ord Minnett has reduced FY19 and FY20 EBIT forecasts by -46% and -47% respectively and also reducing EPS estimates by -55% and -58% for the same periods.

Now that the bad news is out, Citi analysts acknowledge the $100m equity raise strengthens the company's balance sheet, but the analysts continue to see risks to short term earnings.

Downgrade to Neutral from Buy, while the price target has been reset at $1.30 compared with $3.50 last month. For FY19, the analysts have positioned themselves near the bottom of management's guided range.

RELIANCE WORLDWIDE CORPORATION LIMITED ((RWC)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 3/1/1

FY18 earnings were weaker than Deutsche Bank expected. The broker is pleased with the upgrade to synergies from the John Guest acquisition but remains concerned about growth in the underlying US business, ex acquisitions.

Given the risks, and the fact the stock still trades at 23x FY20 price/earnings estimates, the broker downgrades to Sell from Hold. Target is $4.80.

SPEEDCAST INTERNATIONAL LIMITED ((SDA)) Downgrade to Hold from Add by Morgans .B/H/S: 1/3/0

First half results were below expectations. Morgans has always focused on cash generation and notes operating cash flow was down -26%. Since capital expenditure was higher, free cash flow was non-existent.

The broker is disappointed net debt increased. Morgans notes the target for net debt continues to be 2.5x pro forma EBITDA but this has not eventuated over the last few years as the company continues to make debt-funded acquisitions.

The broker downgrades to Hold from Add on quality concerns. Target is reduced to $4.09 from $7.21.

SUNLAND GROUP LIMITED ((SDG)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

FY18 results were ahead of guidance and broadly in line with Morgans' expectations. The broker believes the quality of the portfolio and product offering will continue to underpin future sales as the business is focused on specific geographic areas such as Gold Coast, Brisbane and Sydney's northern beaches.

There is also potential for earnings upside in the longer term with profits from several multi-storey projects in the pipeline. Morgans downgrades to Hold from Add on valuation. Target is reduced to $1.85 from $1.94.

STOCKLAND ((SGP)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/3/1

Stockland's FY18 result was in line with Credit Suisse and guidance. Management guided to 5-7% FFO growth in FY19 and DPS growth of 4%.

The result highlighted the challenges Stockland faces in its retail division, in the broker's view, with slowing growth and negative revaluations coming at a time when the company is trying to reduce its exposure to retail.

Although the company has flexibility to drive earnings by managing residential embedded margins, headwinds facing other parts of the business lead the broker to downgrade to Neutral from Outperform. Target is reduced to $4.35 from $4.56.

SIGMA HEALTHCARE LIMITED ((SIG)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/2/2

Sigma has run up 20% since July, reflecting a forecast earnings recovery by FY20, post the loss of the Chemist Warehouse contract, and the possibility of an acquisition using the working capital saved by the loss of the contract, Credit Suisse suggests.

Or, a buyback is possible. The broker sees the stock as now fully valued and downgrades to Neutral (High Risk) from Buy ahead of next week's earnings result. Target unchanged at 55c.

SPARK INFRASTRUCTURE GROUP ((SKI)) Downgrade to Neutral from Buy by Citi .B/H/S: 1/5/1

Apparently, part of the local investment community is worried about higher taxes and the implications for dividends in the years ahead. Citi analysts are less so, having adopted the view the cash tax rate will gradually revert to the statutory rate by calendar 2023, from 2019 onwards, and this implies scenarios that are too pessimistic should be kept at bay.

But the analysts acknowledge uncertainty remains the key word. Recommendation has been pulled back to Neutral from Buy on share price appreciation. Target price remains $2.66.

See also SKI upgrade.

SANTOS LIMITED ((STO)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/4/2

Since Santos rejected the bid from Harbour Energy it has been beholden upon management to prove their strategy could provide a better outcome, says Credit Suisse, which is not yet convinced. The stock may have run up 22% since May but the broker believes it's all about the oil price and not about strategy.

If not for the oil price, Credit Suisse believes the stock would be trading "materially" below the Harbour bid price. The broker retains a $6.35 target with oil price strength offsetting the loss of takeover premium, but downgrades to Neutral from Outperform on a number of risks.

VIRGIN AUSTRALIA HOLDINGS LIMITED ((VAH)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/1/2

FY18 results beat Credit Suisse estimates. This was mainly because of a stronger performance from the domestic operations, along with higher margins. However, the domestic performance was offset by a weaker outcome in other segments.

Deferred tax assets of around $452m have been written off and Credit Suisse suspects management is more downbeat regarding the prospect of profitability in the medium to longer term. Rating is downgraded to Underperform from Neutral. Target is lowered to $0.20 from $0.25

WISETECH GLOBAL LIMITED ((WTC)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 1/2/2

Macquarie reviews its investment case following the 40% rally in the stock post the FY18 result. M&A assumptions have also increased.

The broker believes the longer-term market penetration and opportunity with CargoWise One is substantial. Yet the current valuation implies a premium of more than 100% to domestic and international peers and, in order to justify current multiples, the market appears to be factoring in rapid expansion.

The broker downgrades to Underperform from Neutral. Target is raised to $17.50 from $11.39.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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