Weekly Ratings, Targets, Forecast Changes

This story features MCMILLAN SHAKESPEARE LIMITED, and other companies. For more info SHARE ANALYSIS: MMS

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 March 18 to Friday March 22, 2019
Total Upgrades: 7
Total Downgrades: 11
Net Ratings Breakdown: Buy 42.15%; Hold 42.89%; Sell 14.96%

Most of the action among securities analysts, so it seems, is about deciding which share price movement triggers a downgrade or upgrade in rating. The share market itself has been hesitating about which direction next, but underneath some of the volatility that has risen to the surface lately might be explained by some of the analysts' decisions.

For the week ending Friday, 22nd March 2019 FNArena registered seven upgrades for individual ASX-listed entities, and eleven downgrades.

Worth pointing out: many of the upgrades have a whiff of "surely this share price cannot stay this low (or lower) forever" to it. Car leasing has two representatives through SG Fleet and EclipX Group among the week's upgrades. Only two upgrades did not move past Hold/Neutral.

On the negative side (downgrades), Sigma Healthcare stands out with two downgrades, but there are otherwise plenty of companies that released financial results after the February reporting season. More bad news means Wagners Holding is in there too, as is Sydney Airport, and Cochlear.

Probably not a surprise there is not much going on in the table for positive amendments to valuations and price targets. New Hope Corp (+3.8%) is the only one worth mentioning. On the flipside, EclipX Group and Sigma Healthcare suffer from the fall-out from their  disappointing market update.

A little more colour is visible in the table for positive revisions to earnings estimates with Automotive Holdings leading the pack (after months of downgrades), followed by oOh!media, Megaport, TPG Telecom, and New Hope Corp. Negative revisions fell upon NextDC, Sigma Healthcare, ExclipX Group, Nufarm, and Caltex Australia.

Bond markets and other macro-economic events have investors' attention as the end of March/Q1 approaches. This also implies local banks' results are drawing nearer too.

Upgrade

ECLIPX GROUP LIMITED ((ECX)) Upgrade to Buy from Neutral by Citi .B/H/S: 2/2/0

The company has retracted prior guidance for net profit to be broadly in line with FY18 and disclosed that, for the five months to February, net profit was down -42%. Notwithstanding the headwinds, Citi believes EclipX is oversold and upgrades to Buy/High Risk from Neutral.

The broker expects an improvement in the second half, amid some of the commercial contract extensions ceasing, cost savings being realised and the company's normal skew to the second half.

Divestment of Grays and Right2Drive has been flagged. Meanwhile, McMillan Shakespeare ((MMS)) refused a request to extend the merger negotiations deadline.

Citi does not believe this will be an end to consolidation, although it may result in other interested parties entering the fray. The broker reduces the target to $1.29 from $2.38.

ELDERS LIMITED ((ELD)) Upgrade to Hold from Reduce by Morgans .B/H/S: 0/1/0

The impact of the prolonged drought, low wool volumes and increased costs have meant a weak first half result is likely and Elders has downgraded FY19 guidance to underlying EBIT of $72-75m.

This is not a surprise to Morgans, given the severity of the drought and the impact of Queensland's floods, and a steep fall in cattle prices has been noted.

In light of the adverse conditions, if guidance is achieved, this will be a reasonable outcome, in the broker's view. Tough trading conditions are somewhat factored into the stock and the broker upgrades to Hold from Reduce. Target is reduced to $6.30 from $7.80.

Should the Nutrien takeover bid for Ruralco ((RHL)) proceed, Elders will be competing with a much larger peer group and this, potentially, removes the corporate appeal that was previously attached to the valuation, in the broker's view.

Morgans reduces FY19 and FY20 forecasts by -12.2% and -11.9% respectively.

HEALIUS LIMITED ((HLS)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 3/2/1

Deutsche Bank notes market conditions have become more challenging and this has led to a downgrade to FY19 guidance. Still, the company is making some progress in its transformation, in the broker's view.

There is a high number of GP additions as well as margin expansion in imaging. Given the 16% total shareholder return implied by forecasts the broker upgrades to Buy from Hold.

Deutsche Bank also expects the share price will be supported if another takeover proposal is announced. Target is $3.01.

NUFARM LIMITED ((NUF)) Upgrade to Add from Hold by Morgans .B/H/S: 6/1/0

Cash flow in the first half was significantly worse than Morgans expected and the company's balance-sheet position remains of concern. The extent of the revision to guidance was also worse than the broker expected.

European acquisitions are now not expected to achieve their original earnings guidance until FY20. Yet, following severe weakness in the share price the broker upgrades to Add from Hold.

Another tough half-year is anticipated and Morgans acknowledges short-term catalysts are limited. Target is reduced to $6.30 from $6.85.

The broker believes the current share price undervalues the existing business and provides no value for the Omega-3 seeds project.

See also NUF downgrade.

NOVONIX LIMITED ((NVX)) Upgrade to Speculative Buy from Add by Morgans .B/H/S: 1/0/0

Morgans has introduced a new rating category, Speculative Buy, for companies where there is potential for significant opportunity but that also carry significant risk.

The broker believes the upside potential for Novonix is compelling, but it has not yet sold its anode material or produced in large scale.

There are a number of issues the company will need to overcome in order to realise its potential.

The broker upgrades to Speculative Buy from Add and raises the target to $0.75 from $0.54.

RESMED INC ((RMD)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 4/2/1

The second quarter result was weaker than Deutsche Bank expected, although the core US sleep & respiratory care market continues to grow at solid rate of 9%.

The broker notes sales weakness can be attributed to rest-of-world devices because of a high comparable period, and slower upgrades to tele-monitored devices in France and Japan.

The broker believes the business has a large opportunity to grow from the increased awareness and further penetration of the sleep apnoea market. The broker upgrades to Buy from Hold. Target is US$125.

SG FLEET GROUP LIMITED ((SGF)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 2/1/0

Morgan Stanley observes the stock has sold off substantially since its AGM in October. The broker believes the business has sufficient levers to meet earnings expectations and a cost reduction strategy into the second half and FY20 should alleviate some of the top-line and margin pressure.

Positive catalysts, nevertheless, are some way off and the broker's upgrade to Equal-weight from Underweight is centred on valuation. New vehicle sales continue to be disappointing, particularly in NSW and Victoria. Target is $2.60. Industry view is In-Line.

Downgrade

BRICKWORKS LIMITED ((BKW)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 0/4/0

First half earnings (EBIT) were ahead of Deutsche Bank's expectations, largely from better-than-expected property earnings.

While remaining positive on the medium-term outlook for property development, Deutsche Bank believes there is unlikely to be significant revaluations from FY20 onwards.

Investment in building products in North America is likely to support earnings in the long-term, although the broker also considers significant upside is unlikely in that space in the next three years.

Deutsche Bank downgrades to Hold from Buy. Target is $18.60.

COMMONWEALTH BANK OF AUSTRALIA ((CBA)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 2/3/3

Following a broader market re-rating, Macquarie finds the bank sector looking increasingly attractive on a relative basis. The sector is offering healthy dividend yields and supportive relative valuations.

Nevertheless, the broker continues to find the current fundamental outlook challenging and retains forecasts that are below consensus.

Macquarie finds it difficult to have a more constructive view until external conditions improve. The broker downgrades Commonwealth Bank to Underperform from Neutral on a relative valuation basis. Target is $69.

COCHLEAR LIMITED ((COH)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 1/2/4

While services revenue growth remains strong, Deutsche Bank expects growth will slow in the second half as N7 upgrades move through the typical product cycle.

The broker also forecasts lower expense ratios will be needed if the company is to achieve the lower end of its FY19 guidance range.

A patent dispute with a competitor also looms, which may lead to a large payment of damages. Rating is downgraded to Sell from Hold. Target is $157.

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

Since the company announced its first half result, it has outperformed the broader market index. Morgans believes share price strength has been principally driven by the re-start of the share buyback and increase in the dividend outlook.

The broker downgrades to Hold from Add, as a result of share price strength. The company has reserved $60m for investment in its energy solutions business in addition to the $18m paid for Greensense, Lumaled and Out Performers.

However, while the segment contributes $0.11 to valuation, Morgans points out it is yet to develop a track record of earnings growth.

The company also highlights that the Oakey power station will have increasing value by providing firming capacity to offset the increasing penetration of renewables into the Queensland generation mix. Target is raised to $1.90 from $1.81.

NEW HOPE CORPORATION LIMITED ((NHC)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 1/2/0

First half results missed expectations because of costs. Credit Suisse suspects investors are concerned that the syndicated loan the company has acquired is a signal for lower capital returns going forward.

The company has entered into a $600m secured loan facility to fund future growth projects. The broker was disappointed with the operating performance as unit costs increased in Queensland because of reduced feed available to wash plant and decreased yields.

New South Wales operations were also disappointing in terms of costs, affected by elevated fuel costs and increased repair & maintenance.

Credit Suisse downgrades to Neutral from Outperform, given the strong rally in the share price. Target is $4.

NUFARM LIMITED ((NUF)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 6/1/0

Ord Minnett notes, while first half operating earnings were in line with expectations, the underlying net loss of -$11.5m was below forecasts. The interim dividend is suspended temporarily in order to manage cash flow.

A poor weather outlook in Australasia and supply issues in Europe continue to dog the stock. Glyphosate is also of concern, because of the recent Bayer court case progressing to the second phase.

Ord Minnett reduces estimates for earnings by -30% for FY19 and by -26% for FY20. This leads to a downgrade to Hold from Buy and a reduced target, cut to $4.50 from $7.25.

See also NUF upgrade.

RURALCO HOLDINGS LIMITED ((RHL)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

In light of the Nutrien takeover bid for Ruralco, Morgans downgrades to Hold from Add and raises the target in line with the offer price of $4.40, from $3.60.

Ruralco has entered into a scheme of arrangement with Nutrien, a global agribusiness, the parent company of Landmark and the largest player in Australia's rural services industry.

Based on Morgans' forecasts the offer price implies an FY19 enterprise value/EBITDA multiple of around 8.8x. Ruralco will report its first half result on May 14 and has guided to a flat outcome.

SIGMA HEALTHCARE LIMITED ((SIG)) Downgrade to Sell from Neutral by UBS and Downgrade to Sell from Neutral by Citi .B/H/S: 0/0/4

Underlying earnings (EBIT) were ahead of guidance in FY19, although UBS notes earnings quality was affected by restructuring costs and weak cash conversion. The company has indicated FY20 underlying operating earnings (EBITDA) will be $55-60m.

UBS makes material upgrades to FY21-22 estimates, reflecting the incorporation of Project Pivot. Project Pivot is the company's $100m cost reduction program, of which around $60m is expected to come from the transition of Chemist Warehouse and the remaining $40m from operating efficiencies.

The company is a quality operator but UBS does not believe the stock warrants a premium to market. Rating is downgraded to Sell from Neutral and the target reduced to $0.45 from $0.58.

Post the release of FY19 financials, Citi has downgraded to Sell/High Risk from Neutral/High Risk. Price target falls to $0.52. The company's guidance towards more capex has led to reduced forecasts.

The analysts see the biggest risk to their Sell rating in the potential of a higher bid to shareholders. Otherwise, execution risks are seen as high, with management aiming to take out $100m in costs out of the business.

The reported financials were labeled as largely in-line. On adjusted basis, the operational performance as actually a smidgen better than expected, admit the analysts. Cash conversion, however, was weak.

SYDNEY AIRPORT HOLDINGS LIMITED ((SYD)) Downgrade to Hold from Buy by Deutsche Bank .B/H/S: 3/2/3

The share price is up over 16% since January, supported by long bond yields, strong passenger growth in January and a positive draft report from the Productivity Commission.

Deutsche Bank expects the stock to underperform, as the airport cycles last year's strong international passenger growth, downgrading to Hold from Buy. Target is reduced to $7.50 from $7.75.

WAGNERS HOLDING COMPANY LIMITED ((WGN)) Downgrade to Hold from Add by Morgans .B/H/S: 1/1/1

The company has advised that its largest cement customer, Boral ((BLD)), has issued a pricing notice. Morgans observes this is significant, given the take-or-pay contract is a cornerstone of Wagner's earnings profile in a volatile south-east Queensland construction market.

The broker notes the south-east Queensland cement market is highly concentrated and assumes the third-party providing the lower quote to Boral might be Cement Australia.

If so, this will support the view that demand conditions are weaker than expected, in the absence of major infrastructure projects and a slowdown in residential activity.

The company has suspended cement deliveries to Boral for six months as the dispute is addressed. Morgans downgrades to Hold from Add and reduces the target to $3.04 from $3.38.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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