Weekly Ratings, Targets, Forecast Changes

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This story features ADBRI LIMITED, and other companies.
For more info SHARE ANALYSIS: ABC

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 May 20 to Friday May 24, 2019
Total Upgrades: 14
Total Downgrades: 18
Net Ratings Breakdown: Buy 40.71%; Hold 42.85%; Sell 16.44%

Against a background of portfolio reshuffling and short covering post surprise election outcome in Australia, local stockbroking analysts are equally busier than one would expect this time of the year.

For the week ending Friday, 24rd May 2019, FNArena registered no less than 14 upgrades in recommendations for individual ASX-listed stocks and 18 downgrades. Not unexpected, the tally represents value seen opening up on a change in forecasts (same government, unexpected) and increasing valuation constraints as share prices continue to rise.

Hence, it would be pleasing to note for most investors only four out of the 14 upgrades stopped at Neutral/Hold. On the flip side, 13 of the 18 downgrades sank the recommendation to Sell. It truly is a bifurcated market indeed.

Computershare was the sole recipient of more than one upgrade during the week (one to Neutral only). On the flip side, AGL Energy, ALS ltd, NRW Holdings and TechnologyOne all received two downgrades. Woolworths received three, all went to Sell.

There is more good news from valuation adjustments and earnings estimates updates.

For once, or so it appears, the pendulum has swung towards more positive amendments. It has been a long while (ironically, this coincides with the local index potentially having peaked for the time being).

On the positive side for adjustments to valuations and price targets, Xero, CSR, Medibank Private and Adelaide Brighton all enjoyed noticeable increases. The negative side is characterised by smaller reductions and only three companies worth mentioning: Computershare, ALS ltd and St Barbara.

A similar pattern has formed in forecast changes with Xero, Aveo Group, James Hardie and ALS ltd leading the pack on the positive side, and with only three companies worth pointing at on the negative side: Virgin Australia, Incitec Pivot, and St Barbara.

Out of season reporting results remain on the calendar in the week ahead, while profit warnings continue to feature as well.

Upgrade

ADELAIDE BRIGHTON LIMITED ((ABC)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/4/2

Earnings forecasts for Adelaide Brighton have been trending lower recently, Macquarie notes, on concerns over a falling housing market. But on a combination of the surprise election win, a likely RBA rate cut and APRA's plan to reduce the mortgage serviceability threshold, confidence should be restored and this will filter into housing.

Thus Macquarie now sees greater upside risk to earnings, particularly in FY20. Upgrade to Outperform from Neutral. Target rises to $4.80 from $3.70.

ANSELL LIMITED ((ANN)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/4/0

Raw material prices have eased. Raw materials account for around 60% of the company's cost of goods sold. Credit Suisse expects Ansell will achieve only a modest benefit in the second half but forecasts a benefit of around 5% for the first half of FY20.

The broker suspects the company will miss its 3-5% organic growth target in FY19, given indications that demand has moderated.

While wary of a subdued macro economy, Credit Suisse still expects 13% growth in earnings per share in FY20 and upgrades to Outperform from Neutral. Target is raised to $27.50 from $24.00.

CHARTER HALL LONG WALE REIT ((CLW)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 1/1/1

Ord Minnett has conducted a review of the company's portfolio and notes the exposure to a shift in demand for long-weighted lease expiry assets in Australia. The broker anticipates a flight of capital to these assets in a low interest-rate environment.

The main leasing risk in the portfolio is the Metcash ((MTS)) facility in Perth, which Ord Minnett considers is materially over-rented. The broker would prefer the risk to be mitigated via a sale of the asset but notes it is one of the better located sites in Perth and has development potential.

Rating is upgraded to Buy from Hold and the target lifted to $5.25 from $4.25.

COMPUTERSHARE LIMITED ((CPU)) Upgrade to Neutral from Underperform by Macquarie and Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 0/7/1

Macquarie notes most of the information in the investor briefing dealt with near-term implications of UK mortgage services. The broker anticipates consensus expectations, which were too optimistic on both margin income and UK mortgage services, will converge with its earnings forecasts.

Following delays in completing the migration of clients from the legacy UKAR platform the company has confirmed this will result in an additional $35m in costs in FY20. Following the response in the share price, Macquarie upgrades to Neutral from Underperform. Target is raised to $17.00 from $16.50.

The company has maintained FY19 guidance at its investor briefing, although highlighted some risks from UK mortgage services. An improvement in the US mortgage servicing business is expected.

Ord Minnett considers guidance achievable and upgrades to Hold from Lighten. Target is steady at $16.50.

CSR LIMITED ((CSR)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/3/3

Earnings forecasts for CSR have been trending lower recently, Macquarie notes, on concerns over a falling housing market. But on a combination of the surprise election win, a likely RBA rate cut and APRA's plan to reduce the mortgage serviceability threshold, confidence should be restored and this will filter into housing.

Thus Macquarie now sees greater upside risk to earnings. Upgrade to Outperform from Neutral. Target rises to $4.70 from $3.40.

ILUKA RESOURCES LIMITED ((ILU)) Upgrade to Buy from Neutral by Citi .B/H/S: 5/1/0

Citi has upgraded to Buy from Neutral on the belief that de-stocking has ended and producers like Iluka can look forward to increased prices. Plus if Sierra Rutile can deliver, there should be substantial upside through significantly increased output volume, estimated at circa 40% potential.

Citi has lifted earnings forecasts by 6%-7% for the years ahead. AUD/USD forecasts have been reset at 0.70 and 0.73 respectively for this calendar year and next. Price target improves to $11 from $10.40.

MEDIBANK PRIVATE LIMITED ((MPL)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 1/4/3

Ord Minnett observes the Coalition win in the 2019 federal election removes the downside risk from Labor's proposed 2% cap on premium rates. The broker still believes margins will fall but now at a slower rate.

The broker upgrades to Hold from Lighten and raises the target to $3.05 from $2.30. The broker expects the incoming government will allow premium rate increases that are only modestly behind claims inflation, even with increasing efforts by health insurers to offset those costs.

NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 4/3/1

Morgan Stanley believes National Australia Bank offers a sound retail and business bank performance and better capital generation, as well as more flexibility following the decision to cut the dividend and partially underwrite the reinvestment plan.

The result of the federal election now lowers the tail risks in relation to credit quality, the mortgage market and regulatory environment and the broker upgrades to Overweight from Equal-weight. Target is raised to $25.70 from $25.10. Industry view: In-line.

QANTAS AIRWAYS LIMITED ((QAN)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/3/1

Credit Suisse believes an outright election win, as opposed to a hung parliament, is a positive for corporate travel demand, which has been weak in the run-up. Qantas will also benefit from Virgin Australia's ((VAH)) plans to cut capacity, which will be positive for Qantas domestic and Jetstar, some 70% of earnings.

Lower risk of industrial action, with Labor failing to get up, is another positive. Put it all together and Credit Suisse upgrades to Outperform. Target rises to $6.40 from $6.00.

RAMSAY HEALTH CARE LIMITED ((RHC)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 2/5/1

Ord Minnett's main concern was a challenge to industry profitability posed by plans by the Labor Party for caps of 2% for two years to premiums. The broker is now confident the pricing environment will be more benign and raises domestic margin forecasts.

As there are fewer challenges in Australian business and improved tariffs in the UK and France, the broker considers the outlook has improved. Rating is upgraded to Accumulate from Hold and the target raised to $75 from $60.

STOCKLAND ((SGP)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 2/2/2

Despite the recent rally in the stock, Macquarie notes it is trading at a -30% discount to the A-REIT sector. While not expecting the spreads to close completely, the broker believes the stock is supported, given residential headwinds have largely passed.

Rating is upgraded to Outperform from Neutral, as recent macro changes have led to a reduction in downside risks. Target is increased by 25% to $4.48.

SUPER RETAIL GROUP LIMITED ((SUL)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/5/0

Morgan Stanley believes the company has the opportunity to move the focus back on productivity after some value-destructive acquisitions. The broker considers the automotive business undervalued and pressures overstated.

Super Retail is post a significant capital expenditure cycle and should deliver strong free cash flow, in Morgan Stanley's view. Rating is upgraded to Overweight from Equal-weight. Target is raised to $10.00 from $8.20. Industry View: Cautious.

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

Virgin has noted domestic demand has weakened and failed to much recover post the Easter period. Virgin's outlook appears worse, Credit Suisse notes, than was provided in last week's Qantas ((QAN)) update.

Virgin is responding by reducing capacity, which is a positive for Qantas, but does have the potential to drive higher per unit revenue. The broker upgrades to Neutral, retaining an 18c target.

Downgrade

AGL ENERGY LIMITED ((AGL)) Downgrade to Underperform from Neutral by Macquarie and Downgrade to Sell from Buy by UBS .B/H/S: 0/2/6

Macquarie lowers earnings expectations across the gas division to reflect a step up in gas costs. Meanwhile, wholesale electricity faces a structural challenge, with the LREC contribution dropping towards zero.

Macquarie believes AGL does not justify a long-term market PE premium, especially as earnings are vulnerable to technology changes. Rating is downgraded to Underperform from Neutral and the target lowered to $19.99 from $20.67.

UBS remodels its view on AGL and downgrades to Sell from Buy. The broker has identified issues that will erode earnings by around -$500m. Despite growth opportunities that add back $150m, net operating earnings (EBITDA) are expected to decline by -$380m over FY19-23.

The broker remains bearish on the company's earnings outlook relative to Origin Energy ((ORG)). The broker acknowledges that, despite the weakening fundamentals, it is possible the share price will be supported by yield investors. Target is reduced to $21.00 from $22.70.

ALS LIMITED ((ALQ)) Downgrade to Sell from Hold by Deutsche Bank and Downgrade to Neutral from Buy by Citi .B/H/S: 2/4/1

Deutsche Bank observes that, over the last few years, the company has benefited from a recovery in global minerals drilling expenditure. However, the rate of growth has slowed.

Geochemistry volume growth was flat in the second half. The broker downgrades to Sell from Hold and reduces the target to $6.57.

Citi found the FY19 results solid as margins in life sciences were better than expected and there was double-digit growth in commodities.

However, the broker downgrades to Neutral from Buy, maintaining concerns around the weak trends in geochemistry which is still the company's largest business and 44% of group earnings (EBIT).

The broker does not expect the second half margin improvement in life sciences to be repeated. Target is reduced to $8.25 from $8.60.

AMP LIMITED ((AMP)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/6/1

Citi envisages material risk there will be minimal capital returns from AMP and the road to releasing value will be difficult. The broker believes the adviser industry is likely to transform to one dominated by salaried advisers and away from the aligned model that makes up 90% of the company's adviser base.

A new business model could require significant investment and take time to be profitable. Citi downgrades to Sell/High Risk from Neutral. Target is $1.90.

COLES GROUP LIMITED ((COL)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/5/2

German competitor Kaufland is looking to start a battle for its share of the Australian households' groceries spending and Citi thinks this will act as the catalyst for a resumption of an industry-wide private label price war.

The analysts have, in anticipation, lowered long term margin assumptions for the incumbents Woolworths and Coles.This leads to lowered forecasts, and a lower valuation.

Price target for Coles drops to $13 from $13.40. Recommendation is downgraded to Neutral from Buy.

EVOLUTION MINING LIMITED ((EVN)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/4/3

Gold has been a relatively strong performer among the metals in the past six weeks, although Ord Minnett assesses the short-term outlook is mixed. US/China trade tensions are re-emerging at a time when the US dollar is strengthening.

Australian gold stocks continue to outperform because of solid cash flow, strong balance sheets and a weakening Australian dollar. However, Ord Minnett downgrades Evolution Mining to Hold from Accumulate based on valuation. Target is steady at $3.50.

IOOF HOLDINGS LIMITED ((IFL)) Downgrade to Sell from Neutral by UBS .B/H/S: 0/4/1

UBS believes the structural shake-up has only just begun and, while IOOF continues to enjoy greater stability versus the rest of the sector, momentum is likely to come under increasing pressure if its elevated contemporary platform pricing is not addressed.

UBS acknowledges there is less reliance on higher-margin legacy products but believes platform earnings could compress by -25% over five years. Rating is downgraded to Sell from Neutral and the target lowered to $5.05 from $5.80.

JAMES HARDIE INDUSTRIES N.V. ((JHX)) Downgrade to Neutral from Buy by UBS .B/H/S: 6/1/0

UBS believes the risk/return is now more balanced and downgrades to Neutral from Buy. US housing starts have commenced 2019 on a weaker footing while Australian detached housing approvals are falling.

The broker suspects restoring above-market growth could take longer than previously expected, while the company has toned down its targets for FY20. Target is reduced to $19.60 from $20.20.

NORTHERN STAR RESOURCES LTD ((NST)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/3/3

Gold has been a relatively strong performer among the metals in the past six weeks, although Ord Minnett assesses the short-term outlook is mixed. US/China trade tensions are re-emerging at a time when the US dollar is strengthening.

Australian gold stocks continue to outperform because of solid cash flow, strong balance sheets and a weakening Australian dollar. The broker downgrades Northern Star to Hold from Accumulate on valuation. Target is $9.80.

NRW HOLDINGS LIMITED ((NWH)) Downgrade to Neutral from Buy by UBS and Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 1/1/1

The company has been awarded the Koodaideri earthworks contract, to be delivered primarily in FY20. UBS upgrades FY20 revenue estimates by 5%.

The broker expects a further $200m in contracts will be won and delivered over the year. The 80% gain in the share price in the year to date means UBS downgrades to Neutral from Buy. Target is raised to $3.10 from $2.55.

The company has won the contract for Koodaideri. Deutsche Bank believes the win was already factored in and, although the contract size is close to forecasts, at $150m over 80 weeks it is likely to be a disappointment to consensus expectations.

The broker marginally reduces revenue forecast for FY20 because of the current outlook and the expectation the company will face capacity constraints. Rating is downgraded to Sell from Hold and the target is steady at $2.31.

OIL SEARCH LIMITED ((OSH)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 2/4/2

Credit Suisse believes PNG LNG expansion volumes will be contracted well below what the market is valuing. The broker suspects contractual price reviews may be pursued more aggressively by buyers.

The country risk profile could also be back to the fore, given recent political instability. Credit Suisse assesses the departure of CEO Peter Botten could cause a de-rating event for the stock.

Amid scepticism about the upside in Alaska, Credit Suisse downgrades to Underperform from Neutral on the basis of a softer LNG contracting environment. Target is reduced to $6.96 from $7.33.

SONIC HEALTHCARE LIMITED ((SHL)) Downgrade to Sell from Neutral by UBS .B/H/S: 3/4/1

With declining organic revenue growth rates in several regions and rising costs, UBS notes the company has relied on acquisitions to boost revenue and earnings growth.

Current forecasts capture an improving margin profile but the broker's revised valuation results in the rating moving to Sell from Neutral. UBS points out the market is applying a large multiple to Australian pathology. Target is raised to $24.90 from $24.00.

TECHNOLOGYONE LIMITED ((TNE)) Downgrade to Sell from Neutral by UBS and Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 0/2/1

First half results were affected by material accounting changes. UBS is comfortable with guidance because of the stronger second half contributions from consulting and on-premises business, in addition to the momentum in high-quality SaaS revenue.

The broker expects 15% compound growth in earnings per share from FY19-21. However, valuation appears stretched and the rating is downgraded to Sell from Neutral. Target is raised to $7.00 from $5.60.

First half results were in line with expectations and Ord Minnett notes momentum is clearly building across both software-as-a-service and in the UK. SaaS metrics were particularly strong and signal the company continues to enjoy larger customers migrating to its cloud offering.

The main drawback for the broker is cash flow, which likely reflects lower upfront cash payments from customers migrating to SaaS. Valuation is now considered stretched and the rating is downgraded to Lighten from Hold. Target is raised to $6.70 from $6.10.

WOOLWORTHS LIMITED ((WOW)) Downgrade to Lighten from Hold by Ord Minnett and Downgrade to Sell from Neutral by Citi .B/H/S: 0/4/3

The share price of Woolworths is now well above Ord Minnett's discounted cash flow valuation, with the PE multiple high at 26.6x FY19 estimates and 24.9x at FY20 estimates for 6.3% and 7.0% growth in earnings per share, respectively.

The $1.7bn off-market buyback has been supportive , and may remain so, but the broker suggests there could be some weakness to follow, as investors reassess. Rating is downgraded to Lighten from Hold and the target raised to $31 from $30.

German competitor Kaufland is looking to start a battle for its share of the Australian households' spending on groceries and Citi thinks this will act as the catalyst for a resumption of an industry-wide private label price war.

The analysts have, in anticipation, lowered long term margin assumptions for the incumbents Woolworths and Coles.This leads to lowered forecasts, and a lower valuation.

The price target for Woolworths falls to $28.75, the recommendation is downgraded to Sell from Neutral.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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