Weekly Ratings, Targets, Forecast Changes

This story features BLACKMORES LIMITED, and other companies. For more info SHARE ANALYSIS: BKL

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 27 to Friday May 31, 2019
Total Upgrades: 8
Total Downgrades: 17
Net Ratings Breakdown: Buy 40.33%; Hold 43.20%; Sell 16.47%

For the week ending Friday, 31st May 2019, FNArena registered 17 downgrades in recommendations for individual ASX-listed stocks against only eight upgrades.

Further adding to the somewhat lopsided picture is that only three of the upgrades moved to Buy with five upgrades stopping at Hold/Neutral. The three fresh Buy rating all came from stockbroker Morgans and went to Costa Group, Genex Power and OZ Minerals.

Vocus Group was the sole recipient of two upgrades during the week, after the company received take-over interest. Both upgrades moved to Neutral.

Then again, only five out of the 17 downgrades moved to Sell. BlueScope Steel received two downgrades, of which one to Sell, and so did QBE Insurance, with both downgrades moving to Neutral.

With exception of Vocus Group, not much is happening with positive revisions to valuations and price targets. There's only a bit more action on the negative side where BlueScope Steel, Domino's Pizza and GUD Holdings might be worth investor attention.

A similar picture emerges for changes to earnings estimates. On the positive side, Fisher & Paykel Healthcare stands out (following profit update), while on the negative side Costa Group's most recent profit warning makes its impact felt, followed by reduced forecasts hitting Xero, and Freedom Foods Group.

Upgrade

BLACKMORES LIMITED ((BKL)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 0/5/1

Reports suggest Australia's flu season is extensive and well ahead of any of the previous five years at this early stage. Morgan Stanley believes this will translate into strong support for sales in the fourth quarter of FY19 and first quarter of FY20.

There is also greater confidence in the cost reduction program, which should support near-term earnings growth. Morgan Stanley upgrades to Equal-weight from Underweight and raises the target to $84 from $75. Industry view is: Cautious.

COSTA GROUP HOLDINGS LIMITED ((CGC)) Upgrade to Add from Hold by Morgans .B/H/S: 4/1/0

It was a litany of disaster for Costa in May. Variable harvest conditions for Moroccan blueberries, not cold enough for mushroom demand, crumbly raspberries and a fruit fly spotted in one of the companies seven citrus orchards. Morgans has "materially" rebased its FY20-21 forecasts as a result of the profit warning.

The broker remains concerned about fruit fly, as a breakout could result in millions per annum to treat the entire citrus crop. But otherwise the broker remains attracted to Costa's portfolio approach, geographic diversity and protected cropping techniques. Taking on board fruit fly risk Morgans upgrades to Add from Hold following yesterday's sell-off, anticipating normalisation from a month best forgotten.

Target falls to $4.77 from $5.68.

See also CGC downgrade.

COLES GROUP LIMITED ((COL)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 0/6/1

Credit Suisse believes Coles can accelerate sales growth over the medium term as it develops digital capability and addresses weakness in its fresh and convenience product range.

A lag in supply chain modernisation is the central competitive risk, in the broker's view, and costs are likely to be above Woolworths ((WOW)) for several years.

Rating is upgraded to Neutral from Underperform and the target raised to $11.83 from $10.81.

GENEX POWER LIMITED ((GNX)) Upgrade to Speculative Buy from Hold by Morgans .B/H/S: 1/0/0

Morgans is confident the K2-H project will go ahead although warns investors they need to be aware that, as the bulk of the stock's value comes from this project, this increases the risk.

Management has targeted June 2019 for financial close on both this project and Jemalong. The broker also updates assumptions for the K2-Solar and K3-Wind projects.

Morgans upgrades to Speculative Buy from Hold and raises the target to $0.29 from $0.25.

OZ MINERALS LIMITED ((OZL)) Upgrade to Add from Hold by Morgans .B/H/S: 4/3/1

Morgans believes the stock's retreat of nearly -20% since early April is overdone. The broker suspects sentiment is the culprit because of ongoing US/China trade uncertainty.

The broker suspects marginal investors use OZ Minerals as a proxy for the outlook for both the copper market and global growth, given its status as the largest and most liquid ASX-listed pure copper play.

The broker marks down copper prices for 2019-21 and raises gold assumptions for 2019. Overall, earnings forecasts improve by 6% over 2019-20 but are -12% lower for 2021.

Rating is upgraded to Add from Hold, as the current valuation is a key buy trigger, Morgans suggests. Target is reduced to $11.27 from $11.40.

SIGMA HEALTHCARE LIMITED ((SIG)) Upgrade to Neutral from Sell by Citi .B/H/S: 0/1/3

Since its FY19 result, Sigma has entered into a new community service obligation deed with the Commonwealth government which has provided some certainty around payments until at least June 2020.

Also, the company has provided more clarity around the cost reductions in relation to the loss of a major contract. Finally, with the re-election of the Coalition this suggests the government will be more supportive of existing regulations around the pharmacy distribution industry.

Citi now upgrades to Neutral/High Risk from Sell/High Risk while the target is steady at $0.52.

VOCUS GROUP LIMITED ((VOC)) Upgrade to Neutral from Underperform by Macquarie and Upgrade to Neutral from Sell by UBS .B/H/S: 1/6/0

The company has confirmed the receipt of a non-binding, indicative proposal at $5.25 a share. Macquarie believes the offer from EQT Infrastructure assumes strong execution on the strategic turnaround at Vocus on the back of recent and ongoing initiatives.

The broker upgrades to Neutral from Underperform and raises the target to $4.70 from $3.25. Should the due diligence not lead to a binding offer, and in the absence of other offers, the broker expects the stock price to return to around $4.15.

The company has received a non-binding indicative proposal at $5.25 a share from EQT Infrastructure, a Scandinavian private equity group.

UBS observes several factors have led to an increase in price versus previous bids, including improved free cash flow conversion and a new management team.

The broker upgrades to Neutral from Sell and raises the target to $4.60 from $3.10.

Downgrade

ATOMOS LIMITED ((AMS)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

The company has updated on prospectus forecasts and now expects FY19 revenue to be over $50m. Pro forma operating earnings (EBITDA) of $1.4m are expected. Morgans assesses the business is gaining traction on new products, particularly as it expands into more consumer oriented business.

The broker downgrades to Hold from Add, following strong share price appreciation. Given the scalable manufacturing operation, the broker points out that additional partnerships can move the dial in terms of revenue/earnings uplift. Target is raised to $1.42 from $0.90.

ANSELL LIMITED ((ANN)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 3/5/0

Raw material pricing trends have been favourable and there are incremental benefits from the transformation program, Macquarie observes. Yet weaker macro economic trends present downside risk to near-term earnings.

Despite an undemanding valuation, the broker downgrades to Neutral from Outperform because of reduced confidence in the macro economic outlook. Target is lowered to $26.90 from $28.20.

BLUESCOPE STEEL LIMITED ((BSL)) Downgrade to Underperform from Outperform by Macquarie and Downgrade to Neutral from Buy by UBS .B/H/S: 2/4/1

Input costs are putting pressure on spreads and global conditions are turning down, overcoming easing risks in Australian end markets, Macquarie observes.

An altered US tariff regime, ongoing trade issues with China and softening economic indicators are posing risks to the outlook. The broker believes there is a high probability of negative earnings revisions in coming months.

Rating is downgraded to Underperform from Outperform and the target is lowered to $10.15 from $14.60. FY20 and FY21 net profit estimates are downgraded by -14% and -15% respectively.

The removal of Canadian & Mexican steel tariffs and high iron ore prices as well as softening demand for housing in Australia all conspire to put pressure on the business, UBS believes. Rating is downgraded to Neutral from Buy.

FY20 and FY21 estimates for earnings are cut by -36%. Despite weakening US spreads, the broker believes the company will still push ahead with the expansion of North Star as this is the right strategy for the long-term. Target is reduced to $13 from $16.

COSTA GROUP HOLDINGS LIMITED ((CGC)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 4/1/0

The company has sharply downgraded 2019 guidance, now expecting profit growth in a range of 1-17% as opposed to 30%. Macquarie reduces estimates for 2019 and 2020 earnings per share by -23% and -22% respectively.

Conditions have changed abruptly since early May, with a late season in Morocco putting pressure on prices while, locally, poor quality fruit has led to a large amount of wastage. Macquarie downgrades to Neutral from Outperform. Target is reduced to $4.05 from $6.03.

See also CGC upgrade.

CSR LIMITED ((CSR)) Downgrade to Sell from Neutral by Citi .B/H/S: 1/2/4

Citi observes the shares have strongly outperformed this year, amid easing alumina cost concerns and the boost in housing market sentiment. The stock has now priced in the rally and the broker downgrades to Sell from Neutral. Target is $3.50.

The broker believes the recent court decision in Brazil to lift production restrictions at Alunorte should help improve supply but this may not be of help to CSR. CSR recently secured a new contract for half of its alumina requirements at around 18-18.5% linkage to the LME aluminium price.

DOMINO'S PIZZA ENTERPRISES LIMITED ((DMP)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 1/4/2

Softer same-store sales growth and fewer store openings lead Morgan Stanley to lower forecasts, believing earnings risk has increased. While the broker still envisages great opportunity in Europe, execution needs to improve to sustain a re-rating.

Morgan Stanley downgrades to Equal-weight from Overweight and lowers the target to $41 from $50. Cautious industry view.

After over 10 years of strong double-digit growth the Australasian business is also slowing. The broker agrees a greater focus on franchisee health is the right strategy but is likely to affect growth in the near term.

DOWNER EDI LIMITED ((DOW)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 4/0/1

The company's partner in the Murra Warra wind farm project, Senvion GmbH, has filed for self-administration in Germany. Despite Downer's minor share in the project it is jointly and severally liable under the contract.

Downer has indicated it has substantial bank guarantees from Senvion. Credit Suisse suspects the catalyst for the market update is the court-appointed custodian may be attempting to offload the cost of completing the project to Downer and the bank guarantee may be insufficient to cover the liability.

Downer is assessing any impact on guidance for FY19. Rating is downgraded to Underperform from Neutral and the target lowered to $7.10 from $7.40.

ESTIA HEALTH LIMITED ((EHE)) Downgrade to Neutral from Buy by UBS .B/H/S: 0/4/0

The company has downgraded underlying earnings guidance by -6% at the mid point for FY19, as occupancy deteriorates. The company now expects like-for-like EBITDA to be $86-88m.

UBS notes the share price has risen 27% since the beginning of 2019 despite the weakening outlook and pressure on staff costs.

With the possibility of a more favourable policy environment under a Labor government now removed, and meaningful sector reform unlikely until the final report from the Royal Commission is tabled, the broker believes the operating environment in the near term is challenging.

Rating is downgraded to Neutral from Buy and the target lowered to $2.85 from $3.00.

G.U.D. HOLDINGS LIMITED ((GUD)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 4/1/0

Channel checks of the auto market conducted by Credit Suisse suggest after-market growth is trending lower and competition is increasing among part suppliers. The broker notes that while GUD has an excellent track record of navigating through increased competition in the past, its relative reliance on auto is now greater than it ever has been.

Credit Suisse has not changed forecasts but sees sufficient downside risk emerging to warrant a pullback to Neutral from Outperform. Target falls to $12.00 from $13.35.

KIDMAN RESOURCES LIMITED ((KDR)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/1/0

Ord Minnett reduces forecasts for global supply of lithium by -8% in 2020 and -14% in 2021, although continued market surplus is still considered likely.

The broker lowers battery-grade price expectations for the next two years by -10%, to US$11,500-12,000/t of lithium carbonate equivalent, and concentrate pricing by -14% to US$550/t.

Rating is downgraded to Hold from Speculative Buy and the target reduced to $1.90 from $3.00.

METCASH LIMITED ((MTS)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/1/3

Credit Suisse believes the widening digital capability gap is another headwind for independent food retailers. While making no changes to forecasts, the broker downgrades Metcash to Underperform from Neutral because of the recent appreciation in the share price.

Fragmented decision-making in relation to investment and implementation of digital strategies are likely to be significant structural barriers, Credit Suisse adds. Target is steady at $2.69.

NRW HOLDINGS LIMITED ((NWH)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/2/1

Demand in the company's core markets continues to improve and Citi envisages upside risk to forecasts from further contract gains and better-than-expected margins. However, the broker considers the stock fairly valued and downgrades to Neutral from Buy.

A key concern is the credit risk associated with the $55m per annum Dalgaranga project. The company provided a $12m working capital facility in December 2018 and also had to support a capital raising by the project owner. Target is raised to $3.01 from $2.52.

PILBARA MINERALS LIMITED ((PLS)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 2/0/0

Ord Minnett reduces forecasts for global supply of lithium by -8% in 2020 and -14% in 2021, although continued market surplus is still considered likely.

The broker lowers battery-grade price expectations for the next two years by -10%, to US$11,500-12,000/t of lithium carbonate equivalent, and concentrate pricing by -14% to US$550/t.

Ord Minnett lowers its rating to Lighten from Hold. Target is unchanged at $0.65, as falling concession prices add pressure for improved operating rates in order to deliver positive cash flow.

QBE INSURANCE GROUP LIMITED ((QBE)) Downgrade to Neutral from Outperform by Macquarie and Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 5/2/1

Macquarie notes some regions in the US have now passed final crop planting dates and this is expected to trigger claims on some crop insurance policies. US crop is QBE's largest exposure and with downside risk growing Macquarie downgrades to Neutral from Outperform.

The broker believes US crop risks are poised to de-rail the company's FY19 results. Industry articles are recommending farmers do not plant crops at all and instead submit insurance claims for their maximum coverage.

Should the attritional loss ratio for QBE's US crop portfolio deteriorate -5%, Macquarie estimates this could result in a -5.8% hit to cash earnings in FY19. Target is reduced to $12.90 from $13.20.

The share price has outperformed the market over the past three months and moved close to the target. Credit Suisse reviews the earnings outlook and key drivers for the next leg up in the share price.

While the company is benefiting from favourable premium rates and early-stage expense efficiency, it also faces a slowdown in the important lender mortgage insurance division, as well as increased volatility from adverse weather claims.

Rating is downgraded to Neutral from Outperform. Target is steady at $13.

TELSTRA CORPORATION LIMITED ((TLS)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/2/3

Telstra has updated guidance around restructuring costs and asset impairment. Management now expects -$800m of restructuring costs to be incurred in FY19 and has also guided to a further -$350m post FY19.

The company also plans to write down the carrying value of its legacy IT systems by -$500m. Ord Minnett downgrades to Hold from Accumulate based on valuation. Target is unchanged at $3.55. FY19 and FY20 earnings estimates are unchanged.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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