Weekly Ratings, Targets, Forecast Changes – 19-08-19

This story features ALS LIMITED, and other companies. For more info SHARE ANALYSIS: ALQ

By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of seven major Australian and international stock brokers: Citi, Credit Suisse, 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 12 to Friday August 16, 2019
Total Upgrades: 24
Total Downgrades: 13
Net Ratings Breakdown: Buy 38.26%; Hold 44.12%; Sell 17.62%

The combination of the local share market seemingly hitting a speed bump and an acceleration in corporate results releases has swung around the dynamic in stockbroker ratings during the week ending on Friday, 16th August 2019.

For the week, FNArena registered 24 upgrades being issued for individual ASX-listed stocks against 13 downgrades. Previously, the pendulum had been firmly in favour of more downgrades.

Somewhat tempering the at face value positive turnaround is the observation only 12 out of the 24 upgrades moved to Buy; the other half got stuck in the Neutral/Hold section. In similar fashion, six of the 13 downgrades moved to Sell. This remains a hugely divided market.

Magellan Financial was the sole receiver of two downgrades to Sell. Star performer CSL is represented on both sides, as is Cleanaway Waste Management.

Plenty of target prices moving up by double digit percentages with take-over target Aveo Group commanding the week's top-of-the-table position, followed by AP Eagers (consolidation), James Hardie (result), Austal (new contract) and gold miner Evolution Mining.

The negative side looks a whole lot more sober, with Orora (result) suffering the largest reduction, followed by Appen, AGL Energy (result) and Tabcorp (result).

The week's table for positive revisions to earnings estimates is filled with large increases with Cooper Energy (result) on top, handsomely beating the likes of Evolution Mining (result), Treasury Wine Estates (result), Cleanaway Waste Management (result) and Breville Group (result).

On the negative side, and as should be expected, we find some of the early disappointers this August reporting season with Whitehaven Coal, AGL Energy, Insurance Australia Group and Woodside Petroleum receiving the largest cuts to forecasts.

The August reporting season speeds up a few notches this week, while the macro background remains closely watched by less than comfortable local investors.

Upgrade

ALS LIMITED ((ALQ)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/2/0

Credit Suisse upgrades to Outperform from Neutral on the back of an expected recovery in geochemistry. July marked the highest exploration activity for six months. The total number of exploration projects was up 36% on June.

Compositionally, gold and other exploration projects were up 46% and 18%, respectively. Credit Suisse expects this will deliver a re-rating of ALS shares, and the target is raised to $8.40 from $7.40.

The company has also acquired Laboratorios de Control ARJ, a pharmaceutical testing company based in Mexico.

AMP LIMITED ((AMP)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 1/5/1

First half results beat Credit Suisse estimates. The result was affected by lower earnings in the businesses that are up for sale but retained units were ahead of forecasts by 7%.

The broker now considers the price structure in the revised terms for the sale of the life business is more favourable, and the deal should gain regulatory approval. The company has also announced a $650m equity raising.

Credit Suisse upgrades to Outperform from Neutral (prior to a short restriction). Target is $2.

AVEO GROUP ((AOG)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/2/0

The company has entered into a scheme agreement with entities controlled by Brookfield Property for the acquisition of securities for $2.195, inclusive of the annual distribution of 4.5c.

Macquarie calculates the cash consideration represents an acquisition multiple of around 29x enterprise value/EBITDA. The broker upgrades to Neutral from Underperform and raises the target to $2.15 from $1.61.

AP EAGERS LIMITED ((APE)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/0/0

The merger with Automotive Holdings ((AHG)) is likely to drive material accretion and a consequent re-rating, Credit Suisse believes.

Since the merger announcement the stock has appreciated 51%, which mostly reflects merger dynamics. Credit Suisse upgrades to Outperform from Neutral.

2019 estimates allow for a -7% decline in first half earnings from both automotive and truck divisions, and a recovery is expected in automotive earnings in 2020. Target is raised to $12 from $7.

CSL LIMITED ((CSL)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/4/0

Net profit in FY19 was in line with Credit Suisse estimates. There was robust sales growth in key products although specialty sales declined in the second half.

Credit Suisse upgrades to Outperform from Neutral as earnings estimates are upgraded and the model is rolled forward. The broker remains cautious on the outlook for specialty products.

Target is raised to $249 from $199. As the stock is trading at a discount to key Australian healthcare peer Cochlear ((COH)) and in line with ResMed ((RMD)) upside is envisaged at current levels.

See also CSL downgrade.

CLEANAWAY WASTE MANAGEMENT LIMITED ((CWY)) Upgrade to Accumulate from Hold by Ord Minnett and Upgrade to Add from Hold by Morgans .B/H/S: 3/1/1

FY19 earnings were below Ord Minnett's forecasts. The broker suspects any general economic softness is likely to be a near-term headwind.

The Australian waste management industry is poised for structural change, with Cleanaway Waste ideally positioned to take advantage of any changes, in the broker's view.

Rating is upgraded to Accumulate from Hold and the target raised to $2.30 from $2.10.

FY19 results missed growth expectations as revenue was softer than expected. However, Morgans believes the share price has overshot on the downside and upgrades to Add from Hold. The company expects underlying operating earnings growth in FY20 to moderate slightly.

The broker notes the balance sheet is strong but, in a period where capital return initiatives are becoming increasingly common, the company prefers to retain its firepower to fund growth. Target is reduced to $2.31 from $2.56.

See also CWY downgrade.

FORTESCUE METALS GROUP LTD ((FMG)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/4/1

UBS upgrades to Neutral from Sell after the trade tensions and local growth weighed on the sector and the Fortescue Metal share price fell -16%. The target is reduced to $6.60 from $7.20.

GENWORTH MORTGAGE INSURANCE AUSTRALIA LIMITED ((GMA)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/1/0

Brookfield Business Partners has entered into a share purchase agreement for all the shares in Genworth Canada.

Macquarie observes the transaction would be removing one of the barriers in completing the acquisition of Genworth Financial by China Oceanwide, which still needs to receive clearance for currency conversion and funds transfer from Chinese authorities.

Macquarie upgrades Genworth Australia to Outperform from Neutral, given the recent decline in the share price and the increase in Genworth Financial's capital flexibility. Target is $3.25.

INVOCARE LIMITED ((IVC)) Upgrade to Neutral from Sell by Citi .B/H/S: 0/6/0

InvoCare's interim report came out below expectations and has triggered reductions for future estimates. Citi has decided to upgrade to Neutral from Sell, inspired by the share price fall, while leaving its price target unchanged at $13.75.

All in all, the analysts continue to expect a normalisation of the death rate, which should make management's task a lot easier in the years ahead. They note the company did not provide any guidance, but also there is a significant amount of operational leverage that will kick in with better numbers.

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

First quarter results were stronger than UBS expected and the outlook remains robust. The broker upgrades to Buy from Neutral.

Volume growth in the US was partially the result of  improved management of distribution channels, management asserts, rather than channel stocking or a pulling forward of sales.

UBS assesses the outlook for margins is strong, as both input costs and cost reductions are supportive. UBS raises the target to $23.80 from $19.90.

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

Citi has upgraded to Buy from Neutral with a revised price target of $2.65 (we had $3.01 since May) while asserting the share price has fallen too far. On the stockbroker's forecasts, the stock is now trading at a -38% discount to the Small Ordinaries.

The analysts acknowledge the risks associated with being a contractor to the mining sector, but nevertheless believe the present discount is simply "excessive".

Revised forecasts assume any exposure to the Dalgaranga Gold project will be written off, plus lower group margins are also assumed.

NEWS CORPORATION ((NWS)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/0/1

Credit Suisse found the FY19 results solid and ahead of expectations, despite a miss at the revenue line. The highlight has been the relatively consistent performance of news and information services.

The focus on value is also more evident. The value of the company's assets, excluding REA Group ((REA)), has effectively halved since the split from Fox back in 2013 and Credit Suisse does not believe this is justified.

An increasing focus on value by management can act to close the gap. Rating is upgraded to Outperform from Neutral and the target raised to $22.50 from $18.90.

ORORA LIMITED ((ORA)) Upgrade to Equal-weight from Underweight by Morgan Stanley and Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/3/0

FY19 earnings were below Morgan Stanley's estimates. Australasia was modestly ahead but North America was soft. No guidance was provided. Further challenging conditions are expected in FY20, amid cost pressures.

Morgan Stanley assesses the difficult outlook is now encapsulated in the share price and upgrades to Equal-weight from Underweight. Price target is reduced to $3.00 from $3.20. Sector view is Cautious.

FY19 net profit was below estimates. Cash conversion was also lower than expected. Ord Minnett was disappointed with the performance in North America, where the earnings (EBIT) margin fell to 4.5% from 5.6%. Australasian earnings were ahead of forecasts.

Nevertheless, after the sell-off in the share price, the broker envisages value at current levels and upgrades to Accumulate from Hold. Target is reduced to $3.00 from $3.40.

REA GROUP LIMITED ((REA)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 2/3/1

Ord Minnett believes the worst of the property downturn is behind the company and there is flexibility around costs. FY19 net profit was below the broker's forecast.

Margin expectations are increased for FY20-21 because of a much lower cost base. Listings are also expected to improve going into the second quarter when easier comparables will be cycled.

Rating is upgraded to Hold from Lighten and the target raised to $90 from $71.

RIO TINTO LIMITED ((RIO)) Upgrade to Buy from Hold by Ord Minnett .B/H/S: 3/3/1

Following a significant market sell-off, Ord Minnett trims near-term iron ore and metallurgical coal price forecasts by -5%. The broker suggests a trading opportunity has opened up, given the aggressive -20% sell-off in Rio Tinto, versus BHP Group ((BHP)) at -12%.

Further Chinese policy support is considered likely, despite the uncertainty around trade tensions and the steel production outlook. The broker upgrades Rio Tinto to Buy from Hold. Target is reduced to $105 from $106.

REGIS RESOURCES LIMITED ((RRL)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 0/2/5

Ord Minnett updates gold price forecasts, which are now 3-7% higher across the forecast period. The broker upgrades Regis Resources to Hold from Lighten following the change. Target is raised to $5.30 from $4.50.

SUPER RETAIL GROUP LIMITED ((SUL)) Upgrade to Add from Hold by Morgans and Upgrade to Accumulate from Hold by Ord Minnett and Upgrade to Buy from Neutral by UBS .B/H/S: 5/2/0

FY19 results were in line with Morgans. The broker expects benign growth in FY20, with management noting there are some positive signs in consumer behaviour at the start of the new financial year.

Morgans envisages upside to the current multiples and upgrades to Add from Hold. Target is raised to $9.87 from $9.01.

FY19 results were below forecasts although Ord Minnett notes the external environment is improving.

The broker believes the company has an attractive business mix, anchored by a resilient automotive business and sports segments that are benefiting from cost savings.

While outdoor has been disappointing, BCF is showing signs of stabilising and Macpac has been a strong performer despite tough comparables.

Rating is upgraded to Accumulate from Hold and the target raised to $10.00 from $9.50.

Underlying earnings (EBIT) were below estimates in FY19 but FY20 trading in the early stages is encouraging and UBS upgrades to Buy from Neutral.

The upgrade reflects accelerating momentum in July sales, with no material shift in discounting as well as upside from tax reductions. The broker raises the target to $9.90 from $9.00.

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

FY19 results and FY20 guidance, at first glance, are better than Ord Minnett expected. However, once the impact of new lease accounting standards are incorporated, guidance is slightly below expectations.

Management has targeted lower capital intensity in the outer years post the NBN migration. This leads Ord Minnett to raise the target to $4.25 from $3.55. Rating is upgraded to Accumulate from Hold.

WOODSIDE PETROLEUM LIMITED ((WPL)) Upgrade to Add from Hold by Morgans and Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 2/4/1

First half results were weaker than Morgans expected. The result was driven by extra costs attributed to Pluto. The broker has gained some confidence in the prospect of the Browse JV signing a gas processing agreement with the North West Shelf.

While finding fears around longer-term LNG supply risks justified, Morgans also envisages upside for global LNG demand. The broker upgrades to Add from Hold and reduces the target to $34.97 from $35.24.

First half financials were weaker than expected. Moreover, management commentary did little to ease Ord Minnett's concerns about the viability of development projects.

Still, the stock is trading below the broker's risk-weighted valuation, leading to an upgrade to Hold from Lighten. Target is reduced to $32.50 from $33.70.

Downgrade

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

Morgans was unimpressed with news of the resignation of AdAlta's chief executive officer Sam Cobb, noting six months of solid progress which included the completion of a $5m placement and entitlement offer.

The broker adjusts its model to include the issuance and places a -25% discount on the valuation to account for leadership uncertainty and also delays near-term licensing and long-term commercialisation assumptions.

Target price falls to 18c from 82c and rating downgraded to Hold from Add.

AUSTRALIAN FINANCE GROUP LTD ((AFG)) Downgrade to Hold from Add by Morgans .B/H/S: 1/1/0

Australian Finance Group has entered into a binding merger with mortgage aggregator Connective Group Pty Ltd. The broker believes the deal will prove earnings-per-share accretive, pending approvals – a major proviso.

The deal will hang on court and ACCC approval and the risk is high enough for the broker not to factor completion into earnings forecasts and valuations.

Meanwhile, the company's full-year result outpaced consensus by 7.5% and the broker expects consensus upgrades to outer year earnings.

Target price rises to $2.30 from $2. The broker downgrades to Hold from Add.

ANSELL LIMITED ((ANN)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 2/5/0

FY19 earnings were ahead of Credit Suisse estimates. However, the top line disappointed, as global markets weakened further. The broker notes FY20 is all about cost reductions and the buyback.

Credit Suisse forecasts FY20 earnings per share of US$1.17, aided by the US$10m earnings (EBIT) benefit from the transformation program and a modest tailwind from raw material costs.

The broker includes a US$70m buyback in FY20 estimates. Following the strong share price performance the rating is downgraded to Neutral from Outperform.

Credit Suisse remains cautious about the continued weakness in the global environment and the impact on revenue and earnings. Target is reduced to $28.00 from $28.60.

ALLIANCE AVIATION SERVICES LIMITED ((AQZ)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/2/0

Ord Minnett downgrades to Hold from Buy following the FY19 results, which were broadly in line with forecasts. The business remains strong but, with an expanding fleet, the broker suspects the pressure on expenditure will remain.

The broker also notes the ACCC is continuing to review the Qantas ((QAN)) stake and the process is likely to conclude in coming months. Target is reduced to $2.60 from $2.90.

AUSTAL LIMITED ((ASB)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/2/0

Earnings (EBIT) guidance for FY19 of $92m has been provided, consistent with prior revenue guidance of $1.8-1.9bn, Ord Minnett notes.

FY20 earnings guidance of at least $105m is ahead of expectations, driven by an improvement in the Australasian shipyards as well as a strong performance at the two major vessel programs for the US.

Austal now holds a substantial order book of commercial ferry contracts following major expansion in the Philippines and the establishment of the leased shipyard in Vietnam.

Ord Minnett downgrades to Hold from Accumulate, assessing the recent run in the share price means the stock is now fully valued. Target is raised to $3.60 from $2.45.

AURIZON HOLDINGS LIMITED ((AZJ)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 1/4/1

Aurizon's full-year result beat the broker (+4%) and consensus (+6%), thanks to a reversal of a QNI bad debt.

The highlight was the capital restructure which will unlock $1.2bn to underpin an extension of the $0.3bn buyback, which should boost earnings per share.

Otherwise, networks eased -1%, and coal -2%, and bulk posted a strong performance.

Earnings per share forecasts rise 1.5% in FY20 and ease -1% in FY21.

Macquarie perceives Aurizon's valuation as stretched and retains an underperform rating. Target price $5.28.

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

FY19 results were in line with UBS estimates. In updating key operating assumptions the broker increases estimates for earnings per share in FY20 by 4%.

Seqirus EBIT in FY19 was US$154m, on track to hit guidance. Behring revenue growth of 10% was underpinned by immunoglobulin.

Based on the recent performance in the share price UBS downgrades to Neutral from Buy. Target is raised to $245 from $223.

See also CSL upgrade.

CLEANAWAY WASTE MANAGEMENT LIMITED ((CWY)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 3/1/1

Cleanaway's FY19 result was largely in line with forecasts but FY20 guidance has been impacted by China's new policies on exported waste.

These have led to volatile recycled material prices and increased waste sorting costs, Credit Suisse notes. Management has refrained from reaffirming margin assumptions.

The broker downgrades to Underperform from Neutral, cutting its target to $1.85 from $2.15.

See also CWY upgrade.

EVOLUTION MINING LIMITED ((EVN)) Downgrade to Sell from Neutral by Citi .B/H/S: 0/3/4

It appears FY19 revealed itself as a small "miss" by circa -3%%, but Citi's downgrade to Sell from Neutral has been inspired by the elevated share price. The company released full FY19 production numbers only last month, point out the analysts.

Citi analysts point out the share price has enjoyed a jolly good ride on the back of the balance sheet deleveraging over years past, but that story is nearing its end. Higher wage costs are reducing future estimates. Target drops by -10c to $4.20.

JB HI-FI LIMITED ((JBH)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 0/5/2

Sales growth for JB Hi-Fi was better than Morgan Stanley feared in the fourth quarter, accelerating to 3.3%. July trading is also better than expected, although the broker notes the business was lapping relatively easy comparables.

The outcome for JB Hi-Fi was solid in FY19, when set against market concerns regarding the lack of post-election momentum. However, Morgan Stanley notes, The Good Guys is experiencing a tough demand backdrop for white goods.

FY20 estimates are increased by 0.5%. Ultimately, the broker suggests the near-term outlook will test the flexibility of the company's model.

Rating is downgraded to Equal-weight from Overweight after the recent outperformance in the shares. Target is $28. Industry view: Cautious.

MAGELLAN FINANCIAL GROUP LIMITED ((MFG)) Downgrade to Sell from Neutral by Citi and Downgrade to Sell from Hold by Ord Minnett .B/H/S: 0/1/5

FY19 results were broadly in line with expectations. Citi finds the risk/reward less compelling now as the stock is trading well above peers, performance fees are lumpy and the medium-term growth prospects are some time away.

Rating is downgraded to Sell from Neutral. The broker believes the company has taken an innovative approach to funds management, offering eligible investors 7.5% loyalty units if they subscribe to the new high conviction trust IPO. Target is steady at $54.

Ord Minnett downgrades to Sell from Hold on valuation grounds. While supporting the strategy to continue investing in listed structures through manager-funded priority offers, the broker considers this simply an incremental driver of growth.

The company has raised capital to further invest in listed products, which tend to come with loyalty bonuses funded by the manager.

While supportive of the building of direct-to-consumer relationships and retirement products, Ord Minnett believes the market is paying up for success. Target is raised to $49.60 from $40.33.

MIRVAC GROUP ((MGR)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 1/1/2

FY19 results were in line with Credit Suisse estimates. The earnings outlook for FY20 is better than the broker expected. The company is guiding for free funds from operations of 17.6-17.8c per security, indicating growth of 3-4%.

The growth in recurring income is the key positive, in the broker's view. Residential pre-sales have trended lower but the broker expects FY20 should be a strong year for residential earnings.

Rating is downgraded to Underperform from Neutral on valuation grounds. Target is raised to $3.04 from $2.85.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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