Weekly Ratings, Targets, Forecast Changes – 17-04-20

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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 April 13 to Friday April 17, 2020
Total Upgrades: 12
Total Downgrades: 15
Net Ratings Breakdown: Buy 49.67%; Hold 41.01%; Sell 9.32%

For the week ending Friday, 20th April 2020, FNArena registered 12 upgrades in recommendations for individual ASX-listed stocks against 15 downgrades.

It means that total Buy recommendations carried by the seven stockbrokers monitored daily has failed to rise above 50%; at least for now. As at Friday, total Buy recommendations stood at 49.61% while Neutral/Hold ratings represent 41% of the total and Sell recommendations are on 9.3%.

Only three out of the seven stockbrokers carry more Buy ratings than Neutral/Holds; Citi, Macquarie and Morgans.

Six out of the twelve upgrades went to Buy (50%) while only four fresh Sell ratings were counted among the 15 downgrades. One went to Whitehaven Coal (disappointing quarterly update) which received two downgrades in total.

Afterpay, Flight Centre and WiseTech Global were responsible for the remaining three downgrades to Sell.

Pretty much nothing was happening in terms of positive revisions to price targets/valuations, but some serious fireworks can be witnessed on the negative side, with G8 Education (capital raising) leading the queue of covid-19 recession victims, followed by the likes of Flight Centre, James Hardie, EclipX Group, and Whitehaven Coal.

The picture for positive revisions for earnings estimates looks slightly better, but only slightly with Metcash, OZ Minerals and Pushpay Holdings enjoying mild increases.

On the opposite side of the week's ledger we find scorched earth and chainsaw carnage been applied to forecasts for companies including Flight Centre, Qantas, QBE Insurance, G8 Education, and Sydney Airport.

As investors are increasingly showing their willingness to look beyond the immediate economic fall-out from the global pandemic, it will become of paramount importance to separate winners from losers, as illustrated by the week's changes.

Upgrade

ADELAIDE BRIGHTON LIMITED ((ABC)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 3/3/1

Despite the prospects of a recession, Ord Minnett believes there is significant potential value in quality companies, such as those that are category leaders with proven business models, strong liquidity and significant valuation support.

Adelaide Brighton's rating is upgraded to Accumulate from Hold and the target is lowered to $3.00 from $3.20.

BWP TRUST ((BWP)) Upgrade to Neutral from Sell by UBS .B/H/S: 0/1/1

UBS has reviewed its retail REIT valuations in light of the government's new landlord/tenant "code of conduct". While the code is tenant-friendly, the broker notes, there could be some offset for landlords in the form of state/local tax relief and covenant relief from banks.

Balance sheets and liquidity positions are generally sound but the broker expects June half dividends to be withheld and longer term payout ratios reduced to preserve capital.

Overall impact varies by REIT, subject to retail exposure. Upgrade to Neutral from Sell for BWP Trust, target rises to $3.37 from $3.24.

COCA-COLA AMATIL LIMITED ((CCL)) Upgrade to Neutral from Sell by Citi .B/H/S: 2/5/0

Citi expects 2020 Australian earnings will drop -1% and New Zealand -9%, given reduced sales in the out-of-home channel. This channel represents around 40% of volume but may be around 50% of earnings (EBIT) on the broker's estimates.

Moreover, coronavirus cases continue to grow in Indonesia and the company's products are likely to be adversely affected if celebrations around Ramadan are suppressed.

While shareholders are attracted to the high and consistent dividend pay-out , Citi envisages the dividend will drop, but only modestly to $0.46 from $0.51 in 2020, with Citi suggesting there is potential for it to fall as low as $0.42.

Rating is upgraded to Neutral from Sell, given the de-rating in the stock. Target is reduced to $10.10 from $10.60.

See also CCL downgrade.

CHARTER HALL RETAIL REIT ((CQR)) Upgrade to Buy from Neutral by UBS .B/H/S: 2/1/2

UBS has reviewed its retail REIT valuations in light of the government's new landlord/tenant "code of conduct". While the code is tenant-friendly, the broker notes, there could be some offset for landlords in the form of state/local tax relief and covenant relief from banks.

Balance sheets and liquidity positions are generally sound but the broker expects June half dividends to be withheld and longer term payout ratios reduced to preserve capital.

Overall impact varies by REIT, subject to retail exposure. Upgrade to Buy from Neutral for Charter Hall Retail, target falls to $3.50 from $4.80.

CSR LIMITED ((CSR)) Upgrade to Hold from Lighten by Ord Minnett .B/H/S: 2/2/2

Despite the prospects of a recession, Ord Minnett believes there is significant potential value in quality companies, such as those that are category leaders with proven business models, strong liquidity and significant valuation support.

CSR's rating is upgraded to Hold from Lighten and the target lowered to $3.80 from $4.00.

G8 EDUCATION LIMITED ((GEM)) Upgrade to Buy from Neutral by UBS and Upgrade to Neutral from Underperform by Macquarie .B/H/S: 1/4/0

UBS believes the government decision to support the childcare industry makes sense. The $301m equity raising has dramatically improved the balance sheet and should support the business through a period of weak conditions, the broker assesses.

This should also provide additional ability to fund acquisitions. On balance, UBS considers the risk/return is skewed to the upside and upgrades to Buy from Neutral. Target is reduced to $1.30 from $1.75.

G8 Education has raised $301m in 377 million new shares representing 82% of the prior issue. Government assistance is keeping the child care sector viable, Macquarie notes, with G8's revenues and cash costs expected to be breakeven, but includes a -20% rent reduction not yet locked in.

The raising has reduced balance sheet concerns and the broker has lifted its target to 78c from 50c, upgrading to Neutral from Underperform on expectation of short term share price strength. But Macquarie sees ongoing demand/supply challenges for the sector through to the end of 2021 and a structural drop in occupancy as a result of the virus.

INVOCARE LIMITED ((IVC)) Upgrade to Neutral from Sell by UBS .B/H/S: 3/3/0

InvoCare's business has been impacted by the government's funeral restrictions but UBS sees a greater risk ahead stemming from lower flu-related deaths this year due to measures imposed on the elderly for Covid-19.

InvoCare has de-risked its balance sheet in raising -$200m of new capital, which more importantly underpins the company's Protect & Grow and acquisition strategies.

The broker forecasts a -5% drop in volumes in FY20, with earnings gradually normalising by FY22. Target falls to $11.85 from $12.35. Upgrade to Neutral from Sell.

OZ MINERALS LIMITED ((OZL)) Upgrade to Add from Hold by Morgans .B/H/S: 6/0/1

Morgans observes OZ Minerals was quick to implement mitigation strategies in view of the coronavirus crisis and has reported no material adverse effects to date. Carrapateena's ramp up is ahead of schedule.

Deferral of $150m in 2020 expenditure has eased any pressure on what was already a strong balance sheet, the broker points out.

With the stock now trading at a -18% discount to valuation the rating is upgraded to Add from Hold. Target is reduced to $10.65 from $10.85.

Morgans trims 2020-21 estimates by -8-10% because of weaker copper prices.

PENDAL GROUP LIMITED ((PDL)) Upgrade to Add from Hold by Morgans .B/H/S: 4/3/0

Funds under management were down -15.2% in the March quarter. Net outflows were largely concentrated in the Westpac-managed funds under management.

Morgans considers market and share price volatility are likely to continue although, given a relatively undemanding valuation, the business is leveraged to any marked improvement.

Rating is upgraded to Add from Hold on valuation support. Target is raised to $6.37 from $5.81.

See also PDL downgrade.

PROSPA GROUP LTD ((PGL)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/2/0

Prospa Group has received access to the government's SME scheme to help small businesses through the lock down, while the government's Structured Finance Support Fund will materially assist non-ADI financial companies to manage customer assistance claims in a manner afforded ADIs (ie banks), Macquarie notes. 

The SME scheme, and potential SFSF access, alter the outlook for Prospa, the broker suggests. Upgrade to Neutral from Outperform. Target unchanged at 94c.

TRANSURBAN GROUP ((TCL)) Upgrade to Add from Hold by Morgans .B/H/S: 4/1/2

Morgans makes further slight downgrades to reflect a deteriorating traffic profile. FY20-21 operating earnings (EBITDA) estimates are downgraded -2-3%. The broker now assumes 2022 will be the year when traffic will fully recover.

While the traffic risk is heightened, the broker believes there is sufficient long-term value at current prices to accumulate the stock. Rating is upgraded to Add from Hold. Target is reduced to $13.71 from $13.78.

Downgrade

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

Morgans expects most lenders will offer moratoriums on debt of up to 6 months for home-loan borrowers facing hardship. The interest is expected to be capitalised and the loans unlikely to be classified as arrears or non-performing.

However, the issue the broker ponders is whether lenders will continue to pay trailing commissions in cases where moratoriums have been granted.

Morgans expects Australian Finance's board will be more conservative with dividend settings and significantly reduces earnings and dividend forecasts.

Rating is downgraded to Hold from Add and the target lowered to $1.70 from $3.25.

ALTIUM LIMITED ((ALU)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 2/1/0

Ord Minnett reassesses the stock since upgrading to Buy on February 28, noting it has outperformed the ASX 200 by 17%. Hence, the rating is downgraded to Hold from Buy. Target is reduced to $28.30 from $32.50.

AFTERPAY LIMITED ((APT)) Downgrade to Neutral from Buy by Citi and Downgrade to Sell from Neutral by UBS .B/H/S: 3/2/1

Citi continues to expect the business model will survive a recession and there is sufficient capital to accelerate growth when the situation normalises. However, growth is expected to slow significantly in the near term.

Merchant sales are expected to be negatively affected by weak consumer discretionary expenditure and more stringent risk controls.

Citi downgrades to Neutral/High Risk from Buy/High Risk. Target raised to $27.10 from $21.10.

The third quarter trading update was in line with UBS estimates. The broker considers the fall-out from the pandemic remains unclear and, while the balance sheet is strong and a capital raising unlikely, the business is fundamentally an unsecured consumer lending enterprise trading in the lead up to a severe recession.

Ultimately, UBS suspects the outcomes will be a function of how much growth the company is prepared to sacrifice to manage bad debts, and the severity of the pandemic. The broker's rating is downgraded to Sell from Neutral. Target is reduced to $13.00 from $13.20.

BLUESCOPE STEEL LIMITED ((BSL)) Downgrade to Neutral from Buy by Citi .B/H/S: 3/3/0

Citi now expects global GDP to contract by -2.3% in 2020, with advanced economies contracting by more than -4.5%.

The broker expects the first half of FY21 to be the most affected, with domestic despatches of steel down -11%. Citi forecasts US steel demand to fall by -20% in 2020.

EBIT estimates for BlueScope are cut by -37% for FY20. Rating is downgraded to Neutral from Buy. Target is lowered to $12 from $13.

COCA-COLA AMATIL LIMITED ((CCL)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/5/0

Ord Minnett reviews its investment thesis for Coca-Cola Amatil in light of the pandemic and resultant social distancing amid reduced tourism and weaker consumer activity.

Estimates are reduced by -19% for FY20 and -14% for FY21. The potential for cost savings is unclear, giving previous cost-saving initiatives.

Despite the recent decline in the share price, the broker assesses valuation support has been removed and the rating is downgraded to Hold from Accumulate. Target is lowered to $9.00 from $12.50.

See also CCL upgrade.

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

CSL has reiterated FY20 guidance and Citi retains forecasts at the top end of this range of US$2.11-2.17bn.

While CSL is yet to witness an impact from the pandemic on its specialty business and hospitals appear to be increasing stocks of immunoglobulin, plasma collections have dipped in late March.

Citi expects the slowdown will be temporary and collections should return to normal around July. Rating is downgraded to Neutral from Buy as a result of the recent increase in the share price. Target is raised to $334 from $332.

FLIGHT CENTRE LIMITED ((FLT)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 5/0/0

The capital raising has served to illustrate the severity of the impact of the pandemic on the travel sector. Ord Minnett remains unconvinced of whether Flight Centre has enough cash to survive the crisis, assuming little or no revenue for the next 12-18 months.

However, the prospect domestic travel opens up sooner than previously expected is a positive that could assist. Rating is downgraded to Lighten from Hold. The target is reduced to $8.96 from $21.54.

GWA GROUP LIMITED ((GWA)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 0/3/1

Lock-down measures in New Zealand and the UK are expected to substantially affect volumes, as Credit Suisse understands only emergency repairs are permitted. Government wage subsidies are available in both regions.

The broker models revenue to decline -14% in FY21 and end markets to trough in FY22.

The broker also notes the commercial exposure to aged care and the hotel sectors, which face challenges from social distancing and travel constraints.

Rating is downgraded to Underperform from Neutral and the target lowered to $2.20 from $3.65.

JAMES HARDIE INDUSTRIES N.V. ((JHX)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 5/1/0

Credit Suisse envisages a higher risk of an abrupt decrease in activity for the company, given its exposure to the repair & remodelling segments. This is around 60% of US sales.

FY21 group net profit estimates are reduced by -39%. Gearing is also uncomfortably high for the broker, although not expected to test covenants.

Rating is downgraded to Neutral from Outperform and the target lowered to $21.50 from $33.50.

NETWEALTH GROUP LIMITED ((NWL)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 1/4/1

Specialist platforms have been resilient in the March quarter, amid ongoing net inflows that have supported funds under management in both bull and bear markets.

Rising cash balances and higher transaction volumes have also provided a further buffer to revenue in soft markets.

As Netwealth has rallied 60% from recent intraday lows, Ord Minnett downgrades to Hold from Buy. Target is raised to $7.70 from $7.55.

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

A reduction in Pendal Group's March quarter assets under management of -15.2% outpaced that of the MSCI world index of -9% due to record outflows, UBS notes.

The broker expects an improvement into FY21 as virus-related volatility subsides, but still sees headwinds for flows and performance fees in the higher margin JOHCM funds, posing a key risk to consensus forecasts.

Given revenue pressures UBS expects cost controls to be a feature in the second half, but as the stock has rallied 55% off its lows the broker downgrades to Neutral. Target unchanged at $5.55.

See also PDL upgrade.

RESOLUTE MINING LIMITED ((RSG)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/0

The company has updated on the Syama oxide project in Mali. Strong results have been returned from satellite projects.

The company is evaluating an underground sulphide operation, although Macquarie believes an extension of the high-grade oxide open pit would be more meaningful for the near term.

The broker downgrades to Neutral from Outperform following recent strength in the share price. Target is lifted 5% to $1.05.

WHITEHAVEN COAL LIMITED ((WHC)) Downgrade to Underperform from Neutral by Macquarie .B/H/S: 4/2/1

The March quarter result was weak, in Macquarie's view, with production from all four operating mines below forecasts. Production guidance is unchanged and sales volume guidance has been reduced.

The broker expects Whitehaven Coal will miss production forecasts but achieve sales guidance in FY20.

Falling coal prices have heightened the downside risk to the broker's forecasts and the rating is downgraded to Underperform from Neutral. Target is reduced to $1.80 from $2.10.

WISETECH GLOBAL LIMITED ((WTC)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 1/2/0

Ord Minnett reassesses the stock since upgrading to Buy on February 28. As a result, the rating is downgraded to Hold from Buy and the target lowered to $16.70 from $18.70. Earnings estimates are unchanged.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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