Weekly Ratings, Targets, Forecast Changes – 19-06-20

This story features COSTA GROUP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: CGC

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 June 15 to Friday June 19, 2020
Total Upgrades: 13
Total Downgrades: 20
Net Ratings Breakdown: Buy 49.71%; Hold 40.89%; Sell 9.40%

Today’s dichotomy in the Australian share market is reflected in research updates released by stockbroking analysts.

On the one hand, underlying trends in earnings estimates and share price valuations and targets have turned positive.

On the other hand, the balance between recommendation upgrades and downgrades has turned in favour of more downgrades – often the same companies enjoying positive momentum in forecasts and price targets are the same ones receiving recommendation downgrades.

Today’s dilemma for investors couldn’t be made any clearer.

For the week ending Friday, 19^th June 2020, FNArena registered thirteen upgrades versus twenty downgrades for individual ASX-listed stocks.

Only two of the upgrades didn’t move past Neutral/Hold, whereas four of the downgrades sank to a fresh Sell.

Carsales and Megaport both received two downgrades, all four to Neutral, after stellar rallies in both share prices recently.

Fresh sell ratings were reserved for the ASX, InvoCare, Regis Resources, and Star Entertainment.

Negative changes to consensus price targets during the week are hardly worth paying attention to, but the positive side reveals plenty of fireworks, including for Viva Energy Group, Healius, and Premier Investments.

The situation is similar, though not quite as extreme, for the week’s adjustments to earnings forecasts.

Heavy downward adjustments were made for Ardent Leisure, Sims Metal Management, and Crown Resorts but these are dwarfed by what is occurring on the positive side of the ledger.

Nine of the top ten largest increases to consensus forecasts all come in double digit percentage, with the week’s top scorer -Oil Search- almost doubling the prior estimate.

Other big gainers include Viva Energy Group, Qantas, Nufarm, and Air New Zealand.

After a brief peek above the 50%, total percentage of Buy/Outperform ratings for the seven brokers covered has now fallen back to 49.71% – still very high by historical standards.

Total Neutral/Hold recommendations take up 40.89% of the total, while Sell ratings account for the remaining 9.40%.

Upgrade

COSTA GROUP HOLDINGS LIMITED ((CGC)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 3/2/0

Pandemic-related restrictions are being eased in Australia with sequential improvement in the food service sector. Meanwhile, Macquarie notes produce pricing remains solid and seasonal conditions robust.

Rating is upgraded to Neutral from Underperform. While Costa Group is at the higher end of the investment risk spectrum, Macquarie believes the bar is now set lower after a recent decline in the share price. Target is $2.87.

CROWN RESORTS LIMITED ((CWN)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 5/1/0

Morgan Stanley switches its preference to Crown Resorts and upgrades to Overweight from Equal-weight. Target is raised to $12.00 from $6.60. The broker believes there is now more reliance on the domestic market, given travel restrictions.

This will become a fight for market share and Crown Sydney, which opens in December, is expected to be the winner. With capacity restrictions, Morgan Stanley does not forecast a recovery until FY22. Industry view: Cautious.

FIRSTWAVE CLOUD TECHNOLOGY LIMITED ((FCT)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

Firstwave Cloud Technology has completed a $15m capital raising, and on rising sales and tight cost control should reach cash flow breakeven by end-2022, Morgans estimates. With funding now settled, management can return focus to the business.

For Firstwave, the key to growing sales revenue is to continue adding distributors who pay to use the company's comprehensive cyber security offering, the broker suggests. Upgrade to Speculative Buy from Hold, target rises to 16.5c from 10.6c.

FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED ((FPH)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/0/3

In the US, Macquarie has research that indicates hospitalisation rates for the pandemic imply a high severity flu season. For the company, hospitalisation rates are a key driver of demand for consumables.

The broker assesses earnings momentum, combined with upside risk presented by second coronavirus wave, is compelling. Rating is upgraded to Outperform from Neutral. Target is raised to NZ$30.97 from NZ$25.02.

HEALIUS LIMITED ((HLS)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 3/1/0

Healius will sell its 69 medical centres, 13 Health & Co practices and 62 dental clinics for $500m. Proceeds of $470m are expected on completion. The sale to BGH Capital requires approval from the Foreign Investment Review Board and should be completed this year.

Meanwhile, trading conditions have improved in recent weeks with pathology revenue close to prior year levels and radiology revenue down in just single digits.

Credit Suisse raises FY20 earnings estimates by 20% and FY21 by 14%, expecting a stronger recovery from the pandemic.

Rating is upgraded to Outperform from Neutral, as the broker assesses the stock is trading in line with the multiple paid for medical centres, which is the least attractive and lowest-return business unit. Target is raised to $3.25 from $2.47.

See also HLS downgrade.

METCASH LIMITED ((MTS)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 3/3/0

Morgan Stanley anticipates a strong update for April and May. The broker believes Metcash merits a higher multiple, given its earnings diversification and balance sheet strength.

Industry feedback suggests the company's food business has taken share over the period of the lockdowns.

Morgan Stanley remains positive on the supermarket segment because of easing food deflation and discounters being less of a headwind.

Rating is upgraded to Overweight from Equal-weight and the target raised to $3.30 from $2.90. Cautious industry view.

PREMIER INVESTMENTS LIMITED ((PMV)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 3/2/0

In light of recent online sales growth, Macquarie is of the view that the company's businesses are well-placed in terms of both brand and sales channels. Peter Alexander, Just Jeans and Portmans performed well over May.

The broker continues to assume some short-term rental relief and wage subsidies. Still, Macquarie is cautious about foot traffic, particularly in the UK. Rating is upgraded to Outperform from Neutral and the target raised to $20.11 from $12.62.

RELIANCE WORLDWIDE CORPORATION LIMITED ((RWC)) Upgrade to Outperform from Neutral by Credit Suisse .B/H/S: 4/2/0

Credit Suisse increases estimates for net profit by 53% in FY20 and 22% in FY21. The contractor outlook in the US has improved materially.

Reports are more mixed in the UK and sales are expected to be down -20-30% amid weakness in the renovation segment.

The broker is more confident Reliance Worldwide can outperform peers and upgrades to Outperform from Neutral. Target is raised to $3.25 from $2.70.

SEEK LIMITED ((SEK)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/1/1

UBS upgrades earnings expectations, anticipating most of the weakness in employment is behind us and job volumes are likely to be flat to slightly ahead from now on.

The broker also envisages potential for some of the new base costs to hold into FY21. Relative to Australian online classified peers, the broker assesses price upside for Seek and upgrades to Buy from Neutral. Target is raised to $23.00 from $15.25.

SUPER RETAIL GROUP LIMITED ((SUL)) Upgrade to Add from Hold by Morgans .B/H/S: 6/1/0

A sharp fall in Super Retail's sales in April was offset by an equivalent rebound in May, to a net -1.7% loss over the two months, Clearly the company has come out of the lockdowns relatively unscathed, Morgans notes, and it would have performed better but for more stringent restrictions in NZ. Success represents a balance of a big increase in online sales and a reduction in costs per unit.

Super Retail now wants to beef up its digital offering after paying down debt hence a $203m capital raising. While the raising is -6% dilutive to FY21 earnings, Morgans believes the resilience the business has shown over the period deserves a higher market rating. Target rises to $9.25 from $7.84. Upgrade to Add from Hold.

VIVA ENERGY GROUP LIMITED ((VEA)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 4/2/0

The first half update was ahead of Ord Minnett's forecasts. Costs and capital expenditure have been managed better than the broker expected.

The announcement of the Geelong energy hub provides an option but the broker has become more positive on the stock because of retail fuel margins, cost management and capital management.

Rating is upgraded to Accumulate from Hold. Target is raised to $2.00 from $1.40.

WESTPAC BANKING CORPORATION ((WBC)) Upgrade to Equal-weight from Underweight by Morgan Stanley .B/H/S: 4/3/0

While Westpac has weak retail banking momentum and no plan for medium-term cost reductions, Morgan Stanley upgrades to Equal-weight from Underweight.

The upgrade stems from an improved margin outlook because of lower funding costs, amid less concern about loan losses and a reduced risk of a capital raising.

Target is raised to $18.10 from $15.00. Industry view: In Line.

WAGNERS HOLDING COMPANY LIMITED ((WGN)) Upgrade to Add from Hold by Morgans .B/H/S: 2/0/1

Australia's weak economic outlook will likely weigh on construction activity over the next 6-12 months, Morgans suggests, but government infrastructure spending will play an important role in the recovery.

Wagner's has contracts in place and a pipeline of tenders as of its first half result which should see the company well-positioned.

Leverage will peak as earnings trough in FY20, but Morgans believes the balance sheet can be managed and a debt facility extended, ahead of an earnings recovery in FY21.

On share price weakness, the broker upgrades to Add from Hold. Target unchanged at $1.20.

Downgrade

ANSELL LIMITED ((ANN)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/4/1

Ansell’s CEO Magnus Nicolin has delayed retirement and will be staying until December 2021. This is due to the pandemic making it difficult to assess CEO candidates.

FY20 guidance remains unchanged with the company noting increased demand for products used by essential workers. Citi highlights the company is expanding its manufacturing and distribution capacity even as it tries to shift its focus away from pandemic-hit industries. 

Ansell is also not increasing its prices except to compensate for increased costs, a strategy appreciated by the broker.

Citi downgrades to Neutral from Buy noting the stock reflects fair value currently. The target increases to $35 from $34.50.

ASX LIMITED ((ASX)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 0/2/4

Ord Minnett notes listing volumes and equity value traded are at high levels, although they have likely peaked and futures volumes may be under pressure.

The broker also expects capitalised costs will continue rising because of the delay in CHESS replacement.

Based on valuation, Ord Minnett considers ASX less attractive than other stocks under coverage and downgrades to Lighten from Hold. Target is reduced to $78 from $81.

CARSALES.COM LIMITED ((CAR)) Downgrade to Neutral from Outperform by Macquarie and Downgrade to Hold from Buy by Ord Minnett .B/H/S: 2/4/0

The company stated that lead volumes have grown strongly since late April, a surprise to Macquarie. The broker suspects part of this increase is cyclical, and one-off factors such as pent-up demand following the easing of social distancing restrictions as well as government stimulus have contributed.

On the basis the strength is cyclical this impact should normalise over time and have little bearing on long-term trends, in the broker's view.

Car ownership may be rising to some extent as a result of the pandemic, for which the implications are positive.

Following a 41% increase in the share price since late April Macquarie assesses value is better reflected at current levels and downgrades to Neutral from Outperform. Target rises to $18.00 from $15.30.

FY20 guidance for Carsales.com points towards operating income between $228-$232m which indicates a growth of 5-6% over FY19. Ord Minnett finds this impressive in the face of volume disruptions and a challenging new car market.

There is also a rebound in dealer activity with lead volumes growing strongly between April 22 and June 16. Public transport restrictions are also acting as a catalyst, notes the broker.

Ord Minnett considers the company to be fully valued and downgrades to Hold from Buy with the target price increasing to $17.06 from $15.72.

FORTESCUE METALS GROUP LTD ((FMG)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/4/1

Ord Minnett downgrades to Hold from Accumulate following a material outperformance of the share price.

The broker still envisages Fortescue Metals will offer strong yields but, given Brazilian iron ore exports are expected to recover in the second half of 2020, lower iron ore prices could weigh. Target is reduced to $14.60 from $15.10.

GALAXY RESOURCES LIMITED ((GXY)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/4/1

Ord Minnett downgrades to Hold from Accumulate because of recent appreciation in the share price. Target is steady at 90c.

HEALIUS LIMITED ((HLS)) Downgrade to Hold from Add by Morgans .B/H/S: 3/1/0

Healius has divested its medical centres business to BGH Capital for $500m with the transaction to be completed by end of 2020.

Morgans considers the transaction reasonably priced that will strengthen Healius’s balance sheet and simplify operations across the main divisions. The company, as per a trading update, is seeing a recovery across its entire business.

The broker cautions the transition to a specialist diagnostic and day hospital operator is far from complete and highlights risks around GP referrals, optimisation of cost base and growth to drive market share gains.

The broker downgrades to Hold from Add on account of the divesture with target price reduced to $2.96 from $3.04.

See also HLS upgrade.

ILUKA RESOURCES LIMITED ((ILU)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/3/0

As there has been no update since the company withdrew guidance and reduced zircon production settings, Ord Minnett assesses there is plenty of risk around the outlook.

The main catalyst is a confirmation of the structure and timing of the spin-off of the royalty for the Mining Area C.

The broker also awaits further detail on the project pipeline to assess how this will benefit from the higher prices that are anticipated.

While remaining positive on the stock for the medium to longer term, Ord Minnett downgrades to Hold from Accumulate. Target is $8.90.

INVOCARE LIMITED ((IVC)) Downgrade to Underperform from Outperform by Macquarie .B/H/S: 2/3/1

Macquarie's analysis suggests the company continues to lose market share. Earnings risk is skewed to the downside. FY20 has been affected by lower case averages because of funeral restrictions.

There is also likely to be lower influenza-related deaths this winter because of physical distancing. Rating is downgraded to Underperform from Outperform and the target is lowered to $10.20 from $12.80.

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

Ord Minnett downgrades to Hold from Accumulate because of recent appreciation in the share price. Target is raised to $17.80 from $17.20.

MEGAPORT LIMITED ((MP1)) Downgrade to Hold from Add by Morgans and Downgrade to Neutral from Buy by UBS .B/H/S: 0/3/0

Demand for remote working and other cloud/collaboration solutions provided by cloud service providers has, unsurprisingly Morgans notes, been incredibly strong over the last six months. Megaport has now been included in the ASX200. The broker makes no changes to near term forecasts but lifts its target to $14.14 from $12.87 after rolling forward forecasts by 12 months.

The stock has rallied 122% year on year and shot up after the initial March sell-off. As the share price is now within 10% of target Morgans pulls back to Hold from Add.

UBS continues to like the business strategy but finds it hard to ignore the recent performance of the share price, which is up 13% since February and has outperformed the ASX small ordinaries by 29%.

The broker assesses there is upside in leveraging the platform to distribute complementary services but, without a business case, this is not factored in.

The short-term opportunity is reflected in the share price and UBS downgrades to Neutral from Buy. Target is raised to $14.05 from $11.90.

NATIONAL AUSTRALIA BANK LIMITED ((NAB)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 6/1/0

While National Australia Bank’s margin improvement is strong as is its credit quality, Morgan Stanley expects loss rates to be higher than peers due to exposure to businesses.

The broker points out the AUSTRAC issue has created uncertainty. All in all, the broker thinks the bank is more expensive than ANZ Bank and Westpac.

Morgan Stanley downgrades to Equal Weight from Overweight and increases its target to $18.50 from $16.70.

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

Novonix has raised $5.7m from institutions and will add another $52-57m from the St Baker Energy Innovation Fund and other existing shareholders, Morgans reports.

The funds will be used to repay debt and expand synthetic graphite production capacity. The company's first graphite customer, Samsung SDI, has shown impressive sales growth.

Novonix has also filed another patent related to its Dry Particle Microgranulation technique which targets cathode production. All of which has led to a share price rally.

While the broker sees much potential, it's still early in the game and risks remain. Hence a pullback to Hold from Speculative Buy and a target cut to $1.09 from $1.39 on dilution.

OPTICOMM LTD ((OPC)) Downgrade to Hold from Buy by Ord Minnett .B/H/S: 0/2/0

Uniti Group ((UWL)), an emerging telecommunications company, is set to acquire fibre network operator OptiComm. The group has proposed a 5-option scheme of arrangement transaction to OptiComm shareholders involving scrip, cash and a combination of both.

The board of OptiComm will vote their combined circa 32% of shares in favour of the scheme and has recommended the shareholders do the same. The broker sees the chances of a third-party counter bid slim at this stage.

Ord Minnett reduces its rating to Hold from Buy with a target price of $5.42.

REGIS RESOURCES LIMITED ((RRL)) Downgrade to Sell from Hold by Ord Minnett .B/H/S: 3/3/1

Ord Minnett downgrades to Sell from Hold because of recent appreciation in the share price. Target is reduced to $4.10 from $4.20.

STOCKLAND ((SGP)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 2/3/1

Stockland has provided a positive update and Ord Minnett increases earnings estimates by 4% based on residential demand that is better than previously expected.

The stock sold off aggressively in February and March as the market priced in the potential impact of the pandemic but has since been the best performer among A-REITs.

As the stock is now trading broadly in line with the broker's target, the rating is downgraded to Hold from Accumulate. Target is raised to $3.50 from $3.10.

THE STAR ENTERTAINMENT GROUP LIMITED ((SGR)) Downgrade to Underweight from Overweight by Morgan Stanley .B/H/S: 4/2/1

Morgan Stanley believes Crown Sydney ((CWN)), which opens in December 2020, will be a winner in terms of the reliance on the domestic market and the ensuing fight for market share.

The broker does not believe this outlook and emphasis on domestic, has been factored into the share price for The Star.

The broker downgrades to Underweight from Overweight and acknowledges it is the sole underweight broker on the stock.

With capacity restrictions, a weaker domestic consumer and restrictions on international travel, the broker does not forecast a recovery in gambling stocks until FY22. Target is raised to $3.30 from $2.50. Industry view: Cautious.

WEST AFRICAN RESOURCES LIMITED ((WAF)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/1/0

Macquarie upgrades processing assumptions for Sanbrado as the performance to date has been strong.

The broker now assumes throughput of 3.2mtpa from mid 2022 to mid 2021 and then reducing to nameplate capacity by mid 2022.

Rating is downgraded to Neutral from Outperform, given recent share price strength. Target is $0.90.

WESTERN AREAS NL ((WSA)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 4/3/0

Ord Minnett downgrades to Hold from Accumulate because of recent appreciation in the share price. Target is steady at $2.20.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

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