The February reporting season in Australia has quite unexpectedly provided investors with a lot to think about. And we’re only one week into the season.
Wall Street is correcting, pushing local equities into a whirlwind of day-to-day volatility. Against this background, stockbroking analysts seem busier than usual in issuing upgrades and downgrades for ASX-listed entities. L
For the week ending Friday, 9th February 2018, FNArena registered no less than 21 upgrades in broker recommendations and 18 downgrades. If investors draw from this the conclusion that local reporting season has been more of a mixed bag thus far, despite robust expectations, they are correct.
In the good books
AMP LIMITED (AMP) was upgraded to Outperform from Neutral by Macquarie B/H/S: 4/4/0. 2017 results exceeded guidance. As revenue growth and earnings improvement is constrained in the three divisions under review, Macquarie believes any divestments could create grounds for a positive surprise and upgrades. The broker adjusts earnings per share estimates down by 7.8% in 2018 and -3.1% in 2019 to reflect changes to methodology. Target is raised to $5.65 from $5.50.
ANSELL LIMITED (ANN) was upgraded to Neutral from Sell by UBS B/H/S: 3/3/0. UBS reviews forecasts ahead of the first half result on Monday. The broker envisages some tailwinds are set to boost earnings over the short to medium term. These include the persistence of robust industrial growth, raw material price deflation into the second half and a decline in the USD/EUR rate. While the broker is cautious about the ability to generate consistent organic growth over the longer term, current conditions are too compelling to ignore and the rating is upgraded to Neutral from Sell. Target is raised to $26 from $21.
BLUESCOPE STEEL LIMITED (BSL) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 4/1/0. Ord Minnett has upgraded to Accumulate from Hold with an increased price target to $16.30 from $16.00. Essentially, the broker believes the weakness in share price is not justified given the improving macro-economic background. Interestingly, the analysts suggest market consensus forecasts are behind the curve and will need to be upgraded post the upcoming interim results release, scheduled for Feb 26.
CENTURIA INDUSTRIAL REIT (CIP) was upgraded to Add from Hold by Morgans B/H/S: 1/0/0. First half results were in line. The highlight for Morgans was increased occupancy following several leasing transactions which were undertaken. Guidance is reiterated. As the security price has declined recently, total shareholder return has increased to over 10% and the broker upgrades to Add from Hold. Target is $2.59.
GALAXY RESOURCES LIMITED (GXY) was upgraded to Overweight from Equal-weight by Morgan Stanley B/H/S: 2/2/1. Following the sell-off in lithium miners year to date and in light of Dec Q production reports, Morgan Stanley sees a window of opportunity. The broker has eased its target on Galaxy to $3.50 from $3.70 but notes the stock price has fallen 35% from its January high. Despite funding headwinds for Sal da Vida and James Bay, this prompts an upgrade to Overweight. Industry View: Attractive.
HANSEN TECHNOLOGIES LIMITED (HSN) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 2/0/0. Credit Suisse sees margin improvement in FY18, and has now lifted forecasts, and sees potentially more upside in case of upside margin surprise. Target price moves to $4.25 from $3.60. The broker notes the shares are trading at a discount vis a vis peers. CS has a so-called ‘blue sky’ valuation of $5.50.
MIRVAC GROUP (MGR) Upgrade to Buy from Hold by Ord Minnett. B/H/S: 3/2/2. A larger second-half skew in the residential business has caused Mirvac’s interim report to miss expectations. But management has stuck with FY18 EPS guidance of 15.3–15.6c, representing growth of 6–8%, on the back of a much stronger second-half residential result. Following a general decline for the listed property sector, Ord Minnett finds Mirvac shares are “inexpensive”. Target price has improved to $2.55. See also MGR downgrade.
NATIONAL AUSTRALIA BANK LIMITED (NAB) was upgraded to Accumulate from Hold by Ord Minnett and to Buy from Neutral by Citi B/H/S: 6/0/2. Ord Minnett saw a mixed first-quarter FY18 trading update, characterised by slightly weak revenue growth, much lower impairments than expected, plus a surprise improvement in NAB’s capital position. Ord Minnett’s price target improves to $32 from $31. First quarter cash earnings were ahead of Citi’s estimates but this appears to be because of delays in recognising the restructuring provision. The broker expects FY18 to be a messy year for the bank as it embarks on restructuring. Since the FY17 result the stock has underperformed and Citi now envisages sufficient value to upgrade to Buy from Neutral. Target is $32.25.
SONIC HEALTHCARE LIMITED (SHL) was upgraded to Neutral from Underperform by Credit Suisse B/H/S: 2/3/1. Credit Suisse believes a pick-up in Australian diagnostic volumes creates an opportunity for the company to raise FY18 guidance at the first half results, due February 15. The broker increases FY18 forecasts by 1.4% and upgrades to Neutral from Underperform. Target is raised to $24.00 from $21.40.
TABCORP HOLDINGS LIMITED (TAH) was upgraded to Buy from Neutral by UBS B/H/S: 4/1/0. First half net profit missed UBS estimates. This was explained by a miss in Sun Bets and wagering. UBS reduces normalised earnings per share forecasts by 14% for FY18 and -7% for FY19, with the changes mainly driven by higher commissions and higher operating costs in wagering. The broker does not believe this is a systemic issue. Given the -12% share price decline since January the broker upgrades to Buy from Neutral. Target is reduced to $5.20 from $5.60.
VILLAGE ROADSHOW LIMITED (VRL) was upgraded to Neutral from Sell by Citi B/H/S: 0/2/1. Improving momentum in theme parks, a reduction in gearing and a drop in the share price has caused Citi to upgrade to Neutral from Sell. The broker retains ongoing concerns about the cinema exhibition division which, combined with a reasonably full valuation, prevents it from being more bullish at this point. Recent trading updates suggest Gold Coast theme parks may have finally hit an inflection point following the October 2016 Dreamworld incident. Target is reduced to $3.45 from $3.55.
In the not-so-good books
GPT (GPT) was downgraded to Neutral from Buy by UBS B/H/S: 2/3/1. UBS believes, as 50% of assets are allocated to retail, the portfolio is likely to deliver the largest decline in retail income growth in the second half and in 2018. The office portfolio remains robust but, given the expected decline in retail, the rating is downgraded to Neutral from Buy. Target is reduced to $5.20 from $5.30.
HARVEY NORMAN HOLDINGS LIMITED (HVN) was downgraded to Underperform from Neutral by Credit Suisse B/H/S: 2/1/3. Credit Suisse makes minor changes to forecasts, upgrading sales revenue for Slovenia and Asia. Rating is downgraded to Underperform from Neutral because of an increase in the share price. Target is raised to $4.03 from $3.91.
JAMES HARDIE INDUSTRIES N.V. (JHX) was downgraded to Neutral from Outperform by Credit Suisse and Downgrade to Lighten from Hold by Ord Minnett B/H/S: 4/2/0. December quarter net profit was ahead of expectations as margins surprised on the upside. Credit Suisse suspects FY18 results will be ahead of guidance, based on forecasts for 5.2% sales growth in North America. However, the elevated valuation and limited potential upside to consensus earnings expectations results in a downgrade to Neutral from Outperform. Credit Suisse’s target is raised to $24.75 from $20.70. Cost are back on track but Ord Minnett believes primary demand growth must return in the coming quarters to justify relative valuation. Given the recent strong performance Ord Minnett downgrades to Lighten from Hold and raises the target to $21.25 from $20.10.
MIRVAC GROUP (MGR) was downgraded to Neutral from Buy by UBS B/H/S: 3/2/2. UBS believes negative news on house prices will start to affect the company, driven by a fall in foreign buyers and capped lending to interest-only buyers. Brisbane apartment settlements have also peaked. Traditional areas which surprise on the upside are likely to remain muted until the FY18 result, in the broker’s opinion. Rating is downgraded to Neutral from Buy. Target is reduced to $2.32 from $2.52.See also MGR upgrade.
PREMIER INVESTMENTS LIMITED (PMV) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 4/2/0. Value appears less attractive to Credit Suisse after the strong appreciation in the share price. The broker downgrades to Neutral from Outperform. Target raised to $15.28 from $14.91 because of an increase in the market value of the company’s holding in Breville.
TPG TELECOM LIMITED (TPM) was downgraded to Sell from Neutral by UBS B/H/S: 1/3/3. UBS values the company’s NBN bypass option – the means outside the NBN to provide fixed broadband services – at around $250 million. Despite this addition to valuation, following the recent run-up on the stock price, the rating is downgraded to Sell from Neutral. The broker emphasises this is not suggesting the mobile foray will fail. However, the roll out is not without risk and, at the current share price, the risk/reward pay-off is insufficient, in the broker’s opinion. Target is raised to $6.00 from $5.50.
Listed below are the companies that have had their forecast current year earnings raised or lowered by the brokers last week. The qualification is that the stock must be covered by at least two brokers. The table shows the previous forecast on an earnings per share basis, the new forecast, and the percentage change.
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