In the good books
1. CHALLENGER (CGF) was upgraded to Hold from Sell by Deutsche Bank
The relationship between Challenger and its Japanese partner is deepening and Deutsche Bank notes MS Primary will now provide to Challenger an annual amount of reinsurance, across both Australian and US dollar annuities, of at least JPY50bn (circa $640m) per year for a minimum of five years. The revised arrangement remains subject to review in the event of any material adverse change for either of the parties and comes also with an increased equity stake in Challenger. Target price jumps to $8 from $7. Rating has been upgraded to Hold from Sell.
2. COLLINS FOODS (CKF) was upgraded to Add from Hold by Morgans
The KFC brand continues to perform well domestically, which implies a better performance from the company’s Australian operations, Morgans suggests. Yum! Brands and Restaurant Brands have recently reported positive quarterly sales for their KFC operations. The broker expects Europe will remain challenging for the company in the short term but a return to sustainable positive same-store sales growth could provide the medium-term catalyst for a more aggressive roll out. The broker upgrades estimates for earnings per share by 0.5-2% for FY19-21, primarily reflecting higher KFC Australia assumptions. The broker believes there is meaningful value to be realised in Collins Foods and upgrades to Add from Hold. Target is raised to $7.78 from $6.90.
3. ST BARBARA (SBM) was upgraded to Neutral from Underperform by Credit Suisse, to Accumulate from Hold by Ord Minnett and to Buy from Hold by Deutsche Bank
The feasibility study at Gwalia has abandoned the underground ore pumping technology concept. The geometry could not meet the pumping rate that the pre-feasibility study had assumed. Long-term plans revert to the trucking option but this has also been downgraded. Production guidance is also downgraded by around -20%. The stock was already trading at a premium to valuation, which Credit Suisse observes was elevated by prior guidance for higher production at lower costs. The maturity of Gwalia is seen battling the limitations of technology. The broker considers that positive news on the Simberi sulphide expansion may offset the value lost by the downgrade to Gwalia. Rating is upgraded to Neutral from Underperform. Target is reduced to $3.30 from $3.90.
Ord Minnett considers the recent sell-off a buying opportunity, believing the company is in solid shape. Rating is upgraded to Accumulate from Hold. Target is reduced to $3.80 from $4.60. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
Deutsche Bank has upgraded to Buy from Hold. Now that the company has announced it will stick to trucking to move ore at Gwalia, Deutsche Bank has remodelled the outlook for the goldminer. Admittedly, this has resulted in -20% less in Net Present Value (NPV) but the analysts retain a positive view on Gwalia overall. They also believe St Barbara can pay out 20c per annum to shareholders in a sustainable manner. Price target drops to $3.80 from $4.80 prior.
4. SANDFIRE RESOURCES (SFR) was upgraded to Outperform from Neutral by Macquarie
Macquarie upgrades to Outperform from Neutral after recent share price weakness. The company is exposed to strong near-term copper prices. The broker envisages potential acquisition or the formal go-ahead for the Black Butte development project as key catalysts for the stock. Target is steady at $7.80.
In the not-so-good books
1. GOLD ROAD RESOURCES (GOR) was downgraded to Neutral from Outperform by Macquarie
Macquarie downgrades to Neutral from Outperform after recent share price strength as first gold from Gruyere is imminent. The target is raised to $1.10 from $0.90, given the more leveraged longer-term outlook.
2. MOUNT GIBSON IRON (MGX) was downgraded to Neutral from Outperform by Macquarie
Macquarie downgrades to Neutral from Outperform because of a lack of valuation upside and a rise of over 70% in the share price over the past three months. The target is raised to $0.90 from $0.78 to reflect both a softer Australian dollar and an increase in the value of the resources currently outside of the mine plan.
3. NEW HOPE CORPORATION (NHC) was downgraded to Neutral from Outperform by Macquarie
Following the company’s first half results, where it highlighted a higher proportion of low-grade coal in the sales mix, Macquarie envisages a challenge to earnings. The broker also incorporates updated commodity prices and FX forecasts. Macquarie reduces its earnings outlook for the business and downgrades to Neutral from Outperform. Target is reduced to $3 from $4.
4. WESFARMERS (WES) was downgraded to Hold from Add by Morgans
Morgans can see the attraction of a business whose products are exposed to electric vehicles, wind turbines and other renewable applications, but also sees Malaysian political risk as a major factor. While the bid is only indicative at this stage, the licence for Lynas Corp’s ((LYC)) Malaysian plant is up for renewal in September. The issue for the plant has always been one of radioactive waste, which leads the broker to question why Wesfamers would exit coal on ethical grounds and then decide to get into rare earths. While more detail is required, Morgans pulls back to Hold for now on increased risk and drops its target to $34.54 from $36.50.
The above was compiled from reports on FN Arena. 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.
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