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Buy, Hold, Sell – What the Brokers Say

Further adding to the somewhat lopsided picture is that only three of the upgrades moved to Buy with five upgrades stopping at Hold/Neutral. The three fresh Buy rating all came from stockbroker Morgans and went to Costa Group, Genex Power and OZ Minerals.

Vocus Group was the sole recipient of two upgrades during the week, after the company received take-over interest. Both upgrades moved to Neutral. Then again, only five out of the 17 downgrades moved to Sell. BlueScope Steel received two downgrades, of which one to Sell, and so did QBE Insurance, with both downgrades moving to Neutral.

With exception of Vocus Group, not much is happening with positive revisions to valuations and price targets. There’s only a bit more action on the negative side where BlueScope Steel, Domino’s Pizza and GUD Holdings might be worth investor attention.

A similar picture emerges for changes to earnings estimates. On the positive side, Fisher & Paykel Healthcare stands out (following profit update), while on the negative side Costa Group’s most recent profit warning makes its impact felt, followed by reduced forecasts hitting Xero, and Freedom Foods Group.

In the good books

1. BLACKMORES LIMITED (BKL) was upgraded to Equal-weight from Underweight by Morgan Stanley B/H/S: 0/5/1

Reports suggest Australia’s flu season is extensive and well ahead of any of the previous five years at this early stage. Morgan Stanley believes this will translate into strong support for sales in the fourth quarter of FY19 and first quarter of FY20. There is also greater confidence in the cost reduction program, which should support near-term earnings growth. Morgan Stanley upgrades to Equal-weight from Underweight and raises the target to $84 from $75. Industry view is: Cautious.

2. COSTA GROUP HOLDINGS LIMITED (CGC) was upgraded to Add from Hold by Morgans B/H/S: 4/1/0

It was a litany of disaster for Costa in May. Variable harvest conditions for Moroccan blueberries, not cold enough for mushroom demand, crumbly raspberries and a fruit fly spotted in one of the companies seven citrus orchards. Morgans has “materially” rebased its FY20-21 forecasts as a result of the profit warning. The broker remains concerned about fruit fly, as a breakout could result in millions per annum to treat the entire citrus crop. But otherwise the broker remains attracted to Costa’s portfolio approach, geographic diversity and protected cropping techniques. Taking on board fruit fly risk Morgans upgrades to Add from Hold following yesterday’s sell-off, anticipating normalisation from a month best forgotten. Target falls to $4.77 from $5.68.

See downgrade below.

3. GENEX POWER LIMITED (GNX) was upgraded to Speculative Buy from Hold by Morgans B/H/S: 1/0/0

Morgans is confident the K2-H project will go ahead although warns investors they need to be aware that, as the bulk of the stock’s value comes from this project, this increases the risk. Management has targeted June 2019 for financial close on both this project and Jemalong. The broker also updates assumptions for the K2-Solar and K3-Wind projects. Morgans upgrades to Speculative Buy from Hold and raises the target to $0.29 from $0.25.

4. SIGMA HEALTHCARE LIMITED (SIG) was upgraded to Neutral from Sell by Citi B/H/S: 0/1/3

Since its FY19 result, Sigma has entered into a new community service obligation deed with the Commonwealth government which has provided some certainty around payments until at least June 2020. Also, the company has provided more clarity around the cost reductions in relation to the loss of a major contract. Finally, with the re-election of the Coalition this suggests the government will be more supportive of existing regulations around the pharmacy distribution industry. Citi now upgrades to Neutral/High Risk from Sell/High Risk while the target is steady at $0.52.

In the not-so-good books

1. ATOMOS LIMITED (AMS) was downgraded to Hold from Add by Morgans B/H/S: 0/1/0

The company has updated on prospectus forecasts and now expects FY19 revenue to be over $50m. Pro forma operating earnings (EBITDA) of $1.4m are expected. Morgans assesses the business is gaining traction on new products, particularly as it expands into more consumer-oriented business. The broker downgrades to Hold from Add, following strong share price appreciation. Given the scalable manufacturing operation, the broker points out that additional partnerships can move the dial in terms of revenue/earnings uplift. Target is raised to $1.42 from $0.90.

2. ANSELL LIMITED (ANN) was downgraded to Neutral from Outperform by Macquarie B/H/S: 3/5/0

Raw material pricing trends have been favourable and there are incremental benefits from the transformation program, Macquarie observes. Yet weaker macro-economic trends present downside risk to near-term earnings. Despite an undemanding valuation, the broker downgrades to Neutral from Outperform because of reduced confidence in the macro economic outlook. Target is lowered to $26.90 from $28.20.

3. COSTA GROUP HOLDINGS LIMITED (CGC) was downgraded to Neutral from Outperform by Macquarie B/H/S: 4/1/0

The company has sharply downgraded 2019 guidance, now expecting profit growth in a range of 1-17% as opposed to 30%. Macquarie reduces estimates for 2019 and 2020 earnings per share by -23% and -22% respectively. Conditions have changed abruptly since early May, with a late season in Morocco putting pressure on prices while, locally, poor quality fruit has led to a large amount of wastage. Macquarie downgrades to Neutral from Outperform. Target is reduced to $4.05 from $6.03.

See upgrade above.

4. G.U.D. HOLDINGS LIMITED (GUD) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 4/1/0

Channel checks of the auto market conducted by Credit Suisse suggest after-market growth is trending lower and competition is increasing among part suppliers. The broker notes that while GUD has an excellent track record of navigating through increased competition in the past, its relative reliance on auto is now greater than it ever has been. Credit Suisse has not changed forecasts but sees sufficient downside risk emerging to warrant a pullback to Neutral from Outperform. Target falls to $12.00 from $13.35.

5. NRW HOLDINGS LIMITED (NWH) was downgraded to Neutral from Buy by Citi B/H/S: 0/2/1

Demand in the company’s core markets continues to improve and Citi envisages upside risk to forecasts from further contract gains and better-than-expected margins. However, the broker considers the stock fairly valued and downgrades to Neutral from Buy. A key concern is the credit risk associated with the $55m per annum Dalgaranga project. The company provided a $12m working capital facility in December 2018 and also had to support a capital raising by the project owner. Target is raised to $3.01 from $2.52.

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

Telstra has updated guidance around restructuring costs and asset impairment. Management now expects -$800m of restructuring costs to be incurred in FY19 and has also guided to a further -$350m post FY19. The company also plans to write down the carrying value of its legacy IT systems by -$500m. Ord Minnett downgrades to Hold from Accumulate based on valuation. Target is unchanged at $3.55. FY19 and FY20 earnings estimates are unchanged.

Earnings forecast

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.

The above was compiled from reports on FNArena. 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.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.