Buy, Hold, Sell – What the Brokers Say

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In the good books

1. CROWN RESORTS (CWN) was upgraded to Outperform from Neutral by Macquarie

Macquarie has examined the strategic rationale for the Crown Resorts-Melco Resorts bid and has given it the thumbs up, pointing to the resulting revenue synergies and stronger penetration into the Asian premium market. The broker believes the deal could offer 17% upside to the Crown share price, on a valuation basis. However, the broker notes that the near-term fundamentals are underwhelming as the US/China trade war continues to hurt VIP trade and the domestic environment faces its own hurdles. The broker cuts earnings-per-share estimates -2% out to FY21 to recognise the removal of the share buy-back. Price target rises to $12.60 to reflect a 50:50 spread across fundamentals ($11.20 a share) vs Melco Resorts takeover at $14 a share. Given the potential for a higher bid, the broker upgrades to Outperform from Neutral.

2. DOMINO’S PIZZA ENTERPRISES (DMP) was upgraded to Buy from Neutral by Citi

Domino’s Pizza has been upgraded to Buy from Neutral at Citi with a slightly reduced price target of $44 (was $45.60) on the observation this stock offers excellent exposure to further store roll outs in Europe. Citi analysts are forecasting 13% EPS CAGR between FY18 and FY22. They do think FY19 guidance seems “stretched”, but also that this is already reflected in the share price. All in all, Citi suggests the risks in Australia are well understood by investors while the upside from European store openings is not yet priced in.

3. MYER HOLDINGS (MYR) was upgraded to Neutral from Sell by UBS

Myer has underperformed the index by -24% in June, which leads UBS to suggest the current valuation is fairly pricing in upside potential from the company’s turnaround strategy. The broker sees the opportunity to hand back 18 floors of leased space for a saving of $18m by FY23, and further opportunities around cost-outs and exiting unprofitable categories. Nonetheless, the broker warns a lack of improvement in trading post-election suggests the risks are balanced. Enough for UBS to upgrade to Neutral. Target unchanged at 59c.

4. SANDFIRE RESOURCES NL (SFR) was upgraded to Hold from Reduce by Morgans and to Accumulate from Hold by Ord Minnett

Sandfire Resources has agreed to buy MOD Resources (MOD) for a cash and scrip equivalent of $167m. The cash component is $42m and the scrip component is 45c per share.  Morgans says, at first glance, the deal offers exploration upside and strategic value given the provincial tenure. Morgans increases its target price to $6.96 from $6.84, primarily to reflect lower $A forecasts. The broker upgrades to Hold from Reduce to reflect the share-price retreat following the announcement.

Ord Minnett has upgraded to Accumulate from Hold .The broker likes the deal, citing net addition to Net Present Value of potentially up to $1 per share, an internal rate of return of 15% post acquisition costs and upside from further exploration. The analysts do acknowledge there now is additional geopolitical risk along with added development risk associated with a project based in Africa (Botswana). Target price unchanged at $8. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.

5. TELSTRA CORPORATION (TLS) was upgraded to Neutral from Underperform by Macquarie

Macquarie notes Optus has increased its post-paid pricing, suggesting competition in mobile is stabilising. Recent competition will still need to flow through, the broker notes, but Telstra will benefit if mobile returns to growth. Macquarie has ticked up its mobile growth and thus earnings expectations and reduced its valuation discount rate due to lower bond prices. Target rises to $3.75 from $2.90. Upgrade to Neutral.

6. VIVA ENERGY GROUP (VEA) was upgraded to Overweight from Equal-weight by Morgan Stanley

Morgan Stanley upgrades to Overweight from Equal-weight on the expectation that forecasts are close to bottoming. In addition, refining offers potential for significant upside medium term, argue the analysts. The analysts also suggest greater evidence of Viva Energy’s retail strategy expansion delivering positive results should start emerging. Lower margins in comparison with rival Caltex Australia (CTX) are seen as a form of protection in difficult times. Target lifts by 5c to $2.35. Industry view is In-Line.

In the not-so-good books

1. COLLINS FOODS (CKF) was downgraded to Hold from Add by Morgans

Collins Foods’ FY19 result met the broker, with the Australian KFC business outperforming by roughly 3%, thanks to improved margins. Morgans notes strong cash conversion helped fund a 50% dividend payout, $63m in capital expenditure and pay down roughly $15m in debt. The broker estimates the 25 Australian stores set to open in FY20 should yield 10% top-line growth. However, a weaker performance from KFC Europe, on top of a higher tax bill and share dilution, have caused the broker to cut earnings-per-share forecasts -2.9%, -3.8% and -3.1% across FY20/FY21/FY22. The broker appreciates the company’s defensive growth profile and believes it justifies the FY20 price-earnings multiple of 18.6x, but downgrades to Hold from Add to account for the recent share price strength. Target price rises to $8.20 from $7.78.

2. FLEXIGROUP (FXL) was downgraded to Hold from Add by Morgans

FlexiGroup has issued new profit guidance and a review of its commercial strategy, which will involve divesting its equipment finance book. The broker views the May addition of major retailers including Myer to its Humm Buy Now Pay Later platform as positive but remains cautious. Morgans believes the divestment of the equipment finance book is sensible, and would see it join Eclipx Group (ECX) and Thorn Group (TGA) on the market, possibly triggering private equity interest.  Broker cuts earnings per share forecasts -12% and -10% across FY20/21 to reflect a slower recovery in the AU Card impairments, and lower Commercial earnings following the equipment finance divestment. Morgans moves to Hold from Add, awaiting greater certainty on the earnings trajectory. Target price eases to $1.80 from $1.83.

3. GENEX POWER (GNX) was downgraded to Speculative Buy from Add by Morgans

Genex Power is raising another $16m from sophisticated investors and $3m from shareholders, which, on top of the recently announced JPower deal, has diluted shares by -9%, well beyond the broker’s estimate. This has triggered a downgrade from Morgans to Speculative Buy from Add. Target price falls to 32c from 33c.Morgans says the extra raising may simply be for a buffer, given debt figures have yet to be determined. Meanwhile, KS1 is to be refinanced with new debt. Morgans believes there is still upside, but the amount of upside has been reduced while the risks have risen.

4. METCASH (MTS) was downgraded to Underperform from Neutral by Macquarie and to Hold from Accumulate by Ord Minnett

Metcash’s FY19 result missed the broker and consensus, deteriorating cash flow triggering a downgrade to Underperform from Neutral. Macquarie notes that Metcash must spend money just to stand still and asks, in the midst of a capital expenditure war, “when is ‘investment’ simply a higher cost of doing business?” Adding insult to injury the banner count fell another 2.5%. Earnings per share estimates fall -1% and target price eases -1% to $2.44.

The result missed Ord Minnett’s expectations with fingers pointing at the lower food result and slightly higher corporate, net interest and tax charges. Also, the tougher environment is now catching up with the Hardware division, suggests the broker. Reduced earnings forecasts have pulled down the price target; to $2.85 from $3.30. Recommendation is downgraded to Hold from Accumulate. The analysts continue to see valuation support for the share price. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.

5. NEWCREST MINING (NCM) was downgraded to Underweight from Equal-weight by Morgan Stanley

Morgan Stanley’s downgrade for Newcrest Mining was hidden inside a commodities sector report, which is why we failed to spot it initially. Morgan Stanley is not a big fan of owning gold stocks as the analysts believe the rally this year has incorporated average gold prices of US$2000/oz or more, and this makes gold stocks expensive. Target price has been revised up to $24.25, from $23, but this remains well below the share price. All four gold stocks under coverage in Australia are now rated Underweight. Newcrest is the only one receiving a fresh downgrade. Industry view remains Attractive, but commentary infers this applies for the rest of the commodities space, not for gold producers.

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. 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.

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