Buy, Hold, Sell – What the Brokers Say

Founder of FNArena
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The final week of the August reporting season ending on Friday 30 August, proved an extremely busy one. FNArena registered no less than 17 upgrades and 28 downgrades for individual ASX-listed stocks. Ten out of the 17 upgrades moved to Buy, so there is a silver lining.

Surprisingly, maybe to some, among the stocks receiving a fresh Buy rating we find Appen, Macquarie and NextDC. Sandfire Resources welcomed two new Buys. Boral equally received two upgrades, but one didn’t move higher up the rankings than Neutral/Hold.

Plenty to see on the opposing side of the ledger where -another silver lining- only four downgrades sunk as low as Sell. Virgin Australia, Ebos Group, Independence Group, and Whitehaven Coal are responsible for all four. Caltex Australia received multiple changes on both sides of the ledger. G8 Education copped three downgrades to Neutral/Hold. Midway kept it to two.

Not completely unexpected, the two tables for changes made to earnings forecasts show large numbers on both sides. This year’s August reporting season had mostly small and mid-cap companies featuring in the final week.

On the positive side, the largest gainers were Pilbara Minerals, Freedom Foods, Northern Star, Mayne Pharma, Webjet, Fortescue Metals, and Village Roadshow. On the negative side, the news was (very) bad for NextDC, Ardent Leisure, Orocobre, Nearmap, South32, and Viva Energy Group.


In the good books

  1. APPEN LIMITED (APX) was upgraded to Buy from Neutral by UBS B/H/S: 2/1/0

First half results were strong, although UBS notes 2019 guidance was not upgraded. The broker believes upside risks remain and considers the valuation attractive relative to peers. Rating is upgraded to Buy from Neutral and the target raised to $30.00 from $26.20. UBS continues to envisage upside opportunity from Figure Eight, and artificial intelligence requirements remain a major tailwind, especially in government, where Figure Eight has operated previously.

  1. AUTOSPORTS GROUP LIMITED (ASG) was upgraded to Outperform from Neutral by MacquarieB/H/S: 2/0/0

A weak new auto market impacted vehicle supply in the first half but improved execution by Autosports in the second half, including better inventory and cost management, led to improved trends in the second half, Macquarie notes. After 16 months of downtrend, worse than the GFC, there are now signs of stabilisation in the car market. Autosports is strongly positioned to capitalise on a turnaround and while the broker acknowledges illiquidity remains an issue, a deep discount to peers appears excessive. Upgrade to Outperform from Neutral, target rises to $1.76 from $1.15.

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

In the wake of Fisher & Paykal Healthcare’s AGM Macquarie has upgraded earnings forecasts to reflect modest growth in the Hospital business combined with a weaker NZD. Commentary around new applications revenue, which the broker notes is a key growth driver, is positive. There remains a risk from further deterioration in mask growth but the company suggests this has stabilised, despite, as the broker notes, the recent update from ResMed (RMD) suggesting market share gains. Macquarie nevertheless upgrades to Neutral from Underperform. Target rises to NZ$16.61 from NZ$14.78.

  1. LINK ADMINISTRATION HOLDINGS LIMITED (LNK) was upgraded to Buy from Neutral by Citi B/H/S: 6/1/0

The release of FY19 financials did not remove all threats and uncertainties (that would be unrealistic) but according to Citi’s assessment it did bring home the message to investors that the share price is simply too low. Even after yesterday’s firm rally, Citi has upgraded to Buy from Neutral with an increased price target of $6.20. EPS forecasts went down -8% for FY20 and up +1% for FY21. The risk of major cost overruns seems more contained, suggest the analysts. Lots of amendments have been made to forecasts, including new leasing standards, the share buyback and a significant rise in depreciation and amortisation. In particular the Woodford issue in the UK is seen as an ongoing overhang.

See downgrade below.

  1. MACQUARIE GROUP LIMITED (MQG) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 4/2/0

Macquarie Group has launched a capital raising to fund new investments in green energy, technology and infrastructure. The company has also provided an update on the first half, currently expecting net profit to be around 10% above the prior corresponding half. The primary driver of this performance is strength in the commodities business, which is expected to fade over the remainder of the year. Ord Minnett observes the growth outlook is supported by the depreciation in the Australian dollar and falling bond yields. Rating is upgraded to Accumulate from Hold and the target reduced to $133 from $134.

  1. NEXTDC LIMITED (NXT) was upgraded to Outperform from Neutral by Macquarie B/H/S: 5/1/0

NextDC’s revenue and earnings largely met Macquarie’s forecast, with revenues impacted by some site-specific issues that have now been sorted. FY20 guidance is in line with the broker albeit below consensus. The broker believes consensus numbers were too bullish regarding Generation 2 ramp-ups. Macquarie also believes the bearish issues are not sufficient to justify the large short position in the stock. Upgrade to Outperform from Neutral, target rises to $7.75 from $6.75.

  1. OZ MINERALS LIMITED (OZL) was upgraded to Neutral from Underperform by Credit Suisse B/H/S: 4/3/0

First half net profit was ahead of Credit Suisse estimates. The underlying result includes various non-cash adjustments, as usual, the broker notes. Cash flow remain strong. 2019 guidance is unchanged although costs are now at the lower end of expectations. Credit Suisse upgrades to Neutral from Underperform on valuation. Target of $9.50 maintained.

In the not-so-good books

  1. ATLAS ARTERIA (ALX) was downgraded to Neutral from Outperform by Macquarie B/H/S: 0/5/0

Atlas Arteria reported APRR earnings ahead of forecast despite declining traffic due to lower snow clearing costs. Greenway earnings were in line. Macquarie notes an opportunity is to simplify the structure with the MEIF2 transaction, but Greenway is at risk of any weak economic environment or major weather event locking up distribution for another three years. Yield growth otherwise re-accelerates in 2021-22 with French tax cuts and Greenway dividend. On a full valuation the broker downgrades to Neutral from Outperform. Target unchanged at $8.12.

  1. AVEO GROUP (AOG) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 0/3/0

FY19 underlying profit was in line with recent guidance. Ord Minnett downgrades to Hold from Accumulate as the stock is trading close to the $2.15 offer price from Brookfield. The broker considers the prospects of a higher offer are low, despite being at a material discount to what is deemed fair value. Target is set at $2.15.

  1. AUSTRALIAN VINTAGE PTY LTD (AVG) was downgraded to Hold from Add by Morgans B/H/S: 0/1/0

FY19 results were ahead of forecasts. Commentary for FY20 appears cautious, amid cost pressures from a prolonged drought and continuing uncertainty with Brexit. Morgans observes the company has made considerable progress on its growth strategy and its core brands are performing strongly in a highly competitive industry. The broker is also pleased with the increased disclosure. Valuation remains undemanding but the rating is downgraded to Hold from Add because of the challenging near-term operating environment. Target is reduced to $0.52 from $0.61.

  1. CAPITOL HEALTH LIMITED (CAJ) was downgraded to Hold from Buy by Ord Minnett B/H/S: 1/1/0

FY19 operating earnings (EBITDA) were slightly ahead of Ord Minnett’s forecasts. The company will focus on appropriately managing costs and staffing requirements while ensuring patient and referrer needs. Additional capital investment will be undertaken as management intends to capture the benefits of the transition to higher-value modalities. In the meantime, Ord Minnett notes industry growth in Victoria is lacklustre. Given the uncertainty that comes with company transformations, the broker downgrades to Hold from Buy. Target is reduced to $0.24 from $0.27.

  1. CALTEX AUSTRALIA LIMITED (CTX) was downgraded to Neutral from Outperform by Macquarie B/H/S: 2/4/0

Caltex Australia’s result fell short of Macquarie as weak industry trends persist. Retail fuel margins are under pressure as competitors look to defend market share by cutting prices, while refiner margins are also soft. As a result of the retail trend the company will close 50 of its 790 convenience sites which the broker estimates would raise $256m. Caltex is responding by reducing costs and lowering capex guidance but given the headwinds facing the retail business Macquarie downgrades to Neutral from Outperform. Target falls to $24.78 from $26.50.

  1. INDEPENDENCE GROUP NL (IGO) was downgraded to Sell from Neutral by Citi B/H/S: 1/3/2

Citi found the released FY19 financials in line with the June quarter update, but it considers the share price too rich. Hence the downgrade to Sell from Neutral with an unchanged price target of $5. The analysts consider there is potential upside from a higher nickel price or from the $66m exploration budget, while management is actively on the lookout for M&A. Citi has reduced average copper price projections. Management also indicated there are no more franking credits left, for the time being. It might decide to buy back shares instead in case of returns to shareholders, suggest Citi analysts, or pay dividends without franking.

  1. LINK ADMINISTRATION HOLDINGS LIMITED (LNK) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 6/1/0

FY19 results were in line with expectations. Guidance for operating earnings (EBITDA) in FY20 to be “broadly in line” is open to interpretation, Credit Suisse asserts. An on-market share buyback sends a positive message and the broker estimates the company has room to buy back around 6-7% of share capital. Rating is downgraded to Neutral from Outperform, post the recent recovery in the share price. Target is reduced to $5.75 from $5.85.

See upgrade above.

  1. MIDWAY LIMITED (MWY) was downgraded to Hold from Buy by Ord Minnett and to Hold from Add by Morgans B/H/S: 0/2/0

FY19 results were worse than Ord Minnett expected. The broker notes pricing is also looking a little shaky for 2020. The company has indicated that pulp prices have declined materially because of a combination of higher Brazilian production at the same time as Chinese demand has slowed. While this is expected to normalise in coming months Ord Minnett suspects the company is concerned that 2020 prices may be negatively affected. The broker downgrades estimates for earnings per share by -24% for FY20 and -28% for FY21. Rating has been downgraded to Hold from Buy as the results have created significant market uncertainty. Target is reduced to $3.31 from $4.37.

FY19 results were in line with Morgans’ expectations. The broker finds the outlook for FY20 more challenging, suspecting the company is not immune to weaker wood fibre conditions. No formal guidance was provided although modest growth is targeted. Morgans reduces FY20 and FY21 operating earnings (EBITDA) forecast by -16.2% and -14.3%, respectively. Pulp prices have dropped significantly in recent months largely because of over-production and high levels of inventory at Brazilian pulp mills. A resumption in buying activity is expected to support better prices but the timing is unknown. Morgans downgrades to Hold from Add given the short-term uncertainty. Target is reduced to $3.16 from $3.90.

  1. NATIONAL STORAGE REIT (NSR) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 0/2/1

FY19 net profit was in line with guidance. Guidance for FY20 growth is unchanged. Ord Minnett suggests self-storage centres have, effectively, flat organic income growth prospects over the next 12-18 months because of lower housing market turnover. The broker believes the stock is trading at fair value albeit not at a premium. Rating is downgraded to Hold from Accumulate. The broker forecasts 2-3% growth in earnings per share for the next five years based on a stabilising occupancy rate of 85%. Target is reduced to $1.85 from $2.00.

  1. PERSEUS MINING LIMITED (PRU) was downgraded to Neutral from Buy by Citi B/H/S: 0/3/0

The share price has been on a tremendous run, which underpins Citi’s decision to downgrade to Neutral/High Risk from Buy/High Risk. The analysts acknowledge if gold rallies higher, this would translate positively for Perseus Mining. Coming to the FY19 performance, it missed expectations by quite a large margin, underlying. At the operational level (EBITDA), however, it turns out market consensus has been beaten by 5%. Lower exploration expenses and higher D&A made the difference. Citi’s bull case valuation is $1.20 while the bear case puts valuation at $0.40. Price target rises 5c to $0.90. Earnings estimates fall as Citi incorporates updated FX assumptions (AU$/US$0.72 instead of 0.68 for 2020).

  1. REECE AUSTRALIA LIMITED (REH) was downgraded to Neutral from Buy by Citi B/H/S: 1/1/0

Reece Australia’s FY19 numbers revealed significantly slower growth in Australia & New Zealand in H2, as well as the fact that Morsco’s contribution only makes up for 26% of the group’s total. Both elements combined have triggered a downgrade to Neutral from Buy from Citi. Core EPS estimates have been scaled back by -15%-16%, exaggerated by the inclusion of an incremental -$33m in amortisation, the analysts explain. Price target loses -11% to $11.21. The FY19 performance slightly missed Citi’s forecasts at face value but the analysts acknowledge there were a number of non-core elements such as FX and amortisation that had to be taken out, before concluding the result was broadly in-line.

  1. SG FLEET GROUP LIMITED (SGF) was downgraded to Neutral from Outperform by Macquarie B/H/S: 0/3/0

SG Fleet’s profit was ahead of Macquarie on a reduction in operating expenses and success in increasing additional products & services in a competitive environment. The company has quantified previously flagged strategic initiatives which, to cut a long story short, mean accounting changes that impact materially on earnings per share calculation but only lead the broker to drop its target to $2.92 from $2.95 given the earnings change is transitional. However, given the time it will take to build earnings from the strategic shift, the broker downgrades to Neutral from Outperform.

  1. VIRGIN AUSTRALIA HOLDINGS LIMITED (VAH) was downgraded to Underperform from Neutral by Credit Suisse B/H/S: 0/0/2

FY19 results were weaker than expected. Credit Suisse notes the aggressive initiatives to cut costs amid reviews of fleet capacity and network. While the initiatives are likely to deliver a sustainable improvement, the broker suggests this may take 2-3 years. Credit Suisse believes the new CEO is taking the right action and downgrades to Underperform from Neutral on valuation grounds. Target is reduced to $0.10 from $0.18.

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 seven major Australian and international stock brokers: Citi, Credit Suisse, 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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