Buy, Hold, Sell – What the Brokers Say

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In the good books

BANK OF QUEENSLAND (BOQ) was upgraded to Neutral from Sell by UBS

Bank of Queensland will undertake a capital raising of $275m. The book build will be priced between $7.69 and $7.78 per share, representing a -10-11% discount to the last close and a 6% premium to net tangible assets. The bank will outline a new strategy in February and UBS expects this will focus on niche areas where Bank of Queensland has an advantage. The broker does not envisage a rapid turnaround, given the current environment, and upgrades to Neutral from Sell. Target is $8.25.

CALTEX AUSTRALIA (CTX) was upgraded to Overweight from Equal-weight by Morgan Stanley

Caltex Australia has announced a plan to spin off its retail property division, selling up to a 49% interest in 250 sites. This is in addition to the 50 that will be sold separately. Morgan Stanley considers this a sensible strategy as it improves the balance sheet and offers the potential for buybacks. At the same time, retail fuel margins appear to have improved and downside risk is reduced, in the broker’s opinion. Rating is upgraded to Overweight from Equal-weight. Target is raised to $34 from $24. Industry view is In-Line.

See downgrade below.

EVOLUTION MINING (EVN) was upgraded to Buy from Neutral by Citi

Evolution Mining will acquire Red Lake in Canada from Newmont for US$375m. Citi notes the company intends to deliver the same re-capitalisation that was performed on previous acquisitions. While the deal fits, Citi cautions that this is a different mine, operationally, to past deals. The broker considers the earnings value is modest for the near term, pending the three-year operational turnaround. Rating is upgraded to Buy from Neutral on the pullback in the share price. Target is steady at $4.60.

METCASH (MTS) was upgraded to Neutral from Sell by Citi

Metcash has confirmed the loss of one of its largest customers, 7-Eleven. While the $800m in wholesale sales is much larger than that of the Drakes contract loss, Citi calculates a similar earnings impact. The broker expects Metcash will retain around 10% of the contract in Western Australia and selected categories. The broker upgrades to Neutral from Sell and raises the target to $2.80 from $2.60 as earnings downgrades are offset by revised cost assumptions and a re-rating in global comparable multiples.

See downgrade below.

SPARK INFRASTRUCTURE GROUP (SKI) was upgraded to Outperform from Neutral by Macquarie

The company has flagged a tough environment and a shift to tax being paid. The re-sets in South Australia and Victoria have an -89 basis points reduction in equity risk premium. Macquarie updates estimates for the final price outcome for the VPN 2020 pricing and change in the timing of the final decision to July 2021. Target is lowered to $2.37 from $2.41. Rating is upgraded to Outperform from Neutral. The broker notes the yield of 6% in 2021 is superior to the company’s regulated utility peers.

WESTPAC BANKING CORPORATION (WBC) was upgraded to Neutral from Sell by UBS

Westpac has announced CEO Brian Hartzer will step down, making this the third CEO of a major bank to have resigned in the last two years. Peter King, the current CFO, has been appointed acting CEO. Chairman Lindsay Maxsted will also bring forward his retirement. While UBS has a limited basis on which to estimate the extent of the likely fine from AUSTRAC it maintains a -$1bn estimate for the first half of FY20. However, the fine could be significantly higher, or lower. The broker believes Westpac may need to spend a significant amount of money to address compliance issues. The share price has fallen sharply and UBS upgrades to Neutral from Sell, given it is approaching the price target.

In the not-so-good books

AMP (AMP) was downgraded to Sell from Neutral by UBS

UBS envisages risks to the Contemporary platform profit margins while the economics around the pivot towards advice are untested. Execution risks around the strategic outlook are expected to grow. As a result, with the shares now trading at a 10% premium to the $1.80 target, the broker finds little allowance for medium-term risks and downgrades to Sell from Neutral.

ALUMINA (AWC) was downgraded to Neutral from Outperform by Credit Suisse

Credit Suisse downgrades to Neutral from Outperform as the stock has “defied gravity”, despite alumina prices falling significantly. The broker believes the alumina price has found a floor at US$280/t. While there is no reason to sell the stock, the broker suspects there may be opportunities to enter at a more attractive level if the current macro environment does not improve. Target is reduced to $2.40 from $2.70.

CALTEX AUSTRALIA (CTX) was downgraded to Hold from Accumulate by Ord Minnett

Canada based convenience retailer Alimentation Couche-Tard has made a conditional non-binding bid for Caltex Australia at $34.50 a share. This follows an earlier proposal of $32.00 per share that was rejected by Caltex Australia. Ord Minnett suspects Foreign Investment Review Board approval may not be easy, given the nature of the infrastructure and terminal assets. Caltex Australia is yet to engage on the deal. Ord Minnett downgrades to Hold from Accumulate and retains a $32 target. This stock is not covered in-house by Ord Minnett. Instead, the broker white labels research by JP Morgan.

See upgrade above

IOOF HOLDINGS (IFL) was downgraded to Sell from Neutral by UBS

With the acquisition of the ANZ P&I business looking increasingly likely to proceed, UBS expects earnings per share will lift 32% into 2020. However, the broker highlights risks to platform profit margins from new entrants, while the company’s decision to double down on platform administration raises medium-term strategic challenges. UBS downgrades to Sell from Neutral and raises the target to $6.70 from $6.60.

MCMILLAN SHAKESPEAKE (MMS) was downgraded to Neutral from Outperform by Credit Suisse

Credit Suisse observes the company is still struggling to find a tailwind, noting market conditions were described as “challenging” at the recent AGM. Novated lease volumes have been hampered by weak car sales in recent months and yields negatively affected by credit availability. While the broker believes group remuneration services will generate a modest increase in novated lease volumes and salary packaging, this will mostly be offset by yield pressures and higher expenditure from the Beyond 2020 program. Rating is downgraded to Neutral from Outperform and the target reduced to $16.10 from $16.55.

METCASH (MTS) was downgraded to Neutral from Buy by UBS

Metcash has announced 7-Eleven will not be renewing its east coast supply contract upon expiry in August 2020. UBS notes the profitability of the contract is low but it is the second major loss in two years. The broker factors in a -$24m earnings (EBIT) impact on the first full year (FY22), to reflect the loss. There is potential for the impact to be less, the broker acknowledges. Rating is downgraded to Neutral from Buy as, while the stock screens inexpensive, there are few catalysts for outperformance. Target is reduced to $2.80 from $3.10.

See upgrade above.

PANORAMIC RESOURCES (PAN) was downgraded to Neutral from Outperform by Macquarie

Panoramic Resources has slashed its FY20 production guidance for all of nickel, copper and cobalt at its Savannah operation, opening up funding gap of some -30%. The miner has secured short-term financing ahead of a likely rights issue. The size of the downgrade and the funding gap have surprised Macquarie, leading to material forecast earnings reductions. The broker downgrades to Neutral  from Outperform and cuts its target to 40c from 50c, balanced by Independence Group’s (IGO) conditional takeover offer at 46c.

SIGMA HEALTHCARE (SIG) was downgraded to Sell from Neutral by Citi

Sigma Healthcare has reached agreement with Chemist Warehouse to resume the distribution of FMCG product. The details of the contract remain commercial in confidence and the company is still assessing the required cost. Citi incorporates the agreement in forecasts, despite the lack of guidance, and believes the share price now fully reflects the benefits of the contract. Rating is downgraded to Sell from Neutral/High Risk. The broker expects investors will focus on FY21 and the new long-term targets. Citi estimates that the original $1.7bn contract was worth around $35-40m in earnings (EBIT) and new forecasts assume almost half comes back in FY22. Target is raised to $0.65 from $0.52.

SYDNEY AIRPORT HOLDINGS (SYD) was downgraded to Hold from Add by Morgans

Morgans downgrades to Hold from Add, given the strength in the share price has compressed the total return potential. The share price has surged 14% since early October, which the broker believes has been on the back of a retreat in government bond rates amid the market appetite for high-quality businesses with yield and defensive growth. Short-term weakness in traffic growth appears to have been disregarded. Target is raised to $8.75 from $8.71.

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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