In the good books
APN INDUSTRIA REIT (ADI) was upgraded to Add from Hold by Morgans
APN Industria has withdrawn FY20 guidance following the release of the code of conduct from the federal government. The company has indicated the potential impact of a requirement to waive a proportion of attendance rent is not possible to determine at the moment. As a result, Morgans lowers forecasts for FY20 and FY21 income by around -2% and -3%, respectively. The balance sheet is considered sound. Following weakness in the security, the broker upgrades to Add from Hold and reduces the target to $2.68 from $3.16.
CSR (CSR) was upgraded to Neutral from Underperform by Credit Suisse and to Equal-weight from Underweight by Morgan Stanley
FY20 net profit was ahead of expectations. The company has noted a boost to FY20 income from stocking up during the pandemic. While the decrease in residential business has played out for the building products segment, Credit Suisse notes revenue has still been remarkably resilient. The broker upgrades to Neutral from Underperform, now assuming CSR materially outperforms the end market. A -20-30% expected decline in volumes over the next couple of years precludes the broker from becoming more positive. Target is raised to $4.10 from $2.80.
CSR reported full year earnings 16% ahead of Morgan Stanley, although the broker had expected a 7c dividend but nothing was forthcoming. No guidance was offered, with management expecting an impact to be evident in FY21 but timing and extent is uncertain. The housing cycle was already declining, the broker notes, so it remains to be seen what the additional virus hit might be. CSR has plenty of cash on the balance sheet, thus the dividend suspension likely reflects conservatism, Morgan Stanley assumes. With risks now more evenly balanced at the price, the broker upgrades to Equal-weight from Underweight. Target rises to $3.75 from $2.90. Industry view: Cautious.
See downgrade below.
GARDA DIVERSIFIED PROPERTY FUND (GDF) was upgraded to Add from Hold by Morgans
Garda Property Group, with exposure to 17 east coast office/industrial properties, has withdrawn its FY20 guidance after the announcement of the mandatory Code of Conduct for commercial tenants and landlords. Morgans assumes dividends to be $0.074 for FY20 from $0.09 earlier and a longer Botannica 9 asset lease. The broker also highlights uncertainty surrounding rent relief measures. The broker takes a long-term view and upgrades rating to Add from Hold with target price at $1.07.
HOME CONSORTIUM (HMC) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse considers, with around 90% of the company stores remaining open, the impact of the pandemic is moderated. The net cash impact from lower cash rent is expected to be relatively minor because of the cost savings and dividend reductions. While acknowledging the challenging conditions could hinder the timing of the company’s strategy, the broker considers the asset locations and relatively low rents may provide an advantage over other traditional retail outlets. Rating is upgraded to Outperform from Neutral, with the stock expected to appeal to longer-term investors. Target is reduced to $3.18 from $3.89.
INVESTEC AUSTRALIA PROPERTY FUND (IAP) was upgraded to Accumulate from Hold by Ord Minnett
Ord Minnett updates forecasts, following the FY20 result. The business is considered able to withstand the uncertainty associated with the pandemic as it has low gearing and there should be high tenant retention. Rating is upgraded to Accumulate from Hold while the target is steady at $1.20. The Investec property fund has restructured its debt facilities, securing a new 10-year fixed-rate facility and extending bank facilities. The hedge book has also been re-set at a cost of -$27m for terminating out-of-the-money hedge positions.
KATHMANDU (KMD) was upgraded to Outperform from Neutral by Credit Suisse
Following a short restriction (from just ahead of the pandemic outbreak), Credit Suisse resumes coverage, upgrading to Outperform from Neutral and reducing the target to NZ$1.40 from NZ$3.65. The broker acknowledges there is earnings uncertainty but believes the strength of the company’s execution during the lockdown, the consumer appeal of its brands and robust balance sheet contribute to confidence going forward. The broker assumes revenues decline by -55% in the second half compared with FY19, with the company not fully returning to FY19 levels until the first half of FY23. This drives substantial revisions to underlying estimates for operating earnings (EBITDA).
SUNCORP (SUN) was upgraded to Add from Hold by Morgans
Suncorp Group’s trading update shows mark to market investment losses in the third quarter amounting to circa -$200m along with a bank collective provision of -$133m booked to deal with a difficult economic scenario. EPS estimates for FY20 and FY21 downgraded by -30% and -16% by Morgans mainly driven by the investment market losses, bank collective provision and overall low growth rates. Even so, robust CET1 capital and medium-term value prompts the broker to upgrade its rating to Add from Hold, with target price at $10.44.
VIRTUS HEALTH (VRT) was upgraded to Add from Hold by Morgans
The company and its banks have agreed that current funding facilities are sufficient to cover the short term. From an operating perspective, IVF treatment in Australia resumed on April 27 and diagnostics are increasing as staff and operations return to more normal levels. A gradual return to normal activity is anticipated over the next six months. Morgans upgrades to Add from Hold, assessing there is more than 10% upside in the stock. Target is raised to $3.17 from $3.04.
In the not-so-good books
ALACER GOLD (AQG) was downgraded to Neutral from Outperform by Credit Suisse
The company has proposed a nil-premium merger with SSR Mining. Credit Suisse believes Alacer Gold has potentially navigated the risk of overpaying for assets with the deal, which also provides geographic diversification without a 20-30% takeover premium attached. Value enhancement remains contingent on operations execution and the broker notes both parties have a sound track record for exploration success. Rating is downgraded to Neutral from Outperform and the target raised to $8.60 from $8.10.
AUSNET SERVICES (AST) was downgraded to Lighten from Hold by Ord Minnett
Underlying net profit in FY20 was slightly below Ord Minnett’s forecasts. The broker notes lower distribution guidance for FY21 and the possibility that Ausnet Services will need additional capital to fund growth. As the stock is now offering only a 4.6% yield, based on distribution guidance, the broker downgrades to Lighten from Hold and lowers the target to $1.75 from $1.90.
CSR (CSR) was downgraded to Neutral from Buy by Citi
Citi expects CSR to report a net profit dip of -40% to $111.1m in its upcoming FY20 results, reflecting top-line earnings pressure and negligible property earnings. Further, the broker expects a final dividend of $0.05 per share (50% franked). The aluminium hedging profile will be the focus medium-term with CSR having a large exposure to aluminium spot prices, comments Citi. The outlook looks challenging with emerging top-line headwinds in aluminium and housing putting pressure on earnings, anticipates the broker. Rating downgraded to Neutral from Buy with target price reduced to $3.45 from $5.60.
See upgrade above.
MACQUARIE GROUP (MQG) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse continues to believe Macquarie Group is a quality business but there are multiple headwinds over the short-term around transaction volumes, asset realisations and the potential for further impairments. Earnings estimates are modestly downgraded by -6%, attributed to lower activity following the impact of the pandemic. Rating is downgraded to Neutral from Outperform as the share price is up in excess of 40% since mid March. Target is reduced to $107.50 from $110.00.
PENDAL GROUP (PDL) was downgraded to Hold from Add by Morgans
Pendal Group reported a 2% growth in cash net profit to $86.6m for the first half. The operating profit exceeded Morgans estimates by circa 10% driven by better than anticipated funds under management (FUM) and fee revenue margins. The group’s second half is off to a subdued start with -13% lower FUM than the previous half, notes Morgans, expecting this to continue in the near term. The broker considers medium-term outlook, backed by cost control, a strong balance sheet and market leverage, to be positive. Rating downgraded to Hold from Add with target price increased to $6.50 from $6.37.
REA GROUP (REA) was downgraded to Neutral from Outperform by Credit Suisse and Macquarie
Revenue growth in the third quarter was lower than Credit Suisse expected. Residential revenue was broadly flat on a -7% decline in national listings. The broker continues to expect a recovery in volumes from the low point over the next few months but, given the recent rally, believes this is appropriately priced. Hence, rating is downgraded to Neutral from Outperform and the target lowered to $94.50 from $94.80.
REA Group posted a solid March quarter, Macquarie notes, featuring a return to revenue growth and an 8% increase in earnings. The virus impact will be felt in the June quarter, hence the company will lower its operational expense to provide at least some offset. REA is highly leveraged to a rebound in listings, has a strong balance sheet and good cost discipline, the broker suggests. But the stock is now trading around fair value following a 41% run-up from the March low. Downgrade to Neutral from Outperform. Target rises to $95 from $90.
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.
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