Buy, Hold, Sell – What the Brokers Say

Founder of FNArena
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Recommendation downgrades have started to outnumber upgrades for ASX-listed stocks.

For the week ending Friday 22 May, the 7 stockbrokers monitored daily by FNArena upgraded 9 stocks, but they also issued 15 downgrades.

Charter Hall was the lucky receiver of 2 upgrades, both to Buy, while commodity exposures Fortescue Metals and Sims Metal Group saw the only 2 upgrades that didn’t move beyond Neutral/Hold.

Among downgrades, only 2 went as far as Sell with Fortescue Metals and TechnologyOne the unlucky targets.

Stock receiving downgrades to Neutral/Hold during the week include Appen, Nanosonics, Western Areas, and Woodside Petroleum.

A number of companies has been receiving positive updates to stockbrokers’ price targets, with Baby Bunting leading for the week, followed by Breville Group, Appen and Arena REIT.

Unfortunately, and certainly not unexpected, negative adjustments remain larger in size. The week’s heaviest blow was reserved for Abacus Property Group. Others seeing targets shrink include Charter Hal, AP Eagers, and Boral.

Amendments to earnings estimates continue to reveal a similar dynamic. On the positive side, all of Xero, Oil Search, City Chic, Zip Co, Santos, Cooper Energy and Arena REIT enjoyed double digit percentage increases to consensus forecasts.

But then some eye-popping downward adjustments befell the likes of Ardent Leisure, OceanaGold, and Graincorp while the likes of Aristocrat Leisure, AP Eagers, Boral and James Hardie shared in the pain.

The local out-of-season reporting season is now winding down with only a few (Select Harvests, ALS Ltd, Mesoblast) on the calendar.

Soon, analysts will start looking towards what might/should/can be expected for the August reporting season, preceded by what is commonly referred to as “confession season”.

In the good books

FORTESCUE METALS GROUP LTD (FMG) was upgraded to Hold from Reduce by Morgans B/H/S: 3/3/1

The fundamental story for iron ore continues to improve and stockbroker Morgans is now predicting the price could reach as high as US$120/tonne on the back of COVID-19 induced supply interruptions affecting exports by major producer Brazil. Morgans notes Brazil is the second largest producer of iron ore, after Australia, and it looks like the odds are very much favouring a disappointing outcome in terms of volumes leaving the country in the months ahead, which will only make the global market even tighter. On Morgans’ calculations, share prices of BHP Group, Rio Tinto and Fortescue Metals are incorporating iron ore priced at US$75/t, US$61/t, and US$76/t, respectively. This implies Rio Tinto’s shares carry the most upside potential, and that’s even without the prospect of a juicy dividend. Fortescue Metals is hereby upgraded to Hold from Buy. The price target has jumped to $11.50 from $8.51 prior.

See downgrade below.

SIMS METAL MANAGEMENT LIMITED (SGM) was upgraded to Hold from Lighten by Ord Minnett B/H/S: 1/5/0

Looking beyond the current crisis, Ord Minnett suggests there is value support for the steel sector, yet Sims Metal is facing a combination of low scrap volumes and low prices, which are affecting margins. However, as lockdowns ease volumes should start to pick up again. Rating is upgraded to Hold from Lighten and the target raised to $6.90 from $6.10.

TPG TELECOM LIMITED (TPM) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 1/4/0

The scheme booklet for the merger with Vodafone Australia signals to Ord Minnett that Vodafone Australia will begin generating substantial free cash flow. This provides the merged company an option to reinvest and compete more aggressively to win market share, eliminating one of the largest concerns of the broker. The financial position of the merged company is also better than the broker expected. Rating is upgraded to Accumulate from Hold and the target raised to $8.65 from $8.25.

WAGNERS HOLDING COMPANY LIMITED (WGN) was upgraded to Outperform from Neutral by Credit Suisse B/H/S: 1/1/1

Credit Suisse believes Wagners is well-placed to benefit from the pulling forward of small regional infrastructure projects in Queensland. However, current activity is coming off a low base. Nevertheless, the haulage business has provided stability, serving mining customers that have continued to operate. This is offset by an expected -20% decline in prices for Boral (BLD) volumes following an update on the pricing dispute. Credit Suisse upgrades to Outperform from Neutral and reduces the target to $1.00 from $1.50.

In the not-so-good books

CLOVER CORPORATION (CLV) was downgraded to Neutral from Buy by UBS B/H/S: 1/1/0

UBS believes the company offers attractive characteristics, being well regarded and a market leader. The business is also relatively defensive in the current environment. However, the qualities are now reflected in the share price and UBS downgrades to Neutral from Buy. Target is raised to $2.50 from $2.20. The company has forecast a strong increase in demand from infant formula customers in the fourth quarter, which the broker assesses could be partly because of inventory stocking and a pulling forward of demand from FY21.

FLETCHER BUILDING LIMITED (FBU) was downgraded to Neutral from Buy by Citi B/H/S: 0/5/0

Citi observes the skew to New Zealand and exposure to residential construction has put the company in a weak position vis-a-vis sales trends. While sales improved in May they were still down -10-20% compared with budget. Disruptions in April and May are expected to materially affect profitability, given the fourth quarter is typically 40-45% of full year earnings. Citi downgrades underlying net profit forecasts by -40% and -62% for FY20 and FY21, respectively. Rating is downgraded to Neutral from Buy. Target is reduced to NZ$3.50 from NZ$6.25.

FORTESCUE METALS GROUP LTD (FMG) was downgraded to Sell from Neutral by Citi B/H/S: 3/3/1

Citi marks to market for iron ore prices, upgrading FY20 and FY21 estimates for earnings per share by 12% and 8%, respectively. The broker forecasts FY20 and FY21 dividends of $1.45 and $0.88 per share, respectively. The dividend yield is assessed as impressive in the near term but drops to 3.7% in FY22 as the broker’s forecast iron ore price declines to US$63/t. Citi downgrades to Sell from Neutral as the valuation now appears stretched. Target is raised to $11.10 from $10.50.

See upgrade above.

TECHNOLOGYONE LIMITED (TNE) was downgraded to Sell from Neutral by UBS .B/H/S: 0/2/1

Margins were in line with UBS estimates in the first half although revenue was slightly lower. The broker believes tight cost controls will be required to deliver on estimates. Valuation remains the primary challenge for UBS and the rating is downgraded to Sell from Neutral. Target is raised to $8.20 from $7.25.

WESTERN AREAS NL (WSA) was downgraded to Neutral from Buy by Citi B/H/S: 5/2/0

Citi downgrades to Neutral from Buy, given a more bearish nickel price forecast. Nickel is expected to underperform on a relative basis over the next 12-18 months as demand from end-use sectors wanes. The broker retains a $2.50 target.

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 stockbrokers: 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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