When it comes to stockbroking analysts updates on individual ASX-listed stocks, the balance between negative adjustments and positive amendments remains skewed towards the positive, with exception of investment recommendations.
Upgrades to valuations and price targets outweigh the downgrades, and the same observation can be made for changes to earnings forecasts, one month out from the August reporting season.
But the local share market has experienced one hell of a rally from its sell-down low in the third week of March, and this is increasingly being reflected in more rating downgrades than upgrades being issued.
For the week ending Friday, 26 June 2020, FNArena registered nine upgrades in ratings against 15 downgrades.
Logistics services provider Qube Holdings stole the limelight during the week, receiving no less than four downgrades, of which only one moved to a Sell.
Freshly announced new customer Woolworths for the company’s flagship development near the main airport in Sydney is triggering higher capex spending for the years ahead.
Only one upgrade didn’t lift to Buy, with Sigma Healthcare the lonely stand-out amidst fresh Buy ratings for salary packaging firms, miners, an oil producer, and one bank.
The week’s overview of downgrades only contains three new Sell ratings, with Sydney Airport and Altium responsible for the additional two.
Scandal hit Freedom Foods and smaller mining stocks feature prominently.
There are some genuine fireworks on display in the table showing positive updates for earnings estimates, led by Nufarm, Air New Zealand, Qantas, and Wagners Holding Co.
The first nine of the week’s top are all enjoying double digit percentage increases.
The opposing side of the week’s ledger has notable decreases, but the numbers are significantly lower for companies including Metcash, Whitehaven Coal, Sydney Airport, and OceanaGold.
This week will see Fisher & Paykel Healthcare and Collins Foods (tomorrow) report out-of-regular-season financial results after which analysts and investors will redirect their focus towards the upcoming August reporting season.
In the good books
CORONADO GLOBAL RESOURCES (CRN) was upgraded to Buy from Neutral by UBS B/H/S: 3/0/0
While lowering forecasts for coal in line with spot prices, UBS notes prices are now well into the cost curve and further downside is likely to be limited. Chinese import restrictions are a headwind for thermal coal, but India is emerging from lockdown which should benefit coking coal demand. Coronado Global is upgraded to Buy from Neutral given its discount to valuation and because of its metallurgical coal exposure. Target is reduced to $1.80 from $2.05.
SANDFIRE RESOURCES NL (SFR) was upgraded to Buy from Neutral by UBS B/H/S: 4/3/0
UBS upgrades to Buy from Neutral. Target is steady at $6. The stock has fallen -20% in the year to date because of weaker perceptions of global growth and the impact of the copper price. UBS assesses the copper price has started to improve and Sandfire Resources is well-placed to benefit. The company has also added growth projects in the US and Africa that may address concerns about the short mine life at DeGrussa.
WOODSIDE PETROLEUM LIMITED (WPL) was upgraded to Buy from Hold by Ord Minnett B/H/S: 4/3/0
A significant recovery in Brent crude oil since the end of April has made growth projects far more viable, Ord Minnett notes. The broker now has greater confidence in Woodside Petroleum’s balance sheet and options to divest and/or acquire assets. Rating is upgraded to Buy from Hold and the target lifted to $26.50 from $25.50.
In the not-so-good books
FREEDOM FOODS GROUP LIMITED (FNP) was downgraded to Neutral from Buy by Citi B/H/S: 1/2/0
A conference call has revealed to Citi that Freedom Foods is in a complete mess, worse than feared. The company needs to divest non-core assets, raise equity, address board composition and governance, and focus on earnings quality and cash conversion, the broker suggests. Citi will wait for the findings of an investigation before adjusting forecasts but has applied a -40% risk discount to valuation and downgraded to Neutral (High Risk) from Buy. Target falls to $3.27 from $5.30.
FLEXIGROUP LIMITED (FXL) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 1/3/0
Credit Suisse assesses the pandemic has clouded the outlook for FlexiGroup. There are some advantages for the company in that its customer base is predominantly over 35 years in age and there is high home ownership penetration. Still, the broker does not believe it is ideal to be launching new products and playing catch up in Buy Now Pay Later in a time of economic disruption. Rating is downgraded to Neutral from Outperform. Target is reduced to $1.50 from $2.00.
OROCOBRE LIMITED (ORE) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 2/4/1
Provisional June quarter sales indicate lithium carbonate pricing has fallen to a record low of US$4015/t. Volumes are also weak. Credit Suisse notes the industry was already in difficulties prior to the pandemic. This is now exacerbated by the disruption to supply chain logistics and end-user demand. Rating is downgraded to Neutral from Outperform. Target is steady at $2.50.
QUBE HOLDINGS LIMITED (QUB) was downgraded to Neutral from Buy by UBS B/H/S: 1/4/1
Woolworths (WOW) will take a lease across two sites at Moorebank. Qube Holdings is expected to spend between -$420-460m to fund the warehouse infrastructure, receiving revenue of around $30m from 2025. UBS considers the transaction a positive development in that the company has locked in a major tenant with low counterparty risk. Rating is reduced to Neutral from Buy as the stock is now trading in line with valuation. Target is raised to $2.80 from $2.70.
SONIC HEALTHCARE LIMITED (SHL) was downgraded to Hold from Add by Morgans B/H/S: 3/3/1
Management has reinstated FY20 guidance, expecting underlying operating earnings (EBITDA) growth to be flat. Testing volumes in most of the company’s divisions have returned to pre-pandemic levels. Morgan is encouraged by the recovery in volumes but notes base revenue across around 35% of the business is subdued, and the pandemic is far from over. This suggests cost savings and government support are doing the heavy lifting. Rating is downgraded to Hold from Add and the target is raised to $28.63 from $27.84.
WESTERN AREAS NL (WSA) was downgraded to Neutral from Buy by UBS B/H/S: 4/3/0
UBS downgrades to Neutral from Buy and raises the target to $2.85 from $2.50. The share price has lifted 42% in the second quarter. The broker, noting the share price appreciation in response to an encouraging drilling result, lifts estimates of the value of exploration assets to $150m.
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.