To gauge the mood among stockbroking analysts, look no further than last week’s upgrades and downgrades for individual ASX-listed stocks.
For the week ending Friday, 3 July 2020, FNArena registered ten upgrades in ratings and 21 downgrades, of which twelve moved to a fresh Sell.
Among those receiving fresh Sell ratings are gold miners, small cap mining stocks, plus Suncorp, BlueScope Steel, and financial platform operator Netwealth.
All but two of the week’s upgrades moved to Buy.
Analysts have been rather busy updating forecasts and valuations/price targets, which has led to a busy-looking set of tables for the week’s largest increases and decreases.
Enjoying the biggest increases to price targets for the week are Eclipx Group, Sigma Healthcare, and NextDC.
On the negative side, health food company in serious trouble Freedom Foods Group leads the table for reductions to price targets, with yet more restructuring Suncorp a distant second.
19 of the 20 stocks ranked for changes to earnings estimates (10 up, 10 down) saw changes in double-digit percentage, with Brickworks the sole exception with a -7.73% cut to forecasts.
Equally telling, only two of the seven stockbrokerages monitored daily is still carrying more Buy ratings than Neutral/Hold; Citi and Morgans.
Total Buy ratings for those seven brokers remains stubbornly high at 49.53% of total ratings, versus 40.14% on Neutral/Hold, and 10.31% in Sell ratings.
In the good books
INSURANCE AUSTRALIA GROUP LIMITED (IAG) was upgraded to Buy from Neutral by UBS B/H/S: 4/3/0
General insurer share prices have underperformed, UBS observes, with average 2020 price declines of -30% in the year to date. The broker attributes this to de-risked investment exposures, lower running yields and an overhang of claims risk. Rating is upgraded to Buy from Neutral and the target is reduced to $6.45 from $6.55.
MAGELLAN FINANCIAL GROUP LIMITED (MFG) was upgraded to Neutral from Underperform by Credit Suisse B/H/S: 1/5/1
Credit Suisse upgrades FY20 estimates due to higher performance fees and investment income from distributions. Retail flows are tracking better than the broker expected. While valuation appeal is limited, Credit Suisse cannot find a negative catalyst on the horizon and upgrades to Neutral from Underperform. Target is raised to $55 from $47. There is potential upside from an announcement on a partnership with Blackwattle, which could be a step into managing unlisted assets and add 10-15% to earnings over the next five years.
TRANSURBAN GROUP (TCL) was upgraded to Accumulate from Hold by Ord Minnett B/H/S: 2/3/2
Ord Minnett expects earnings should stabilise at around 20% ahead of pre-pandemic levels in FY23, and then grow at a relatively strong 7-9% per annum. The broker incorporates new assumptions for the three airport-exposed assets, Citylink, Airport Link and Eastern Distributor. Rating is upgraded to Accumulate from Hold and the target lifted to $16.00 from $15.25.
In the not-so-good books
BLUESCOPE STEEL LIMITED (BSL) was downgraded to Underweight from Equal-weight by Morgan Stanley B/H/S: 3/2/1
BlueScope Steel is considered to be a high-quality business with a strong balance sheet and good cash generation. However, the broker suggests the company should follow an agile approach with challenging conditions in the US. The US steel industry utilisation, functioning at around 55%, is under pressure while steel spreads have declined to their lowest levels since 2011. Even though North Star is expected to perform better than peers, the broker expects a negative impact on volume. The broker has reduced FY20-21 earnings estimates for North Star along with lower earnings forecasted in Australian steel products. This implies lower operating income for FY20 and FY21. Morgan Stanley reduces its rating to Underweight from Equal-weight with the target price reducing to $10 from $13.50. Industry view: Cautious.
HUB24 LIMITED (HUB) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 3/1/1
HUB24 has outperformed the market by 15-20% over the last three months, Credit Suisse observes. The benefits from the rebound in equity markets are expected to be diluted by the tiered pricing structure and the likely deployment of high investor cash balances. The broker continues to expect significant inflow and market share gains but assesses the company still needs to reduce platform fees. A greater proportion of earnings are leveraged to cash which Credit Suisse expects will be deployed in the next 12 months. Rating is, therefore, downgraded to Neutral from Outperform and the target is raised to $12.00 from $10.20.
NETWEALTH GROUP LIMITED (NWL) was downgraded to Underperform from Neutral by Credit Suisse B/H/S: 1/3/2
Credit Suisse observes Netwealth has outperformed the market by 15-20% over the last three months. Looking into FY21 the broker envisages a flatter earnings profile and a declining revenue margin. Consensus earnings estimates are assessed to be too high, with little valuation protection, and this increases the risk of disappointment. Hence, the broker downgrades to Underperform from Neutral. Target is raised to $8.30 from $7.50.
SARACEN MINERAL HOLDINGS LIMITED (SAR) was downgraded to Hold from Accumulate by Ord Minnett B/H/S: 2/3/0
Ord Minnett downgrades to Hold from Accumulate, assessing the stock has run out of returns. The broker remains positive on gold, based on inflation expectations and falling real yields. Target is raised to $5.40 from $4.90.
THE STAR ENTERTAINMENT GROUP LIMITED (SGR) was downgraded to Neutral from Outperform by Credit Suisse B/H/S: 3/3/1
Credit Suisse lowers FY21 estimates for earnings per share by -43% after the company guided to its casino operating capacity. The broker previously assumed a near full recovery in FY21 but now expects FY21 revenue will be around 70% of FY19, given the ongoing coronavirus restrictions. Rating is downgraded to Neutral from Outperform. Target is reduced to $3.40 from $3.75.
SUNCORP GROUP LIMITED (SUN) was downgraded to Hold from Add by Morgans and to Underperform from Neutral by Credit Suisse B/H/S: 2/3/2
Suncorp has announced a restructure to improve its business performance. The company has been forced to balance pricing and cover levels during negotiations for reinsurance in FY21. Morgans notes there is not as much P&L protection now and Suncorp will also have to hold higher general insurance capital given greater risk exposure. The broker downgrades to Hold from Add, envisaging better value elsewhere in the sector. Target is reduced to $9.40 from $10.44.
Credit Suisse observes Suncorp has resisted, again, resetting financial targets so investors will be faced with gradual earnings downgrades. The broker expects the company will deliver a 6-7% return on equity in the outer years, well below the prior target of at least 10%. Suncorp has announced an organisational restructure but this lacks detail, and Credit Suisse assumes it is just the start of larger changes. Cash earnings estimates for FY21 are decreased by -6%. Rating is downgraded to Underperform from Neutral as the stock has outperformed peers recently. Target is reduced to $8.75 from $9.65.
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.
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